More Barrels, Bigger Budgets

Oil is now leaving the Persian Gulf faster than before the conflict with Iran began in late February. Ship-tracking data cited by The Wall Street Journal show regional exports, including cargoes rerouted through bypass pipelines, averaged more than 24 million barrels per day in mid-October, edging past the 23.3 million barrel pre-war pace. That is welcome news after last week's hotter-than-expected September inflation report, covered by my colleague Jake Gradwohl, where higher fuel costs showed up in categories such as airfares. Still, more barrels do not guarantee cheaper ones. Global inventories were drained at a record pace earlier this year and must be refilled, several damaged Gulf refineries have yet to fully restart and the cost to insure a ship navigating through ongoing Middle East conflict has tripled. With mediation talks with Iran stalled and more U.S. forces heading to the region, the oil market has adapted to the conflict rather than outlasted it.

Against that backdrop, attention turned to corporate earnings as reporting season gathered momentum. According to FactSet data, third-quarter S&P 500 earnings are expected to grow 29%, which would mark a third consecutive quarter above 25% and more than double the 10-year average. The spotlight belonged to three companies at the center of the AI buildout: SpaceX, Meta and Tesla. Each confirmed that AI demand remains extraordinary, and each reminded investors that the cost of competing keeps rising. The market judged them less on their results than on how they intend to pay for what comes next.

A Strong Quarter with a Bigger Ask

Meta posted another record top-line result, with revenue climbing 26% year-over-year to $64.6 billion. Despite Instagram time spent per user reaching new highs and more than 10 million people in the U.S. and Canada setting up a Muse personal agent in just six weeks, investors focused on how much Meta plans to spend and how it intends to pay for it. Management raised the low end of its 2026 capital expenditure guidance by $5 billion, despite third-quarter capex being $7 billion below expectations, and offered no specifics on 2027 beyond a commitment to keep investing aggressively. Meta also announced a non-voting Class C share to be distributed one-for-one to existing holders in January. The new stock gives Meta the ability to raise equity, issue employee stock incentives and fund acquisitions without diluting Mark Zuckerberg's majority vote. It also gives Zuckerberg the ability to sell shares to cover a potential bill under California's proposed Proposition 40 billionaire tax in exchange for his pledge to remain near headquarters for eight years. Combined with the filing's disclosure that Meta may need to raise hundreds of billions of dollars over several years, the news revived AI funding worries and sparked a sharp selloff across the AI complex.

The Opposite Problem

Tesla's results delivered the mirror image and received a similarly cool welcome. The company generated more than $1.5 billion of free cash flow, when analysts expected it to burn $3.8 billion of free cash flow, and lowered its 2026 capital spending outlook to roughly $20 billion from more than $25 billion. Investors questioned whether less spending means slower progress on Optimus robots, Cybercab and the Terafab chip plant, particularly with external Optimus deliveries now targeted for late 2027. In short, Meta was penalized for how much it may need to raise, while Tesla was penalized for how little it plans to spend in the near term.

SpaceX, meanwhile, appears to be spending with little hesitation. Capital expenditures reached $19.6 billion in the third-quarter, and management expects that number to rise to $35 - $40 billion in the fourth quarter alone as it races to quadruple its AI compute capacity in 2027. That ambition also explains the growing speculation about a combination with Tesla. On the SpaceX call, Musk confirmed that both boards have formed special committees of independent directors, while cautioning that no terms have been agreed and that any deal would need support from at least 50% of all Tesla shareholders. The strategic logic is visible in SpaceX's results as its AI compute business now generates more than half of revenue, and the two companies are already weighing how to split the bill for the massive semiconductor fabrication project, Terafab.

Despite last week's hot inflation print and WTI oil prices back above $100 a barrel, the heightened scrutiny of AI spending and how it is funded sparked a flight to safety on Thursday, pulling the 10-year U.S. Treasury yield back below 5%. The episode is a reminder that the market no longer rewards AI ambition by default. Many investors are now weighing how spending is financed and when it will earn a return. Given that much of the market’s leadership is tied to AI, how this debate shakes out will likely matter a great deal to the direction of stocks in the coming months. With index earnings growth expected to increase more than 30% this year, the fundamental backdrop remains supportive of stocks. However, we are monitoring the situation closely as earnings season ramps up with Alphabet, Amazon and Microsoft reporting next week.

Takeaways for the Week

• Persian Gulf oil exports have surpassed prewar levels, but depleted inventories and continued attacks on tankers argue against a quick decline in prices

• S&P 500 earnings are on pace for a third straight quarter of growth above 25%

• Meta and Tesla showed that investors now grade AI spending on both its size and how it is funded

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