AI Stocks Take a Breather as Bank Worries Resurface

Markets Lose Altitude

After weeks of AI-fueled gains, Wall Street finally exhaled.

The Dow Jones fell 0.7%, the S&P 500 lost 0.6%, and the Nasdaq closed down 0.5%.

Investors took some chips off the table following an extended rally, while renewed trade tensions between the U.S. and China gave them another reason to stay cautious. President Trump’s latest tariff threats - potentially doubling import duties on Chinese goods from November 1 - didn’t exactly help calm the mood.

Regional Banks Back in the Spotlight

If there was one sector you didn’t want to be in on Thursday, it was regional banking. The KBW Regional Banking Index dropped more than 6%, with Zions Bancorporation (ZION | -13.14%) and Western Alliance Bancorporation (WAL | -10.81%) leading the decline.

Zions revealed a $50 million write-down tied to a commercial loan gone sour, while Western Alliance filed a lawsuit alleging that a borrower violated collateral terms. These aren’t isolated blips, as JPMorgan CEO Jamie Dimon reminded investors earlier this week, “If you see one cockroach, there are probably more.”

Larger peers didn’t escape unscathed either: Citigroup (C | -3.53%) and Bank of America (BAC | -3.52%) both fell amid broader concerns about credit quality and liquidity. The market’s message was clear, the regional banking stress is far from over.

AI Leaders: A Tale of Two Stories

On the tech front, sentiment was mixed. Salesforce (CRM | +3.98%) impressed investors with upbeat long-term guidance, targeting 10% annual revenue growth as adoption of its AI “agents” accelerates.

Analysts from Morgan Stanley praised the company’s organic growth path, noting that the surge in automation tools could be a future catalyst, even if overall IT budgets remain tight.

Meanwhile, Oracle (ORCL | +3.09%) reassured investors about the profitability of its cloud and AI projects. After rumors suggested razor-thin margins of just 14%, the company clarified that a major cloud contract worth $60 billion over six years should yield 35% gross margins. Crisis averted — at least for now.

On the flip side, Hewlett Packard Enterprise (HPE | -10.14%) became the day’s biggest tech loser. Its guidance for fiscal 2025 underwhelmed investors, citing integration challenges with Juniper Networks and margin pressure from AI server operations.

Free cash flow is now expected between $1.5 and $2 billion, well below Wall Street’s $2.4 billion forecast. Ouch.

Macro Still on Hold: Thanks to Washington

The U.S. government shutdown continued into its third week, limiting new macroeconomic data releases. The Fed’s industrial production report was postponed, and even some housing data came out with caveats.

Fed Governor Christopher Waller hinted that a 25 basis point rate cut later this month remains likely, but the path beyond that is murky. He warned that the shutdown itself could inflict real economic damage if it drags on, a not-so-subtle nudge toward Congress.

Elsewhere in the Market

TSMC (TSM | -1.6%) posted record quarterly profits and raised its full-year outlook but still saw its U.S.-listed shares slip. Profit-taking, again.

ManpowerGroup (MAN | -6.52%) disappointed with lower net income and weak Q4 guidance, while Travelers (TRV | -2.92%) fell after mixed quarterly results.

Oil prices eased roughly 1.5% as U.S. inventories rose, and the euro strengthened to 1.1692 against the dollar.

My Take

After several weeks of AI euphoria, the market looks ready for a cooldown. The enthusiasm around automation and cloud margins is justified, but it’s hard to ignore the cracks forming in the financial system, especially among regional banks.

Until Washington gets its act together and the Fed confirms its next move, I expect volatility to remain high. In short: AI may be the future, but credit risk is still the present.

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Kristoff - ChartMill

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