Microsoft Beats, Alphabet Misses and Fed Holds Steady
Oracle reassurance moved the market more than the Fed did.
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The indices finished Wednesday with small gains, with breadth about 54% positive, 127 new 12-month highs and 248 new lows. The Fed was largely a non-event. For a few minutes, it looked like stocks were running on Fed Chairman Kevin Warsh’s comments, but the timing was coincidental. About two minutes after Warsh started speaking, Oracle (ORCL) reaffirmed its outlook at its investor day, and that is what moved the market.
Fed Points to December
The decision kept the Fed’s benchmark rate between 3.75% and 4% on a 10-2 vote, and the statement did little to challenge expectations of a hike at the meeting that ends on December 9. The two dissents both favored a quarter-point increase. Cleveland Fed President Beth Hammack has dissented before, favoring tighter policy. Governor Lisa Cook hasn’t. It was her first dissent in more than four years.
Cook has called the AI buildout her top concern heading into next year, saying it is “already causing inflationary pressure” that “may not resolve quickly.” So the same spending that has investors worried about profitability is now giving Fed officials a reason to raise rates. The AI boom is no longer just a stock market issue. It is part of the inflation problem.
Bonds didn’t like it, and the iShares 20+ Year Treasury Bond ETF (TLT) moved lower. Stocks shrugged it off, but Warsh made a point the AI bulls shouldn’t ignore. He said he disagrees with the idea that the AI buildout can stay unaffected by rising borrowing costs, because interest rates “affect almost everything directly or indirectly.” He also noted that investors are getting more cautious and that credit spreads on some riskier assets are widening.
That ties directly to the access issue I wrote about on Wednesday morning. Cost and access aren’t separate problems. When rates rise, lenders get pickier, the extra yield they demand from riskier borrowers goes up, and the weakest companies are the first to be shut out. The strongest AI names can still get money. Warsh is telling us the circle of companies that can is getting smaller.
What Oracle Told Investors
On the surface, the Oracle news wasn’t exciting. The company reaffirmed fiscal 2027 earnings of $8.10 a share and revenue of at least $90 billion, both slightly below the consensus. The stock still jumped more than 9%.
What investors liked was the timeline. Oracle said its capital spending will peak in fiscal 2027 and 2028, and it set a target of $30 billion in free cash flow by fiscal 2029, with revenue climbing above $225 billion by fiscal 2030. Oracle is one of the heaviest borrowers in the AI buildout, and its free cash flow is negative right now. Investors have been worried that the spending would never stop. Oracle told them when it will.
That is what the market has been missing all earnings season. Meta Platforms (META) and Tesla (TSLA) beat estimates and were sold anyway because investors couldn’t see where the spending ends. Oracle guided slightly below estimates and was rewarded because it gave a date for when the spending turns into cash.
Split Decision
Microsoft (MSFT) was out first after the close with a beat on both lines. Adjusted earnings came in at $4.89 a share against the $4.72 consensus, and revenue of $92.28 billion topped the $90.74 billion estimate. The Microsoft Cloud business brought in $63.9 billion, and its growth accelerated to 30% from a year ago. The stock is up about 4% on the headlines.
Alphabet (GOOGL) went the other way. Earnings of $2.12 a share fell well short of the $3.01 consensus, and revenue of $127.6 billion was slightly below the estimate. The stock is down about 6%.
What makes the Alphabet reaction stand out is how strong parts of the report were. Google Cloud revenue more than doubled from a year ago, driven by demand for its AI infrastructure. Search query growth was the fastest in five years, and the Gemini app has reached a billion users. By almost any measure, Alphabet’s AI investments are producing growth. But the earnings didn’t keep up, and that is the issue investors have worried about all season. Growth alone isn’t enough anymore. The market wants to see the spending turn into profits, and tonight Microsoft showed that and Alphabet didn’t.
That is a healthier reaction than we have seen. Last week, investors sold Meta (META) and Tesla (TSLA) almost regardless of what they reported. Tonight they rewarded one report and punished another. A market that is sorting winners from losers is in better shape than one that is dumping the whole group.
These are only the first reads, and the conference calls are where investors will hear about spending plans. Last week, Tesla was up after hours and reversed when the details came out. Amazon.com (AMZN) reports tomorrow, along with the GDP and PCE numbers in the morning.
Game Plan
My plan hasn’t changed. I’ll trade the reactions to these reports rather than guess at them, and I have plenty of cash to put to work if the moves give me opportunities.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre was long AMZN.
