AI Capex Hangover Spurs Rotation Into Defense and Rails

Grant Calloway

We are exactly, uh, twenty-two minutes away from the opening bell. It is 9:08 a.m. in New York, and let me tell you, this tape is tighter than a drum this morning. Futures are bleeding. S&P futures down zero point six one percent. Nasdaq-100 futures off nearly a full percentage point--zero point eight six percent to be precise. And- and- and what we are looking at here is a classic, old-school hangover. A capex hangover, specifically. Wall Street is finally waking up from the AI open bar, looking at the bill, and going, "Wait, we paid how much for this?" Look at Tesla. Down six percent pre-market. Q2 profits missed, but the real kicker is Elon Musk out there promising "massive 2026 capex." Or- or Alphabet. Alphabet's down four percent pre-market because their full-year capital expenditure projection is hitting a staggering two hundred and five billion dollars. Two hundred and five billion. Investors are starting to ask, where is the actual cash flow today? Not in 2030. Today.

Grant Calloway

And if you want to know where the real, cold cash is actually landing right now in 2026, you don't look at the cloud. You look at the dirt. You look at metal. Look at the defense sector earnings that just crossed the wire. Lockheed Martin--LMT--is gapping up six percent this morning. They posted a massive Q2 profit of seven dollars and ninety-four cents per share. Compare that to just one dollar and forty-six cents last year. That is not a typo. And they boosted their full-year sales outlook to between seventy-nine point seven five billion and eighty-one point seven five billion dollars. Why? Because their total backlog grew to two hundred and thirty point four billion dollars. That is up thirty-eight point three percent from one hundred and sixty-six point five billion last year. The Pentagon is scrambling to restock, and Lockheed has the keys to the warehouse. Then look at RTX Corporation. Up six percent pre-market too. They just raised their full-year sales guidance to ninety-five to ninety-six billion, with adjusted EPS coming in at seven-ten to seven-twenty-five. They are sitting on a colossal two hundred and eighty-nine billion dollar backlog. That is one hundred and seventy billion in commercial aviation and one hundred and nineteen billion in defense. That is physical reality. That is stuff you can drop on your foot, and it is generating real, predictable margins right now.

Grant Calloway

Even the ground-level economy is showing this exact same pattern. Union Pacific just reported. UNP beat expectations with a Q2 EPS of three dollars and forty-one cents, beating the three-twenty-eight consensus, on six point eight six billion in revenue. The trains are moving. The defense lines are humming. The boring stuff is working. You know, back on the NYSE floor, during the dot-com wreck, I watched this exact movie play out. The second those tech capex budgets start to look like black holes, the specialists would quietly start rotation into rails, energy, defense. It's the ultimate capital migration. By the way, if you want to keep track of these rotations without drowning in the noise, check out jellypod.com. They turn your daily newsletters and feeds into a custom, hyper-focused daily audio briefing. It's how I stay sane. That's jellypod.com. But back to the floor. When the high-flyers get penalized for spending too much, the boring "bend metal" companies always capture the crowd. It is happening again.

Grant Calloway

Now, if you want to see what is really driving the panic in the futures market this morning, it is not just Alphabet's balance sheet. It is the Red Sea. We had a sudden, violent pre-market spike in crude. Brent is trading at ninety-eight dollars and seventy-five cents a barrel, up almost five percent--four point nine eight to be exact. WTI is crossing ninety dollars and eighty-one cents. This is after Iran-backed Houthi rebels hit a Saudi Arabian oil tanker. A direct physical disruption at one of the tightest choke points in global trade. This isn't some abstract algorithmic trade; it means retail gasoline prices are headed right back over four dollars a gallon. And that- that- that immediately filters into the bond market. The 10-year US Treasury yield just spiked to four point six nine seven percent. It is testing that fifty-two week high of four point six nine percent we saw back in May. The bond market is screaming that sticky inflation is back, and it is throwing a massive wrench into next week's Federal Reserve meeting.

Grant Calloway

I mean, look at the sudden swing in interest rate expectations. According to the CME Group's FedWatch tool, traders have pushed the probability of a Fed rate *hike*--not a cut, a hike--at next week's meeting up to thirty-four percent. Last week, that probability was sitting at a mere twelve percent. Talk about whiplash. Personally? I think this rate hike paranoia is a classic pre-market panic. The futures market loves to price in armageddon at 8:30 a.m. when liquidity is thin, and then we see the cash market open and cooler heads prevail. But the tension is real. Keep an eye on Intel after the close today. Their earnings are going to be the ultimate test of whether tech can fight through this macro headwind, especially with their AI chip strategy and factory margins under the microscope. We'll see. As we used to say on the floor: the tape always tells the truth, but it doesn't always tell it on your schedule. Quick reminder, this podcast is for educational purposes only and is not investment advice. Have a good trading day, folks. Talk soon.