Tesla stock price initially witnessed a decline on Thursday but later recovered and the stock closed the session 2.2 percent higher. Tesla reported stronger revenue numbers but earnings per share were slightly lower than market expectations. IBM witnessed a small drop after the results. Investors are concerned about the future guidance offered by the management. Overall outlook for technology sector remains bullish as AI is expected to keep demand higher for computer hardware and online services segment. While headline numbers looked solid, the underlying signals from both companies revealed mounting cost pressures, slowing momentum in key divisions, and shifting investor tolerance for risk in a high-rate environment.

Tesla’s Soaring Costs Drown Out a Revenue Record

Tesla’s third-quarter results exposed a widening gap between growth and profitability. The stock fell up to 5% on Thursday after the electric vehicle leader reported earnings that missed Wall Street expectations, even as it delivered record revenue.

The company reported $0.50 per share in earnings, falling short of analysts’ forecast of $0.55. Revenue, however, surged to $28.1 billion, surpassing projections of $26.4 billion. Yet, the top-line strength did little to calm investors, who were rattled by the margin collapse and sharp jump in expenses.

Tesla’s operating expenses climbed 50% year-over-year to reach $3.4 billion, while its operating margin slid to just 5.8%, nearly halving from a year earlier. The company’s net income plunged 37% to $1.4 billion, despite an overall revenue increase of 12%. As Electrek noted, Tesla’s operating income fell roughly 40% year-over-year amid intensifying financial headwinds.

Executives pointed to a combination of cost drivers behind the weaker profits. Tariffs alone dented results by more than $400 million during the quarter. The company also saw declining regulatory credit revenue and committed heavier spending toward AI and autonomous technology — moves vital to long-term leadership but costly in the near term.

Nevertheless, Tesla maintained a degree of financial resilience. The company reported $4 billion in free cash flow and closed the quarter with a robust $41 billion in cash and investments. Still, investors remain skeptical about whether CEO Elon Musk’s accelerated innovation strategy can balance escalating capital intensity with consistent margin recovery.

IBM’s Software Slowdown Casts a Shadow on Its Transformation

IBM also joined the list of companies punished for not doing “enough” following an earnings beat. Shares dropped around 6% on Thursday morning, despite stronger-than-expected quarterly results that included adjusted earnings of $2.65 per share versus forecasted $2.45. Revenue came in at $16.33 billion, modestly above expectations of $16.09 billion.

The headline numbers, though positive, masked cracks in IBM’s software engine — the growth driver behind its AI and hybrid cloud transformation. Software revenue grew 10% year-over-year to $7.2 billion, aligning with estimates but failing to beat them, leading to questions over IBM's current growth narrative.

Particularly concerning was the slowdown at Red Hat, long viewed as the centerpiece of IBM’s modernization efforts. Growth in the unit eased to 12% in constant currency, down from 14% in the previous quarter. Analysts such as Evercore ISI’s Amit Daryanani echoed concerns that a sustained deceleration could test the market’s faith in IBM’s transformation plan.

Despite near-term disappointments, IBM raised its full-year targets. Management projected full-year revenue growth of more than 5% and lifted its free cash flow guidance to $14 billion. This confidence suggests that IBM’s underlying business remains structurally sound, though the company faces increasing pressure to show tangible AI-driven results beyond projections.

Investor Sentiment: Valuations Under Strain

The mixed reports from both Tesla and IBM come at a time when market optimism is colliding with valuation fatigue. As MAI Capital Management’s Chris Grisanti remarked, “The market is strong but stretched. Many stocks are being priced on 2030 or 2035 projections.” That long-horizon pricing leaves little room for short-term softness, making the market highly reactive to any sign of deceleration.

The pullbacks in Tesla and IBM underscore a growing investor dichotomy — enthusiasm for innovation versus the reality of rising costs and execution challenges. It also signals that investors are demanding evidence of sustainable earnings growth before continuing to underwrite aggressive forward valuations.