Oracle Warning Triggers AI Selloff as Broader Market Stays Strong

The hawkish Fed cut was more dovish than expected. The Fed came through with the quarter-point cut as expected and did indicate that they have a wait-and-see stance regarding further cuts, to see where inflation and employment trends are headed. But Powell also said that no one had a rate hike in their forecast, and more importantly, they announced they will be buying US T-bills to the tune of $40B a month to provide support to the money market. Equities rallied on the news, and interest rates fell. 

Interest rates fell again today. The US 2-year is down to 3.52% from 3.60% right before the announcement. The 10-year has moved from 4.18% to 4.11%. Big moves, though the bulls wanted far more. The US dollar index has moved down below 98 due to the lower interest rates. 

But the market is down today on the Oracle (ORCL) news. That is, indexes with major AI exposure, the Dow, even-weighted S&P, and Russell 2000 are up today, while the market-weight S&P and NASDAQ are down a lot, on difficulties at Oracle. The shares (ORCL) are down 13.8% despite a strong beat on earnings yesterday, and a small miss on revenues, due to weak guidance, a real net earnings number that was weak before booking a gain on an asset sale, $10B in negative free cash flow, and raising their ’26 capex guidance to $50B. The report clouded the profitability timing for AI in general, as well as the challenge of financing the truly massive data center build-out that the industry has on the table. 

The repercussion of the Oracle situation has pricked the AI bubble in a big way today. NVIDIA is down 3.5%, semiconductors - 2.3%, the Magnificent 7 -1.1%. This has thrown a wet blanket on the expected start to the Santa Claus rally that should be happening following the more dovish-than-expected Fed cut. 

On the commodity front, precious metals are higher on the lower interest rates, with silver in an apparent squeeze up 4.5% to yet another all-time high, now up 26% in a month. Crude oil is down 2% to $57.30, down 4.2% in a week. Natural gas is down 7%, now down 14% in a week. Gasoline is down 1.8%, now down 13% in a month. The energy move will be very helpful for inflation, but it is starting to make one wonder about growth trends in general. Crypto has taken a meaningful hit. Expected to rally meaningfully to lower interest rates, Bitcoin is down 3% to below $89.4K. 

The overall picture is still positive outside of the AI correction today.  The only sectors in the red are tech, communication services, and energy. The Dow is up 1% to a new all-time high, and the Russell 2000 is up 0.4%, also a new all-time high. The even-weighted S&P is up 0.6% and also at a new all-time high. While the AI correction is painful, the names are still outperforming YTD, and it’s better to have the bubble slowly cool than fall off a cliff.

The trend remains positive, and tech is still making the lion’s share of earnings.