Big Tech Earnings, the Fed and Iran Are in Play as the Market Tries to Recover
Alphabet and Microsoft report after the close, and Warsh takes the stage.
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The market enjoyed a relief bounce Tuesday as pressure on AI-related names eased. However, it will be quickly tested when Alphabet (GOOGL) and Microsoft (MSFT) report earnings after the close Wednesday. Amazon (AMZN) follows on Thursday.
The recent pattern for mega-cap AI names has been that even strong reports with good guidance are sold because of worries about the level of capital spending and whether all that spending will produce sustained profitability.
Recent market action has discounted those concerns to some degree as they have gained attention, and Tuesday’s buying suggests some of the fear has been worked off. However, uncertainty remains, and the likelihood that strong reports will be chased is low. Investors will likely look past earnings and straight to spending plans.
What to Watch Tonight
The spending numbers are huge. In July, Microsoft said capital spending in its fiscal first quarter would top $50 billion and guided Azure cloud growth to 44% to 45%. Alphabet’s planned spending of $180 billion to $190 billion is one of the biggest concerns hanging over the stock.
Analysts expect Microsoft to earn about $4.72 a share on revenue of about $90.6 billion, and Alphabet to earn about $3.02 on revenue of about $127.7 billion. The question for both is whether cloud growth is strong enough to justify the spending, because investors will be looking at that.
The Fed at 2 p.m.
The other big event Wednesday is the Fed decision at 2 p.m. ET. The Fed under Chair Kevin Warsh is in a bind. September’s inflation readings stayed higher than the Fed would like, pushed up by tariffs, energy costs and the AI boom. At the same time, the September jobs report showed only 29,000 jobs added. Warsh didn’t signal a move either way in his Oct. 16 remarks, and with the midterm elections next week, changing rates now would be a surprise.
Fed Fund futures show less than a 10% chance of a hike Wednesday, but close to an 85% chance of one at the next meeting, which ends Dec. 9. So the focus will be on Warsh’s press conference and the degree to which he confirms that a hike is coming. A Fed that is preparing to raise rates while job growth slows to a trickle is a Fed that is more worried about inflation than about the economy.
The market has been less sensitive to the inflation issue lately, in part because it has been more focused on the availability of credit than on its cost. That is what is driving the AI names, as we saw with Broadcom’s (AVGO) guarantees for Anthropic, and it will continue to be a dominant issue. A December hike makes borrowing more expensive, but for the AI group, the bigger question is still whether lenders will provide the money at all.
We also get the first estimate of third-quarter GDP and the September PCE inflation numbers on Thursday morning, a few hours before Amazon reports. A hot PCE number would reinforce whatever Warsh says today.
Iran After the Midterms
A geopolitical issue is also building in the background. The Wall Street Journal reports that the U.S. has told several Gulf Arab countries to be prepared for a short, intense military campaign against Iran after the midterm elections. The U.S. is sending an additional Patriot missile defense system to Israel, restocking munitions in the region and adding another aircraft carrier group next month. President Trump hasn’t made a decision, but people familiar with his thinking say he is leaning toward a large post-election attack.
The midterms are next Tuesday, and the Fed’s next decision comes Dec. 9. If the strikes happen, oil, which is already near its highs, could push higher right before a meeting where the Fed is expected to raise rates because of inflation. Oil and the Fed will be tied together for the next six weeks.
Game Plan
My game plan is to watch for opportunities as the news hits. For example, if we see a selloff in Alphabet and Microsoft that drags down the mega-cap AI names, I may look for additional entries in SpaceX (SPCX) or other names that see reflexive selling. SpaceX doesn’t have the same funding issues as others, so a broad selloff in the group would give me a chance to add at better prices.
I’ll let the reactions tell me where the opportunities are. I have plenty of dry powder and the patience to be selective.
At the time of publication, Rev Shark was long AMZN and SPCX.
