CFS Market Insights: Mixed US results and AI financing affect sentiment

Welcome to CFS Market Insights. So today we're going to talk about three topics: the start of the US earnings season, what's going on in technology companies, and finally recent developments in the area of rare earths.

We'll start off by talking about US earnings, which have started off quite strongly with some very strong numbers, particularly out of banks and financial services companies.

More recently, the numbers have been a little bit more mixed. We've had numbers from Netflix, which disappointed the market, and Tesla's numbers were actually softer than people have been expecting.

So that's created a bit more of a cautious tone in markets in the last couple of weeks.

The key thing in the coming weeks is going to be the results coming out of technology companies. All eyes are going to be on those big names, especially NVIDIA, which won't release numbers until the middle of November.

Expectations have remained very high. Markets have delivered strong investment performance. But the key is going to be what earnings expectations are - not just for the rest of this year, but into 2026.

While we're on the subject of technology companies, it's worth actually going to a little bit more detail about the unfolding stories in Big Tech around a web of circular financing and cross shareholdings.

So OpenAI has committed to buying around about $60 billion worth of semiconductor chips annually from NVIDIA for the next five years.

And at the same time, NVIDIA is investing back into OpenAI.

In another transaction, Oracle has pledged billions of dollars to secure access to AI infrastructure.

So these commitments actually dwarf current revenues. For example, OpenAI's annual revenue at the moment is around about $12 billion.

So this cross shareholdings and the commitments to make substantial future investments are something that we've been spending a lot of time focusing on. It's actually sort of raised some question marks in our own minds about the way that these investments are going to be paid for. It does demonstrate that the rapid build-out of data centers to support AI is becoming a very important part of the investment landscape.

One thing that we are paying quite a lot of attention to is the fact that the significant development of AI data centres is actually pushing up electricity prices in those US metropolitan areas, very close to the data centres, and we are watching the inflationary pressures that are coming through from these investments in the coming months.

So finally, an important announcement in the last couple of weeks whereby Australia has signed a multi-billion dollar critical minerals deal with the United States.

Both countries will invest about $1 billion each over the next six months, with a multi-year plan to build out supply chains and processing capacity.

So markets have actually reacted pretty quickly to price this into investments.

Rare earths stocks have continued to perform incredibly strongly in the last couple of weeks.

It is important to take stock of these investments over the longer term, particularly as these projects will be multi years in their development.

We're paying particular attention to not just the extraction, which is challenging enough, but also the processing of these rare earths to put them into commodities that can be used by end industrial companies. And there are some real challenges, both technically, but also environmentally, in setting up these processing capabilities.

One of the drivers to this investment has been that China currently processes about 90% of the world's rare earths and has recently introduced sweeping export controls.

This is an area that will be subject to ongoing discussions between the Chinese and the US government and is obviously tied into the ongoing focus around tariffs.

We'll continue to keep a close eye on these developments within our investment portfolios, but continue to focus on greater diversification across our equities and fixed income portfolios in what continues to be quite a challenging macroeconomic environment.

Thanks for watching CFS Market Insights. See you next time.