For those of you who would prefer to listen:
Unfazed: That pretty much sums up the Market’s response to the ongoing conflict with Iran. The price of crude surged back above $100 this week. The Market barely blinked. It’s been trying to move past the conflict. Politics and geopolitics definitely can influence price action. But more than anything else, it’s earnings that drive stock prices. We are smack dab in the middle of Q1 Earnings Season and this was the biggest week. The Tech Titans took the field. This, in addition to a Fed meeting, a Royal visit, new data for the U.S. Economy and a surprising OPEC departure. It was quite a week. In the face of so many issues, risks and events, the Stock Market remains all Bulled-up. Here’s another rapid rundown of what happened and why it matters:
The explosive April rally continued the first day of May. Tech led the way. Strong earnings and a neutral Fed triggered the move to fresh, all-time highs. The S&P cleared 7200 for the first time. The Tech-heavy NAS reached 25K. It was the strongest month for stocks since the Covid vaccine rally in 2020. After a significant sell-off in March, traders seemed to be out of position. The majority on Wall Street were still leaning Bearish. When the Market stopped going down, many were caught offsides. The Tech rally commenced. It started with short-covering. Buyers stepped in. That led to a furious chase. That’s what April brought. Then May started out with a bang.
Earnings:
This was the biggest week for 1st quarter results. 180 S&P companies reported earnings this week. That’s nearly 40% of the index. Five of the companies (Apple, Amazon, Alphabet, Microsoft and Meta) account for over 20% of the total S&P value alone. It’s no small deal. Earnings Season provides a snapshot into the health of Corporate America. It’s a time when we investors can focus on facts rather than emotion and hype. In aggregate, companies seem to be in solid shape. Heading into the week, the run rate for earnings growth in Q1 was 15.5%. That was already ahead of expectations. Then came the Tech Titans.
Ahead of their reports was a Wall Street Journal article reporting that ChatGPT owner OpenAI was struggling. This put a dent in the AI-trade, which came alive with a vengeance in April. Semiconductors had their second-best month in history, next to February of the year 2000. Nvidia became the first $5 Trillion company, representing the undisputed AI King. That said, the OpenAI story raised questions about the sustainability of the massive AI investments, not to mention its pending IPO later this year. But those concerns were short-lived. The results reported from the Tech Titans were even better than expected. And there were many important takeaways.
Amazon reported a double-beat. Both revenues and profits were ahead of Street estimates. The company’s revenue grew 17% in the quarter. Its cloud business, Amazon Web Services, saw its revenue grow 28%. The aggressive AI spending is driving that. This was better than expected, however there were whispers around the Street that AWS revenue growth might clear 30%, which had been driving the stock higher ahead of earnings. Amazon also raised its revenue guidance for the rest of the year. Aggressive spending has been an issue for these Silicon Valley giants. Investors want to make sure there will be a return on it. Amazon proved it is. Demand simply can’t keep up with supply. The company said it would spend roughly $200 Billion this year on its AI plans. That’s a whopping 60% increase from 2025. Management is confident it’s money well spent. This AI renaissance is believed to be the investment opportunity of a lifetime. That’s certainly what the Market suggests.
Amazon’s retail business continues to prove its resiliency. High gas prices and nagging inflation are slowing American spending down. Amazon’s loyal customer base continues to purchase on the platform due to price and ease of use. Its retail sales grew 12% in Q1. Amazon just passed Walmart, becoming the largest revenue generating company in America. It produces over $700 Billion in sales per year. The company is now worth nearly $3 Trillion, making it the 5th largest company in the country. These are just astounding numbers. Amazon also acquired a satellite company while also releasing a surprising Box Office smash “Project Hail Mary”. Amazon’s results put a charge into all 3 major indexes. It was definitely Market-moving.
Google parent Alphabet also reported a double-beat. Its Cloud business was the driver, with revenue surging 63% compared to a year ago. Its backlog doubled from just a quarter ago, indicating Google continues to take Market share. Admittedly, that growth comes from a smaller base. It is catching up with Amazon and Microsoft, who have led the space. Google plans to spend $190 Billion this year to support the AI infrastructure build. “We are seeing unprecedented internal and external demand for AI compute resources,” CFO Anat Ashkenazi said on the earnings call. “The investments we are making in AI are delivering strong growth, as evidenced by the record revenue and backlog growth in Google Cloud and strong performance in Google services.”
Advertising remains Google’s core business. It still accounts for 70% of company revenue. Ad sales grew 16% in the first quarter, with the search leading the way at 19% growth. YouTube’s ad sales generated nearly $10 Billion in the quarter. CEO Sundar Pichai said viewers around the Globe are watching over 200 Million hours of content on YouTube every day. YouTube passed both Netflix and Disney as the most watched streaming platform and TV network.
Gemini has experienced a major adoption. That shows real demand for its AI platform, beyond the hype. ChatGPT remains the most popular large language model app with over 900 Million weekly users. But Google’s Gemini is closing in, the fastest-growing AI app out there. Gemini Enterprise, its AI platform for businesses, saw a major jump in paid subscribers. That indicates it is competing well with Anthropic, which had been an earlier winner in the enterprise space. Google’s Waymo business continues to expand. The autonomous vehicle service cleared 2 Million rides last month. It’s increased 10X in less than 2 years. Half of the Waymo rides are in California. Those Jaguars can be seen all over San Francisco today. A Waymo is the ultimate AI mobile device. A year ago, Google was considered a loser in the AI race. The company has made it clear, it is in it to win it. Alphabet has become the 2nd largest company by market capitalization leaping both Apple and Microsoft, quite a run.
Microsoft also reported a double beat. Its cloud business, Azure, led the charge with 40% revenue growth. Management expects the strength to continue as AI demand continues to outpace supply. But the increase in capital spending put the brakes on the stock price as investors are concerned about positive returns and Microsoft’s ability to innovate. The company said it will spend $190 Billion this year, well ahead of the $160 Billion it outlined prior. Total company revenue growth is not keeping up with the rate of spending. Microsoft is caught between the massive growth in its cloud business and the increasing risk that Artificial Intelligence is negating the need for software as a service. What’s more, its Co-Pilot AI tool has not seen the rapid adoption that other AI apps have experienced. It’s considered a laggard. But management says that’s their opportunity. It’s a show-me situation. Software stocks have been hit hard, not participating in the rally like other areas of Tech.
Meta, the company formerly known as Facebook, also reported a double beat. Increased spending expectations to as much as $145 Billion this year. At the same time, it didn’t raise guidance for revenue, indicating it’s taking longer for these massive investments to yield returns. The Street didn’t like that. The stock fell on the news. The company still maintains a strong user base, with over 3.5 Billion daily users on its platform. That’s Facebook, Instagram and WhatsApp, among others. The company did see a traffic decline from the previous quarter as the conflict in Iran and war in Ukraine brought outages.
Meta is laying off thousands of employees while it invests aggressively in Artificial Intelligence. CEO Mark Zuckerberg said, “If a team used to take 50 or 100 people and now it takes 10, having 50 or 100 people on that team can actually be counterproductive going forward so I think we need to fix that.” He added that reducing the team sizes doesn’t necessarily mean the company will be laying off all of those people. But the issue is clear. AI is proving that many jobs will no longer be needed. On the earnings call, Zuckerberg said he doesn’t believe AI will replace people, as many fear. He said, “Instead, I think that AI is going to amplify people’s ability to do what you want, whether that’s to improve your health, your learning, your relationships, your ability to achieve your personal career goals and more.” Not everyone is so sure. It’s a big issue for the future of Planet Earth.
Apple followed the other Titans with a double-beat of its own. Strong demand for the iPhone was the driver. The company generated $57 Billion in revenue in the quarter. That was a 21.7% increase from a year ago. Outgoing CEO Tim Cook called the demand for the iPhone 17 “extraordinary”. Services, its most profitable business line, was up 16%. Sales in China picked back up, generating over $20 Billion. That is a key insight for the Global Economy. China had been a major laggard of late. Geopolitics and a slower Economy had been an issue. The health of U.S. and China trade will be front and center when Presidents Trump and Xi meet in Beijing in 2 weeks. The Market will certainly be watching.
Intel stock had its best month in history. That’s saying something for this 6-decade-old company that helped power the advancement of the internet. That historic Bull Market led to that Dot-com bubble, which ultimately burst. Intel’s stock price doubled in April, yielding a tidy return for American taxpayers after the government took on a 10% position last year. Semiconductors have been the undisputed leaders in the AI trade. Intel is trying to reinvent itself. The Market likes what it sees.
Visa reported a solid quarter, which is a direct reflection of the American Consumer. Representing nearly 70% of America’s economic production, studying consumer behavior is essential for investors. Credit card companies are key barometers there. Visa’s revenue grew 17% in the quarter. Payment volume rose 8% in the U.S. with broad-based spending improvement in both credit and debit. The company attributed part of the strength to higher tax refunds. This from CFO Chris Suh: “Both discretionary and nondiscretionary spend remain strong. We do not see signs of the lower spend consumer weakening in our volumes.” It’s pretty remarkable considering the higher fuel prices, which tend to suck away the spending in other areas. What’s more, Visa raised its outlook for the rest of the year. That’s a statement that Management feels confident about the continued strength of the American consumer.
Demand for the “Real Thing” remains strong. The Coca-Cola Company also reported a double-beat. Coke saw another increase in volume growth, showing that sales are increasing due to actual demand, not just higher prices. Across its suite of beverages, Coke’s water, sports, coffee and tea segments reported the strongest global growth. Demand was strongest for Coke Zero, which saw a 13% increase in sales. The company’s tea and bottled water business also saw strength. Coke’s juice and plant-based beverage lines were the weakest. Coke is a barometer for the Global Consumer, as its beverages can be found in every country on the planet. Management did say the conflict in Iran has had a negative impact on sales in the region, and has noticed an increase in commodity prices, but is able to absorb them. You can learn a lot about the Global Economy by studying the Coca-Cola Company.
Beyond Tech and the Consumer Companies, which have been driving the Stock Market of late, are the Energy companies, which fuel and power our ways of life. Both Chevron and Exxon reported earnings on Friday. The results provided much to learn from. Profits for both companies were down significantly compared to a year ago. Keep in mind, the price of Oil was in the $50’s for most of the quarter before it spiked in response to the conflict in Iran. The price has doubled since.
Exxon has about 15% of its daily production impacted from the conflict in Iran. It’s driving costs higher, which squeezes profits. The cost of delivering refined products has skyrocketed in the Persian Gulf. Even when the Strait of Hormuz opens, Exxon CEO Darren Woods said it would take 1-2 months to normalize at the earliest. Under normal circumstances, it takes on average a month for barrels to leave the Persian Gulf and arrive to its customers. Much of that is going to Asia. Exxon redeployed roughly 13 Million barrels to the Markets that needed it most.
Chevron is less exposed to the Middle East than most large Oil companies. Its largest Markets are the Americas, Australia, Africa and Asia. Chevron has a unique position in Venezuela. The company mostly felt the negative impact of the conflict with higher transportation and refining costs. Both Chevron and Exxon benefit from higher Oil prices. The challenge is to make sure supplies are there to meet demand and that high prices don’t crush demand. That’s not happening yet. It’s the supply disruption that has caused the price spikes.
America’s Economy keeps chugging along. Q1 Gross Domestic Product grew at a 2% rate. That was a nice jump from the sluggish 0.5% number reported for Q4. AI is a big reason. Business spending, especially in the form of infrastructure, equipment, and software related to AI, is doing a lot of the heavy lifting for the Economy. That segment grew 8.7%. It accounted for three-quarters of the GDP growth. Spending on equipment alone increased 17%. Personal Consumption lagged a bit. High prices from inflation are the clear culprit there. Not everyone is benefiting from the massive AI spend. But both the Economy and the Stock Market sure are.
In a great bit of irony, King Charles came to America to honor its 250th anniversary from its British dependence. The newly crowned King first went to the White House, then reached Capitol Hill before heading to New York City. He was the first British Royal to address Congress since his mom, Queen Elizabeth, in 1991. The King’s speech was well-received and well-reviewed. It came at a time when western alliances fray. President Trump has an affection for the Royals. That much is clear. That in and of itself seems strategic. King Charles eloquently asserted: “From the bitter divisions of 250 years ago, we forged a friendship that has grown into one of the most consequential alliances in human history.” The King emphasized the importance of NATO and the defense of the sovereignty of Ukraine. President Trump said that Charles gave a great speech, and that he was a little jealous. It was an important message at a pivotal time.
The United Arab Emirates (UAE) announced it is leaving OPEC. The organization has been in existence since 1960. The UAE has been a member since 1967. This break in the cartel indicates a strengthening in alliance with Israel and the United States and a strain with the Saudis. This also means more Oil could be produced, once the conflict concludes. The UAE no longer wants to be held to production levels determined by OPEC. Of course, OPEC is heavily influenced by the Saudis.
This is no small deal. It’s a fight over the region’s future. This isn’t just about Oil. It’s more about 2 competing visions for the future of the Middle East. The UAE is focused on modernizing, embracing commerce, and attracting tourism. It views itself like a Las Vegas in the Middle East. It wants to reduce its dependence on fossil fuels and escape the constant threat of terror in the region. This withdrawal really demonstrates that Persian Gulf unity has cracked. It makes the conflict with Iran even more consequential.
It is an end of an era at the Fed. This was Chair Powell’s final meeting as the head. There was no rate cut. One wasn’t expected. Also unexpected were 4 dissenting votes. That had not happened since 1992. Importantly, they were really skewed. 1 wanted a rate cut. The other 3 want flexibility for a hike later in the year. This situation is quite uncommon. The Fed members are certainly sending a message to the incoming Chair. He already has his work cut out for him, as the White House has strong expectations of lower interest rates. Despite all this, the Market wasn’t fazed. Treasury yields barely budged. But the direction it did move was flattening. Just 1% separates the yield curve, from 2-Years all the way out to 30. Another surprise, sort of; Powell is not leaving right away. That is rare. He plans to stay on as a Governor until the lawsuit completely goes away. So, what’s the takeaway for America’s central bank? The Market is looking at solid economic growth combined with high energy prices and a new Fed Chair that might be pressured to cut. That’s for tomorrow. It’s not worried about it today.
Berkshire Hathaway is hosting its annual investor event this weekend in Omaha. The Oracle will be missing from center stage. For the first time in six decades, Warren Buffett will not be presenting at the Berkshire annual meeting. He has officially handed over the reins to a new leader and a new team. There’s a theme here in Corporate America. As I mentioned last week, both Apple and Disney are in the midst of leadership succession. It doesn’t stop there. The Coca-Cola Company has a new leader this year. When you add in the Fed Chair, 2026 is proving to be the end of an era for many high-profile leaders. And that’s entirely natural and healthy.
Back to AI and Job Losses:
Over 45K Tech workers were let go in March. That’s the most in over 2 years. Management has made it clear, unlike previous job loss cycles, the terminations are not due to business struggles. Quite the contrary, they’re happening because technology is replacing the need for more human brain power.
Nearly $700 Billion is expected to be spent this year on AI. The median S&P 500 company generates roughly $575K per employee. However, the Tech Titans with company values well above $1 Trillion, generate over $2 Million per employee. That makes these companies much more profitable and of course, it’s those bottom-line earnings that drive stock prices. This is the muscle and the backbone of the AI-trade. With over 60% of the S&P companies now reported, over 80% of them have beat both revenues and earnings estimates. Earnings have grown thus far at a 15.5% clip, far eclipsing the 13% growth estimated just a month ago. Despite all the crises and chaos around the Globe, the Stock Market sits at fresh, all-time highs. This is proof positive that, beyond anything else, it’s earnings that are the biggest driver of stock prices.
Thanks for sticking with me on this long and eventful piece. There’s clearly so much going on.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
