For those of you who would prefer to listen:
There’s no way to sugarcoat it; There was a Tech Wreck on Wall Street this week. There were some big movers that hit the Stock Market. Intel, a company revitalized by the massive AI infrastructure build, had its worst day since the 1970s. Alphabet, a Tech Titan and key leader in AI, had its worst day ever. For those paying attention, ever is a long time. Between Earnings Season, the Fed meeting and next week’s election, there’s a ton going on. There was much to learn from the events. We study and analyze; That’s our job. We like to inform and educate; That’s a commitment. This is likely to be one of those longer ones. So, if you’ll indulge me, I tried to put a lot of brain food into this piece. Here’s another rapid rundown:
Earnings Season is in full swing. This was the busiest week as 162 of the 500 S&P companies, representing one-third of the index, released their report cards. As a reminder, the Street was modeling 29% earnings growth at the onset. So far, they’re coming in even better. However, the growth is concentrated in Tech. In fact, just 10 companies are expected to account for two-thirds of that growth. Expectations were already high. The companies by and large delivered. But what they said about certain segments of their businesses and future plans is what moved the Market.
Microsoft was the winner of the Tech Titans this week. The company’s cloud business, Azure, grew revenues 48%. That was far ahead of the 45% expected. Microsoft expects to keep spending on AI. The company reiterated its Capital Expenditures (CapEx) is expected to reach $190+ Billion for the year. The Market seems to believe that’s justified. Microsoft has remained free-cash-flow positive while scaling its cloud and AI capacity. The company plans to spend less in CapEx next year, to the tune of $170 Billion, which the Market liked. That’s still a massive amount of money.
Google was a different story. Alphabet, which is the official corporation, reported another solid quarter. Revenues grew a strong 25% compared to last year. It wasn’t good enough. The Street expected more. Search was the reason. Advertising was weaker across the platform. This is important for a couple reasons. First, Search is the backbone of Google’s business. It is the most profitable and has helped fund its other ventures. AI is considered a major threat to Google Search. Secondly, it raises the questions as to whether it is losing market share to others like Amazon and Meta, or are companies across the board pulling back on their advertising budgets due to economic concerns? The answer is still not clear.
There was some serious strength in its infrastructure. Alphabet’s Cloud business more than doubled its revenue from a year ago, which is exceptional growth. That’s the AI side. The company continues to take share in the space as demand continues to outstrip supply. Alphabet is also making AI chips which have been enthusiastically embraced. Alphabet expects to keep the pedal to the metal on its AI spend, which is giving the Market some angst as the returns thus far have been mixed. The aggressive spending put the company in the red for its free cash flow, and it widened further in Q3.
This is a moment in the AI trade and Alphabet is a key barometer. The Bulls believe this investment is necessary for Alphabet to be a long-term winner. The company is supremely positioned for the AI race with Cloud, Gemini, YouTube and Waymo, among many other businesses. On the flip side, the Bears see Alphabet scrambling to keep up and vulnerable as Claude, Chat and Muse take share while its Search business evaporates. The Bears clearly have the upper hand today. The stock had its worst sell-off in its history in response which certainly put a dent in the overall Market as Alphabet is a Top 5 holding in the S&P. It’s also a Dow component.
Amazon is always a high-profile company during Earnings Season. Being a major player in both Retail and Tech, the company provides so many insights to the health of America’s Economy. Amazon did something it rarely has; It reported a double-miss.
The company’s cloud business, Amazon Web Services, reported 39% revenue growth compared to a year ago. That beat expectations. What’s more, it was the fastest growth since 2021. This is by far Amazon’s most profitable business. Management sees its revenue growth accelerating to 40%+ both next year and the following. The Market loves that. What it didn’t like was the increasing AI spending and its sluggish retail business.
Amazon’s North American Retail Business grew just 6% in Q3. That missed expectations. Its international business grew just 5%. Part of the slowdown was due to its flagship Prime Day getting pushed up to Q2. And like Google, Amazon’s advertising business also showed weakness, with annual growth decelerating to 12% from 26% the quarter before. The Market has gotten weary of perceived excessive spending, as it pertains to AI. It wants to see returns on the investment. But the Market is also sniffing out some serious changes ahead and the impact AI is already having on our way of life. Much more on that later.
Meta, the company formerly called Facebook, sold more stock this week. The proceeds are to further fund its AI investments. The secondary, which raised another $95 Billion, was priced at $625. The stock was at $770 a month ago. You can see the Market is anxious about the seeming limitless AI spend.
Importantly, not all stocks went down. There were definite pockets of strength in Earnings this week.
Visa reported a record year for both revenue and profit. The September quarter was its fiscal year-end. Despite the many inflationary pressures, Consumers keep spending. Visa’s Payments volume grew 9% during the quarter. Total cross-border volumes were up 14%. This from Visa’s CEO: “Growth across consumer spend bands remained relatively consistent with prior quarters, with the highest spend band continuing to grow the fastest. We did not see signs of the lower spend consumer weakening in our volumes.” That’s pretty consistent with America’s economic activity. The American people feel the pain of high prices, but they keep spending for now. Looking further out, Visa has expanded beyond credit cards to other sources of revenue. The company launched initiatives to support agentic AI commerce, cryptocurrency, and fraud detection. AI is impacting everything in this Digital Age.
It’s been quite a year for Eli Lilly. The company blew past Q3 earnings and revenue estimates. What’s more, it raised its outlook. Demand for its weight loss and diabetes drugs has gone through the roof. Management identified expanded U.S. coverage for obesity care as a material positive. They’re referring to Medicare’s decision to start covering GLP-1s for weight loss under a temporary pilot program. This, from the CEO: “We’re pleased with the early uptake and access, and I think doctors and patients are as well.” GLP-1s are all the rage and Lilly has been the early leader. Now there’s a pill. People seem to want it.
Coke doesn’t seem to be hurting from the GLP-1 craze like so many other food and beverage companies. The Coca-Cola Company just reported another double-beat. The Beverage Titan exceeded earnings estimates for the 6th consecutive quarter and raised its outlook for the full year. Demand for the Real Thing remains strong. Coke’s revenue and earnings growth is on the back of increased volume, not just price hikes. Worldwide case volume rose 5%. That was driven by a 16% increase in Latin America. Perhaps the World Cup had something to do there. Consumers have proven choosy when it comes to their spending. People are still opening their wallets for Fairlife and Minute Maid while Coke Zero and Diet Coke have become staples.
Energy has been the best-performing sector in the Stock Market this year and it isn’t even close. The 40% rise in Oil prices, triggered by the conflict in the Gulf, has sent Energy stocks up over 50% on the year. Chevron and Exxon are the majors here and no surprise, both companies just reported record quarters. There is a major fuel crisis going on. Multiple attacks on refineries in Russia and the Middle East have reduced global capacity by Millions of barrels per day. Importers have turned to U.S. Gulf Coast refineries for diesel supplies in response. “Refining capacity is very tight today,” Exxon CEO Darren Woods said. “Frankly, diesel is the key crunch point here because it is so critical to economic growth with very inelastic demand.” And as we all understand from Econ 101, reduced supplies with increased demand trigger higher prices.
American Energy companies have certainly benefited from this situation. Refineries are running at capacity. There hasn’t been a new refinery built in America in decades, while many have closed over the years. “The system is under stress,” Chevron CEO Mike Wirth stated. “We remain in an environment that is fairly fragile.” It’s become so evident that despite all the advances in alternative energy, the world still runs on crude.
Boeing, which is a Dow component, reported another solid quarter in the company’s generational recovery from disaster. Revenues continue to grow while the return to profitability is in sight. But the stock got hit when management pushed out the ramp up of its best-selling 737 Max planes until later next year. Supply chain constraints are the issue. CEO Kelly Ortberg emphasized: “I know everybody wants us to go faster, but we’re going to do it right.” Considering the perceived short-cuts which took place under previous management the last few years, this seems very appropriate. But of course, the Market is about results and profitability, and positive free cash flow is what drives stock prices. The stock sold off on the news. Aircraft production and deliveries are key to Boeing’s recovery since the bulk of an aircraft’s price is paid when the customer receives it.
2026 has also been a year of IPOs. The Anthropic prospectus is out, submitted this week. This could be the largest offering in history, outdoing the SpaceX IPO this Summer. The 300 page document outlining the opportunity ahead for the company has been described as both promise and peril. The roadshow commences next week.
Anthropic warned that while its tools can help find new treatments for disease, its safeguards are “incomplete” against bad actors who might use them to create biological weapons. That’s a problem. Anthropic also has a narrow customer base from which it receives revenue. They’re also sort of competitors. That’s what makes this AI revolution so complicated and dangerous. Dependence on competitors creates structural weakness: Microsoft, Google and Amazon distribute Anthropic’s models while competing directly against it. This situation seems strategically vulnerable and costly.
Anthropic revealed it’s on the hook for nearly $400 Billion in commitments to Google, Amazon, Microsoft and Broadcom over 7 years, payable whether or not it uses the capacity. The company currently has $132 Billion in cash. Three of them have agreed to advance Anthropic $77 Billion and pay them once the IPO closes. That leaves the public investors to fund the balance.
Companies are staying private far longer than they used to. The biggest gains have been experienced for private investors. Here’s this for perspective: Amazon IPO’d in 1997. Nearly all of its historical value has been realized as a public company. Specifically, it’s 99.983%. Amazon is a $2.5 Trillion company. It went public at $54 Million. In comparison, SpaceX IPO’d in June at a valuation of $1.77 Trillion. That’s basically where it trades today. So, it begs the question: are IPO’s the opportunity for investors to buy or for insiders and private equity/Venture Capital to sell? Perhaps that’s a rhetorical question. Regardless, expect a ton of hype.
There was also a Fed meeting this week. Usually, that’s the biggest Market event of the week. Not so this week. Despite the inflationary pressures, the Market assigned just a 9% probability of another rate hike. No hike came. The reason given by the central bank was it is awaiting the “accumulation of more information.” Those were new words from the Fed. As one of our sources indicated, information was another word for elections…
The Fed continues to find itself in a really tough position. The Economy keeps chugging along in solid shape, with Q3 GDP having grown at a 3.4% clip. That was ahead of expectations. The tricky part for the central bank is the biggest driver of inflation is not interest rate sensitive. It’s all about Oil and AI. The Bond Market has known that for a while. For the Fed, it seems pretty simple; If inflation gets worse, they’ll raise rates. If it gets better, they’ll cut. That has them reactive. The Bond Market is the one in charge.
Of course, there is the election. It’s finally here. Those nonstop commercials and text messages will evaporate next week. Expectations from all of our sources indicate a substantial Democrat victory in the House and a toss-up in the Senate. That seems to reflect all the polls too. When it comes down to it, it’s really anyone’s guess. What is clear is the Independents are the key swing voters. They helped carry President Trump over the goal line in 2024. They’re looking likely to swing back towards Democrats in ’26.
The turnout is expected to be bigger for Democrats than Republicans. Democrats seem to have the passion and emotion this time. Our sources see Rural Republicans not happy with the direction of the current administration. They’re really not happy with White House policies around the war, inflation and trade. Don’t expect them to vote blue, though. I was told that most are “culturally incompatible with the Democrats”. They’re more likely to just not turn out this time.
This from one of our Washington sources:
“Trump’s dreadful polling numbers suggest a big night for Democrats – it would be a shocker if the GOP retained its House majority. We give a slight edge (55%) that Democrats take the Senate”
We will be watching closely with interest as the ballots are tabulated Tuesday. Elections always have implications for investors. Policies in Washington don’t dictate the Market, but they certainly do influence. This time it’s not just Congress that’s on the ballot. AI is also on the ballot too.
Back to the Market:
Despite the big hit to Tech, all things considered, the overall Market is holding up relatively well. The S&P 500 is just 3% off its all-time highs. It has basically gone sideways for months. Just last week, it fell to levels first reached on June 1st. That, after hitting a fresh, all-time high the first week of October. It has spent nearly all of the last 5 months within the 7500-7700 range. That equates to roughly 51-53K for you Dow watchers. But the rotation has been palpable. Tech’s weakness has led to Consumer Staples and Health Care strength. These are defensive areas often considered safe havens. Energy has been strong all year on the back of higher Oil prices. They’re the engines for the Stock Market heading into November.
The year-end rush is upon us. Halloween is here and the Holidays are coming fast. This is also normally the best 2 months on the calendar for the Stock Market. That said, there’s little normal these days. Right now, the Market is paying for restraint and charging for spending. Realistically, that’s what a 5% 10-Year is supposed to do. We are going to learn a lot next week and the coming weeks. I hope you learned something from reading or listening to this piece. I hope you enjoyed it too. Thanks for staying with me all the way.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
