The AI infrastructure trade stagnated through August, with enthusiasm fading even after NVDA beat earnings and raised guidance. Investors shifted their focus to weakening economic data and looming Fed rate cuts, fueling the narrative that the AI boom had run its course. That changed yesterday, when Oracle reignited the trade with a blockbuster earnings call.

While Oracle missed estimates across the board, its forward guidance stole the spotlight. Oracle’s remaining performance obligation (RPO)—a metric that captures contracted but not yet recognized revenue—surged to $455 billion (+359% YoY) after Oracle signed four multibillion-dollar contracts during the quarter. Management also said several more multibillion-dollar deals are in the pipeline, potentially pushing the backlog above $500 billion in the next few months.

The market reaction was swift. Oracle’s stock price soared as much as +40% intraday, and the rally spilled over into the broader AI infrastructure trade, as shown in the heatmap below. Despite recent doubts, demand for AI-driven cloud infrastructure remains powerful. It remains to be seen how durable this rebound is—but for now, Wall Street is betting the AI story still has legs.
 

What To Watch Today

Earnings
 

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Economy
 

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Market Trading Update

Yesterday, we discussed some of the market divergences, such as the spread between homebuilders and lumber prices. Notably, that conversation focused on how the economic data doesn’t support the rallies we see in many market areas. While sentiment can drive markets short-term, the long-term fundamentals will eventually “rue the day.”

The most recent economic data certainly doesn’t support the more optimistic outlooks from Wall Street. Employment growth is substantially weaker than previously thought, given Tuesday’s negative revisions of 911,000 jobs. Yesterday, the Purchasing Price Index (PPI) also showed no signs of inflation growth, and services and manufacturing surveys remain on the cusp of contraction. These certainly aren’t the data points that bulls should be ingesting, but they are.

Looking at a monthly chart, the risk of a correction is becoming more prevalent. The top chart shows the 12-month relative strength index (RSI), which is now pushing into more overbought territory. The next panel shows the market’s trend channel going back to 2009. Not only is the market trading 2-standard deviations above its 48-month moving average, it’s also trading at the top of its long-term trend channel. The bottom panel graphically represents the deviation from its 4-year moving average.

While this is a very slow-moving chart, which makes it useless for trading a portfolio, it does suggest that the risk of a correction has risen sharply in recent months. The last time the market was this overbought was in April, which preceded a 20% correction. The previous five events preceded similar 20% corrections or more.
 

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The important note is that while complacency is very high, and portfolio allocations should remain tilted toward equities, the risk of a short-term mean-reverting event is NOT ZERO.

The current market has required little management or position controls, which lures investors into a slumber of complacency. Simple processes are avoided in search of further gains, and such an environment always turns out poorly.

While “this time certainly seems different,” it is likely not. Manage your risk accordingly.
 

PPI Sends Treasury Yields Lower

Both headline and Core PPI came in at –0.1% for August, well below expectations for a +0.3% gain. The downside surprise highlights the easing of producer-level inflation pressures and adds to evidence that pricing power is weakening across the supply chain. Bond yields moved lower in response, with the yield curve flattening slightly as long-end yields fell more than the short-end.

For the Fed, the PPI miss reinforces the case for a rate cut at this month’s meeting. While policymakers have been cautious about declaring victory on inflation, the data show a softening alongside a weaker labor market. However, tomorrow’s CPI release will be the more consequential data. If consumer prices echo August’s softer PPI, the Fed may have more reason to accelerate its easing cycle. For now, futures markets aren’t convinced that will happen soon. The odds of a 50-bps cut at next week’s FOMC meeting increased by less than 1% following the PPI release, to 7.9%. In other words, futures markets remain nearly dead-set on a 25-bps cut next week.   
 

The Index Isn’t Always Accurate

How was the weather yesterday in the United States? You could answer by citing an average temperature or precipitation level. However, doing so would severely misrepresent the weather in many parts of the country. Similarly, the typical response to “What did the market do today?” is often to quote the change in the S&P 500 index. While stock indexes generally give a broad idea of what is happening, they can greatly overlook the performance of many individual stocks. Likewise, and related to this article’s topic, most people quote the change in the ten-year US Treasury yield as an index of how bonds performed. Although this index of bond yields can be somewhat helpful, it can also be very misleading.

Treasury bond yields across the maturity spectrum, also known as the yield curve, tend to move together on most days. However, the size of changes across different maturities can vary significantly. These variations happen because different economic and monetary policy factors, along with investor sentiment and narratives, affect yields differently along the yield curve. 

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