For those of you who would prefer to listen:
October concluded with one of the most Market-moving weeks in memory. Between the Tech Titans’ earnings, a Fed rate cut and a Presidential summit between China and the U.S., there was a tidal wave of news for investors to ride. And the AI Bull kept charging ahead. The S&P just banked its 6th consecutive monthly gain as it continues to run in the face of any issue in its way. Here’s another rapid rundown:
Let’s start with Earnings Season. So far, with roughly 80% of S&P components having reported, earnings grew over 10% in Q3. That’s well ahead of the 7.9% expected when the quarter began. Growth has accelerated, led by Big Tech. Approximately one-third of the S&P 500 by market cap reported this week. Among them were the Tech Titans. The AI-trade is still going strong. As we’ve stated, time and again, more than anything else it’s earnings that drive stock prices.
Earnings Season: Amazon and Google highlighted the week. The Street was waiting with anticipation. Neither disappointed.
Amazon beat expectations pretty much across all categories. The accelerated growth at Amazon Web Services, the company’s cloud business, was the standout. AWS grew revenues by 20%. It also accounted for two-thirds of company profits. CEO Andy Jassy said it’s sustainable. That’s a big deal. Amazon beat the Street estimates by $3 Billion in revenues and nearly 40 cents in earnings. It really was a blowout quarter.
Amazon now expects to spend $125 Billion on its AI initiative in 2025. The previous estimate was $118 Billion. That is unequivocally the highest AI spend amongst the Tech Titans. Management said next year, it will be higher. Amazon raised its revenue guidance for the current quarter while also announcing major job cuts. The company said it plans to become leaner, faster and more efficient. To that end, Amazon says it now has over 1 Million robots deployed across its global operation. AI is everywhere at Amazon.
Google recorded another double-beat and raise. The company experienced double-digit growth across all its businesses. This from CEO Sundar Pichai:
“Our full stack approach to AI is delivering strong momentum and we’re shipping at speed, including the global rollout of AI Overviews and AI Mode in Search in record time. The Gemini App, Google’s Large Language Model service, now has over 650 Million monthly active users. It’s catching up, on the heels of ChatGPT, which has 800 Million active users.”
What’s more, Alphabet has over 300 Million paid subscriptions led by Google One and YouTube Premium. In addition, YouTube TV is on track to surpass Comcast, becoming the largest linear TV provider next year. The Market loves recurring subscription revenue. Google’s cloud business, which is providing vast storage for the AI buildout, grew another 34%. That beat the Street. It’s really fast growth.
Alphabet now expects its AI spend to be between $91-93 Billion this year. That’s up from the prior guidance of $85 Billion. The Market doesn’t seem spooked by the increased spending because thus far, Google is showing the aggressive AI investment is generating more growth which is falling to the bottom line. Waymo, Google’s autonomous vehicle business has seen its revenue spike too. Officially, it is part of Alphabet’s “Other Bets” business. But last month, the company reported that Waymo was generating $6 Million every week in September. That has it set to clear $300 Million for the year and is believed to be on track to exceed $1 Billion in revenue in 2027. Alphabet’s AI initiatives are experiencing acceleration, and the Market likes it.
Apple did something it had never done before. It generated over $100 Billion in revenue in a single quarter. It was $102.5 Billion to be exact, which was an 8% increase from a year ago. The iPhone 17 was a big driver, as was its fast-growing services business. What’s more, Apple saw its profit nearly double. Few companies have pricing power like the Cupertino iPhone maker. The company is also elite at controlling costs. Both were evident in this quarterly report.
The iPhone is looking pretty strong for the holidays. At least Tim Cook and team are feeling that way. Management guided revenue growth of 10-12% in the December quarter. That is a big jump from what the Street had, at just over 6% growth. Apple expects iPhone revenue to grow at a double-digit rate.The Street was modeling 7-8% growth. Apple’s CFO said it will be the iPhone’s “best quarter ever”. That’s quite a statement about this legendary device. The iPhone is also expected to help return China back to growth. Wall Street analysts estimated iPhone 17 and iPhone 17 Pro sales were up 29%in the first two weeks of October, pointing to likely catalysts from China’s Golden Week holiday. That’s some serious momentum. It’s no wonder Apple’s stock has come alive of late, helping drive the S&P to new heights.
Microsoft also reported a double-beat. Azure, its cloud business, topped it all with 40% growth. Total company revenue grew 18% in the quarter. Microsoft’s AI spend came in just under $35 Billion in the September Qtr. That was still higher than expectations. The company said that it expects to spend more in 2026, than it will this year. And 2025 has seen a 58% increase in spending from last year. The AI-race is still fiercely competitive. The Tech Titans have gone all in. After a strong year, Microsoft stock was ripe for a sell-the-news event. That it did, after hitting a record high Tuesday.
Meta, the company formerly called Facebook, reported a strong quarter too. Revenue grew 26%. It beat Street estimates for both revenue and profits. Here’s a staggering statistic: 3.5 Billion people use a Meta service on a daily basis. That’s Facebook, Instagram and WhatsApp among others. Advertisers covet Meta users.
Despite the strong quarter, Meta’s stock fell the most since 2022. The reason seems to be its aggressive spending habit. The company raised its 2025 capex guidance to $70-72 Billion from prior $66-72 Billion. Management said CapEx will be even higher next year. That was the same message from Amazon, Microsoft and Google. However, the Market has become concerned that Meta’s aggressive AI spending is becoming reckless. Meta actually issued a bond this week to help pay for its substantial AI capital expenditures. In fact, it doubled its debt outstanding with the bond offering. Bond investors scooped up the securities, as it’s deemed ultra-high quality. But Meta stock fell on the news with investors wondering, will the massive spend ever end?
The Fed
As was widely expected with interest rates, the Fed cut this week. However, bond yields rose. That’s the Market making a statement. Not only did the Market price in that cut. It had already priced in another in December. However, this week the Fed Chair made it sound less likely. The October rate cut was not a unanimous vote. The overnight rate might freeze where it is for the rest of the year.
This from the Fed Chair at the press conference: A December rate cut was “not a foregone conclusion, far from it”. Stocks immediately fell on those words. Another ¼-point cut had been priced into the Market, with a 91.7% probability as of last week. Today, the chances of a cut fell to 69.8%.
The reduced economic data released due to the government is further complicating an already challenging situation for the central bank. There has been weakness building up in the Labor Department. That validated the October cut. But there will be no Job Report released next week. The data-dependent Fed will be without key data. Economic activity continues across the country at a decent clip. But the large spending is increasingly coming from the wealthiest of Americans. Delta Airlines earnings report reflected it. The growth has been found in the first-class cabin and international routes. Growth in Coach has stalled if not contracted. Americans living paycheck to paycheck are more dependent on borrowing. Housing is too. These are major areas of America’s Economy. Lower rates will help.
The big keep getting bigger. The Stock Market is not the Economy. The Economy is not the Stock Market. But there is definite overlap. AI has accounted for 40% of US economic growth and 80% of Stock Market gains. This is where the disconnect comes. Corporate America is investing heavily in systems and innovation. An argument can be made that it’s coming at the expense of people. Hiring has stalled. It’s part of the reason the Fed cut rates this week. It’s a rare thing for the Fed to cut with the Stock Market at all-time highs. It’s hard to know what’s normal anymore.
America’s Federal government is still closed for business. It’s been shut down for a full month. Talks have gone nowhere. A new month should increase the pressure on Congress to act, as more Americans won’t be paid. Both parties have dug in, thinking they are winning the shutdown. Ballots will be cast on Tuesday, providing a glimpse into the nation’s mood. The big event will be the midterm elections next year, and Washington is always in campaign mode. It seems pretty clear; Nobody wins in a shutdown. Besides, the Market clearly doesn’t care. It’s basically gone straight up since the shutdown.
China – US Summit
Presidents Xi and Trump met in South Korea. It was their first in-person session in 6 years. The result was effectively a truce. Both sides agreed to delay imposing further tariffs. President Trump reduced the tariff rate on China to 45% from 57%. In response, China agreed to drop its rare-earth export ban, something that has been impeding America’s digital advancements. The US may allow China to purchase advanced semiconductors. I repeat, may. That one is still vague. The American President indicated Nvidia’s most advanced Blackwell chips are not available to China.
So much was left unanswered. There was no update on terms for the sale of TikTok. It’s been reported the leaders didn’t even discuss Chinese access to America’s most powerful microchips. What’s more, it appears that the Presidents didn’t come to any resolution on longer-term issues, like the massive US trade deficit with China, concerns about Chinese piracy of American intellectual property, Russia-Ukraine, and of course the future of Taiwan. The rival nations have long disputed the legitimacy of Taiwan’s sovereignty. And Taiwan is huge in manufacturing semiconductors that are fueling AI.
So, what’s the takeaway? Here’s what one of our sources said: “China must feel more satisfied than the US about where it is compared to the beginning of 2025, in part because Beijing has stood up to Trump’s “Liberation Day” tariffs and identified a potent leverage tool through rare Earths export controls.”
The White House came away from South Korea feeling pretty good. In fact, exceedingly good. When asked on a scale of 1-10, President Trump gave the meeting a 12. Our source gave it a 7. A 7 is definitely not an A. But it is a passing grade. The truce seems to have bought another year of reduced tensions. That in and of itself is something. But the longer-term issues are far from settled. The can keeps getting kicked down the road. The 2 global powers are inextricably intertwined economically. But the partnership is far from stable and trusted. Both nations are fiercely focused on winning the Digital Revolution. And both see it as a zero-sum game. So, there’s that.
Back to the Market:
The Market continues to ignore the various geopolitical risks. The perceived lack of an immediate threat is the reason. The Market is all about growth right now. The AI trade is the driver. Global spending on Artificial Intelligence is projected to reach nearly $1.5 Trillion this year, marking an almost 50% increase year-over-year. It’s expected to top $2 Trillion next year. The Tech Titans validated that spending trend again this week. $116 Billion came from these companies in the September quarter alone. It’s still very early days for this Digital Revolution.
Companies are embracing AI, but very incrementally at this stage. According to recent surveys, the corporate adoption rate is still roughly 10%. One thing is clear, that spending is not going towards people. Americans living paycheck to paycheck are struggling to get ahead. Inflation and wage stagnation are the pressures. Investors and asset owners have benefited greatly from the Bull run. Those who don’t have been left behind. The Market is not the Economy. The Economy is not the Market.
Despite the repeated record highs, leadership has really narrowed. Just 13% of the S&P components are above their 20-day moving average. That number was over 60% at highs this Summer. In fact this week saw something rare. On an up day, only 104 stocks were in the green. Roughly 400 of the S&P 500 were down on the day. It was the weakest gain since 1990. Tech continues to dominate. The Market rewards accelerating growth.
It’s the AI trade that has Wall Street all Bulled-up. Corrective price action in tech, with a rotation back into the laggards would be a healthy thing. It’ll happen. It’s just a matter of when.
The extended Bedell Frazier family lost another one. His name is Tom and boy was he a good one. A natural entrepreneur, this guy loved cool and clever ideas. Sports topped that list. But much more, Tom loved people. Importantly, his family all came first. He adored his beautiful bride Sharon and 3 outstanding kids, Laurie, Kristen and Eric, as well as his grandkids. Both laughter and tears have draped those dearest to Tom. But his lasting message can stay with us forever: “Shower the people you love with love – show them the way you feel”. It sure is impactful how James sang it and Tom lived it. Things are gonna be much better having had someone like Tom in your life.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
