For those of you who would prefer to listen:
The Bulls got tested this week. The Bears were out for blood. It was like the Super Bowl for stocks on Wall Street. Heading into Friday, the Tech-heavy NAS was on track for its worst week since Obliteration Day back in April of ‘25. Silver lost over 1/3 of its value in the week. Bitcoin has been for sale all year, falling to levels last seen in 2024.
The speculative fever has broken. The narrative around AI is evolving quickly. What had been a Bullish backdrop of massive investment in AI infrastructure, leading the multi-year rally, has increasingly stalled. The Tech Titans topped back in October. Only Google hit new highs. Concerns are on the rise regarding industry disruption, widespread job losses, and some growing credit stress. It’s definitely been a sell-first, ask questions later environment. Software companies have been hit the hardest. The Bears took the upper hand for the first time in a while. The Bulls fought back Friday. This fight ain’t over. It just might last into Spring.
The Tech Titans aren’t planning to hit the brakes on their massive AI investments anytime soon. In fact, they keep raising the stakes. These Silicon Valley leaders are spending enormous amounts of money on chips, data centers and networking equipment as the companies rush to build out their AI infrastructure. The Top 4 spenders, often referred to as “Hyper-scalers”, are expected to collectively spend over $600 Billion this year. That’s Amazon, Microsoft, Alphabet’s Google, and Meta, the company formerly known as Facebook. These quad American companies are on track to spend more this year than Germany will.
The Market has gotten quite cautious on the aggressive spend. Investors are looking for returns on those massive investments. Tech Titan stocks have only rallied if companies show early results. Google’s jaw-dropping capital expenditure (CapEx) forecast of $175-$185 Billion for the year got a pass from investors as the company delivered stellar growth in its cloud revenue. It was similar with Meta as the company said it plans to spend between $115-$135 Billion. Amazon just upped them both. The Street definitely wasn’t ready for it.
Amazon shocked the Market with its announced planned spend of $200 Billion this year. That’s a 60% increase from last year. The company’s CapEx is disproportionally directed at building out AI infrastructure to support the rapid growth of Amazon’s Web Services business. On the conference call, CEO Andy Jassy said AWS momentum is accelerating as it continues to pick up huge contracts, both corporate and government. It’s important to remember, Andy Jassy used to run AWS before succeeding Jeff Bezos as CEO. He took the business line from zero revenue to over $60 Billion today. Though down, Amazon’s stock closed Friday well off its lows.
Andy Jassy assured the Street that the increased spending is merely to meet demand and that Amazon will get a return on the investment. The big issue for Amazon, it is spending more than it makes. Management insists it will be disciplined and not reckless with its spending. The Market isn’t so sure. That’s at the heart of the Bull-Bear debate: Will this aggressive spend ultimately be profitable and how long will it last. That said, Amazon has a long track record of success. What’s more, Nvidia CEO Jensen Wang reiterated the need to invest, calling it a ‘generational buildout for AI’. Silicon Valley leaders believe that investment in infrastructure is crucial for connecting the high-performance AI chips and servers. Friday’s rally reflected that conviction.
For Amazon, the largest cloud services provider in the world, enterprise demand for AI infrastructure has been white-hot. AWS simply cannot meet the demand. Growth is not Amazon’s problem. AWS saw its revenue grow 24% in the quarter, the fastest growth in over 3 years. It easily exceeded the Street’s expectations. Although a smaller unit for Amazon, contributing less than 20% of overall sales, AWS generates over 60% of the company’s profit. This followed the strength Google experienced with its cloud business growing 48% in the quarter. Google’s cloud business is quite smaller than Amazon’s. Both growth rates are beyond impressive for their sizes.
The clear driver of the spending surge is to expand data center capacity to meet the seemingly insatiable demand for generative AI and cloud services. This includes adding over 3.8 gigawatts of power in just the last 15 months. That’s enough to power 4 San Franciscos. Amazon plans to double AWS capacity again by 2027. The company has also invested $8 Billion in AI startup Anthropic, which is part of its AI strategy. Anthropic is expected to be one of the hottest IPO’s later this year. Also expected to IPO is ChatGPT owner OpenAI as well as Elon Musk’s SpaceX. With the recent souring on Tech, it will be fascinating to see investor temperament when these dynamic private companies go public.
While AI is the obvious headline, Amazon continues to invest in its logistics and fulfillment network. That’s what supports Amazon’s core e-commerce business. It sends all those Amazon vehicles throughout neighborhoods from coast to coast. The company keeps growing its customer base with further expansion into rural America. It has also increased its same-day and next-day delivery capabilities while expanding delivery of fresh foods. Amazon has been making major changes in its retail division too. It keeps rolling out new Whole Foods stores across the country and plans to open a 225,000-square-foot mega-store outside of Chicago. This is a trial designed to increase its competition with Walmart and Costco. Amazon also continues to invest in its Low Earth Orbit (LEO) satellite network called Project Kuiper. It’s part of the company’s long-term innovative strategy. Amazon also cut close to 10% of its workforce. AI is having a major impact on jobs too.
Back to the Market:
The weakness in Tech didn’t stop the Dow from hitting fresh, all-time highs. It reached the 50K level for the first time Friday. What a historic achievement. More on this milestone next week.
Leadership has broadened big time. The recent strength has come from Energy, Materials, Industrials and Consumer Staples. These sectors are at all-time highs, while Software stocks find themselves 20% lower from their peaks. Some are down 30, 40 and even 50%. Software companies continue to face competitive pressures from AI.
One thing is clear: It’s been a Dow world with the Tech wreck. The Stock Market, as measured by the S&P 500, is likely not able to sustain a rally without Tech participation. It is the largest sector by far, bigger than the 4 current leading sectors combined. The Friday rebound in Tech is comforting. We shall see if it’s long-lasting. This is definitely a stock picker’s Market. The good news: Bedell Frazier loves picking stocks. We keep navigating this choppy environment and are hanging in just fine.
And for those of you wondering about the Super Bowl indicator this year. Don’t hang your hat on it. The theory is that if the NFC team wins, the Stock Market ends the year in the green. If the AFC team wins, it ends red. It was a quirky theory that had a high success rate for decades. But no more. It’s actually been wrong 6 of the last 7 years. What’s more, the S&P has ended the year in the green on the backs of 11 of the last 12 AFC Super Bowl champs. I honestly don’t care who wins. Let’s hope it’s a good game, commercials are entertaining and the Bay Area shines as host.
Have a nice weekend. Enjoy Super Bowl Sunday! And enjoy the Winter Olympics! Let’s go Team USA!
What a weekend for healthy competition at the highest level. It’s all really good stuff. We will be back, dark and early on Monday.
Mike
