For those of you who would prefer to listen:
The Stock Market kept the brakes on. There have been back-to-back weekly decliners, which followed 6 straight weeks of gains. It makes sense with so much going on. This was as big of a week for Market-moving events as I can ever remember in my near 30-year career. There’s a ton for the Market to absorb: Earnings. Economic data. Fed Meeting. Global wars. Oil. And oh, yeah, that not-so-small election next week. With that said, here’s another rapid rundown:
Earnings Season – Tech Titans
This was the biggest week of earnings. Over 40% of the S&P 500 Market cap reported. The Tech Titans were well represented. The group was expected to post the slowest EPS growth in 6 quarters. No surprise, AI remains the key theme. There has been a massive amount of investment in the secular growth theme. Big Tech CEOs still see underinvestment as the biggest risk, which means aggressive AI capital expenditures remain a tailwind for the Market. But Big Tech’s AI splurge has caused some investor concerns, hungry for a quicker payday on the Billions invested. Investors like to see returns on their investments. You know how that works.
The star of Earnings Season so far is Amazon. The company reported another double beat. It also raised its outlook, something the Market always likes. That’s great news ahead of its busiest quarter with the Holidays ahead. What’s more, Amazon said Generative AI is growing 3X as fast as its cloud computing business did a decade ago. That’s quite a statement. CEO Andy Jassy called the advancement of Artificial Intelligence a once-in-a-lifetime opportunity, and investors will really appreciate the return on aggressive investment over time. Revenues grew 11% for the company, with the fastest growth continuing at Amazon Web Services. The company raised guidance for the rest of the year, highlighting profit margin expansion across all segments. Then there’s this: Its International business went profitable for the first time. Profitability at Amazon has never been higher. The stock rallied on the back of this report, triggering Friday’s gains.
Apple also reported a double beat on better iPhone sales, though its Services business came in a little light. The outlook for the December quarter also underwhelmed. That led to a slight sell-off in the stock, but it still maintained its top status in the S&P 500. iPhone sales, which account for half the company’s revenue, grew 5% in the quarter. That was better than expected. The rollout of Apple Intelligence seems to be the driver, though it’s still very early days for Apple and AI. The lowered guidance was not too surprising as many are still waiting for more advancements in the AI rollout before the massive iPhone upgrade cycle. The thing is, Apple doesn’t care about being first. Apple cares about being best. That’s been the case from day 1 with Steve Jobs.
Alphabet, more affectionately referred to as Google, also reported a double beat. Q3 strength was driven by both advertising and cloud outperformance. Alphabet Q3 revenue beat by 2% while operating income beat by 8%. The Google Cloud segment saw growth accelerating 35% compared to a year ago. That Cloud strength was driven by adoption of AI products and AI search innovations. Gemini, Google’s answer to ChatGPT, is now incorporated in all major Google products. It now has over 2 Billion monthly users. That was quick. Management talked up how AI is driving more searches in terms of number and complexity while also helping to drive costs down. That’s a powerful combo. Search and YouTube came in line to slightly better than expected. For perspective, Google’s cloud business wasn’t even profitable a couple of years ago. Now it runs at a 17% profit margin and climbing. Aggressive AI spending is definitely paying off.
Microsoft easily beat Street estimates with its fiscal Q1 results as its Azure cloud segment crushed expectations. This from CEO Satya Nadella: “AI-driven transformation is changing work, work artifacts, and workflow across every role, function, and business process.” The stock initially rose with the results. However, the shares reversed course after Microsoft forecast slower Azure revenue growth and continued capacity constraints at data centers amid surging demand. The company is struggling to keep up with demand. Microsoft also plans to continue spending heavily on cloud and AI to build the necessary infrastructure. More spending is leading to lower stock prices if it’s not resulting in increased profits. One thing seems clear, Microsoft’s early lead in the AI race has narrowed. The other Tech Titans are catching up.
Meta, the company formerly known as Facebook, also reported a double beat. This was the 5th of the “Magnificent 7” which reported earnings this week. AI continues to be the driver there too. The company said it will not provide specific 2025 guidance until its Q4 call. Management did set expectations for a significant capital expenditure growth in 2025. That sent the stock lower. The Tech Titans earnings prove that the AI boom is starting to pay off but it’s also clear that more major investments still lie ahead. The growth is undeniable. The big question from an investor standpoint: How much is the growth worth to the stocks? The Market is presently recalibrating just that.
From Big Tech to Big Oil
Chevron and Exxon both reported better than expected earnings. Record production in the prolific Permian Basin in West Texas led the growth despite lower Oil prices in the quarter. Exxon said it reached its highest production level in 4 decades at 3.2 Million barrels per day. The company returned $10 Billion to shareholders. Exxon also raised its dividend. This is the 42nd consecutive year that Exxon has increased its dividend. It sure is a great way to grow money in a low-risk way.
Chevron’s beat was also highlighted by rising US Gulf production combined with significant cost reductions. Chevron returned $7.7 Billion to shareholders, in the form of dividends and stock buybacks. Chevron grew US production 14% and anticipates producing over 1 Million barrels per day in the Permian next year. There’s also this: Chevron is officially moving its corporate headquarters to Houston from San Ramon, ending 145 years of being a California company. Chevron is rooted as Standard Oil of California. It’s an unfortunate development, but no surprise as so many companies have left the Golden State, citing increasingly unfriendly business policies. Texas has been on the receiving end of many of these historic California companies.
Oil & War
Crude prices jumped Friday on rumors Iran will retaliate after Israel’s missile attack. That was last weekend. Israel hit Iranian military targets, avoiding Oil and Nuclear sites. The price of Oil fell early in the week as expectations of de-escalation rose. The war premium got eroded. It is building again. WTI jumped back above $70 before settling Friday at $69.46. Importantly, US Oil production hit a monthly record high in August. American energy independence has been so critical for our national security, basically eliminating dependence on foreign sources. The price of Oil would be well north of $100 without it. Go fill your tanks up before the price spike hits the pump. They tend to rise faster and fall slower when the price of Oil is volatile.
This is serious stuff. Last weekend’s airstrikes marked the first time that the Israeli military has openly attacked Iran. They targeted aerial capabilities and missile manufacturing facilities. Israeli Prime Minister Benjamin Netanyahu said the strike “achieved all its goals,” while Iranian President Masoud Pezeshkian vowed a “proportionate response.” A de-escalation would allow fundamentals once again to dictate price direction for crude. The surplus in supply with tepid demand would lead to lower Oil prices. China is a big reason, as the number 2 global economic power continues to struggle. But a re-escalation could absolutely threaten supplies and output.
Our sources tell us that an Iranian attack is likely in the next couple days and is expected to come in the form of drones and ballistic missiles from Iranian proxies rather than Iran itself. That’s perceived as a possible attempt by Tehran to avoid another Israeli retaliation. Regardless, this renewed flare-up of tensions raises the risk of a major escalation. That sent Oil prices higher into the weekend, though they’re nowhere near the highs on the year. That’s the Market saying it’s on alert but not concerned quite yet. That’s generally how spikes happen.
Compounding the geopolitical problems is news that North Korea sent thousands of troops to the Ukrainian border. The rogue nation said it will support Russia until it achieves victory in its war with Ukraine. North Korea blames South Korea and the United States for threatening a nuclear war. These are tense times.
It’s the Economy Stupid
America’s Economy keeps chugging along at a decent rate. This week, it was reported that GDP (Gross Domestic Product) grew 2.8% in Q3. That was faster than the 2.6% expected. It was a slight step-down from Q2’s final 3.0%. The report noted increases in consumer spending, exports, and Federal government spending. Despite the majority of Americans not feeling good about it, the US Economy continues to grow at a solid clip. Clearly, not everyone is experiencing it. That’s a huge issue in the election. Americans tend to vote with their wallets. James Carville knows what he’s talking about.
There was a big surprise with Friday’s job report. October nonfarm payrolls increased by only 12K. 115K was expected. What’s more, it came with notable downward revisions to the prior 2 months. August and September were revised downward by 112K. The unemployment rate stayed at 4.1%. Importantly, the increases were found in healthcare (+52K) and government (+40K), while professional/business services (-49K) and manufacturing (-46K) saw the biggest declines. The economically significant sectors clearly slowed. The report was already expected to be questionable, given hurricanes and labor strikes. But the August and September revisions were consistent with the trend of the labor-market cooling. The Market is now pricing in 97.8% probability of a 1/4-point cut. It meets the day after the election. This was also a critical data point ahead of the American people entering the voting booths.
The Bond Market is telling us the Fed is making a mistake with another rate cut. The Economy is still growing, but inflation has yet to be resolved. Higher commodity prices are creating pressure again. More rate cuts could ignite more inflation. The 10-Year Treasury is back above 4.3%, a multi-month high and an important technical level. The Bond Market is sending yields higher while the Fed is cutting. They’re going in opposite direction. Something’s gotta give. The Bond Market is usually right.
Election
It’s the final stretch in the race for the White House. Doesn’t it feel like it’s been going on forever? I can only imagine what it’s like in one of the swing states. The heated Presidential election is still seen as too close to call. There are major implications the Market is focused on, like taxes, deregulation, the deficit, tariffs and immigration. The ultimate removal of the election overhang also brings the potential for unwinding of downside hedges, while year-end seasonality is even more favorable in election years. The 7 swing states polls remain razor thin. All sit within the margin of error. The likelihood of us knowing the results Tuesday night seems highly unlikely. Our Washington sources believe we won’t know until Wednesday evening or Thursday at the earliest. Recall Biden wasn’t declared the victor until Saturday and it took 5 weeks to declare George W Bush the winner against Al Gore on December 12th in the 2000 election. The Market, as we all know, does not like uncertainty. We’re destined to get it.
Year-End
Getting past the election will allow the Market to shift its focus to 2025 earnings. It’s always better when we can focus on facts rather than rhetoric. The Street is currently looking for 15%+ earnings growth for the S&P next year. That would be quite an acceleration from this year. There sure is a lot that can go wrong and right. We’ll all stay tuned for that. For now, it’s November. This is the beginning of the strongest period for the Stock Market on the calendar. Goldman did a study. Since 1928, the median S&P 500 return from October 27th through December 31st is +5.22%. It’s been up an even better 6.25% in election years. That’s nearly a century of data. We’ll see how it goes in 2024. One thing you can count on; Bedell Frazier will be there at your side.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
