by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a review of two key factors behind yesterday’s stock sell-off: a report highlighting inaccurate accounting related to data centers and another report suggesting artificial intelligence will lead to massive economic dislocations. We next review several other international and US developments that could affect the financial markets today, including the first corporate lawsuit demanding a rebate for its tariffs paid and more China-Japan tensions.

US Technology Industry: Credit rater Moody’s yesterday warned that a gap in US accounting rules is allowing big technology firms to conceal tens of billions of dollars of potential liabilities for their AI data centers. The problem stems from the firms’ use of special-purpose, off-budget vehicles that don’t require a full accounting of the potential costs of failing to renew a data center lease. The report was one major reason for the downdraft in US stock prices yesterday.

• The report also illustrates the increasingly opaque financial accounting that is helping to support hyperscalers’ stock prices even as they pump billions of dollars into new data center projects.
• In turn, the funky accounting is likely to be taken as one more sign that the sector is in an investment bubble. However, even if it is, it would be very difficult to predict when the bubble might definitively pop.

US Artificial Intelligence Industry: Another factor in yesterday’s market action was a dire report by Citrini Research that warned of massive economic disruption as artificial intelligence begins to outstrip human capabilities. According to the report, “For the entirety of modern economic history, human intelligence has been the scarce input . . . We are now experiencing the unwind of that premium.” Because of this, the report said the repricing of human knowledge will drive down asset values across a wide range of industries.

• Separately, Meta today announced that it has agreed to buy six gigawatts’ worth of AI computing power from chipmaker Advanced Micro Devices, in a deal valued at more than $100 billion that could result in Meta owning as much as 10% of AMD’s stock.
• The deal is only the latest transaction that has raised concerns about daisy-chain financing and excess capital investment related to AI. While such deal announcements initially were taken well by investors, sentiment has shifted, and the Meta-AMD deal could well weigh on technology shares today.

US Trade Policy: Responding to last week’s Supreme Court decision invalidating much of President Trump’s tariff policy, FedEx yesterday became the first US company to sue for a rebate of the tariffs it has paid. According to trade experts, the federal government could now potentially be on the hook for some $160 billion in rebates. We suspect that many firms will sue the federal government for rebates, potentially leading to cash windfalls but also signaling the start of long, complex, and expensive legal cases.

• The administration today began applying its temporary, blanket replacement tariffs at a rate of just 10%, as Trump initially announced, after key trading partners pushed back against his later vow to hike the rate to 15%. However, administration officials say the president still intends to raise the blanket tariff to 15% in the near future.
• Separately, the Wall Street Journal reports today that the administration is considering imposing national-security based tariffs on half a dozen key industries in order to help offset the impact of the court decision. The new tariffs being considered could cover industries such as large-scale batteries, cast iron and iron fittings, plastic piping, industrial chemicals, and power grid and telecom equipment

European Union-United States: In another response to the US administration’s loss of its main trade cudgel, the European Parliament yesterday suspended work on two pieces of legislation needed to implement the US-EU trade deal tentatively agreed to last year. EU officials said US policymaking is now in too much flux to set anything in stone. The move is likely to anger the US administration and lead to retaliation, which naturally could weigh on EU asset values.

United States-Iran: The Wall Street Journal said yesterday afternoon that Chairman of the Joint Chiefs of Staff Gen. Dan Cane and other senior Pentagon leaders have warned President Trump and his administration that a prolonged attack on Iran would carry significant risks, such as US and allied casualties, depleted air defenses, and an overtaxed force. Since Gen. Cane is reportedly trusted by the president, the news means there is possibly less of a chance of the attack going forward. If it doesn’t materialize, one obvious result would likely be a retreat in global oil prices.

China-Japan: The Chinese government today widened its ban on the export of critical minerals and other key goods to Japan, adding 20 major Japanese companies to the blacklist. The prohibited exports include rare earths used in motors and magnets, machine tools, batteries, and semiconductor-making equipment. Affected companies include Mitsubishi Heavy Industries, IHI, and NEC.

• The move is the latest in a long series of actions Beijing has taken to punish Prime Minister Takaichi for her statement last autumn that a Chinese blockade of Taiwan would require a military response from Japan.
• The export ban could cause considerable disruptions for the affected companies, highlighting the importance of geopolitical risk as China becomes more aggressive on the world stage.

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