Good Morning Investors,
Microsoft ($MSFT ( ▼ 0.07% )) joined Nvidia ($NVDA ( ▼ 0.42% )) in the exclusive $4 trillion market cap club last night as AI infrastructure leaders delivered explosive earnings that validate my bullish thesis since April's lows. With Microsoft surging 8% and Meta ($META ( ▼ 0.08% )) jumping 11% in premarket trading, the Magnificent 7's capex spending strategy continues separating winners from laggards in this execution-driven market.
The numbers tell the story: Microsoft's Azure revenue topped $75 billion annually (+34%), while Meta's advertising revenue of $46.5 billion beat estimates by $2.5 billion. Both companies signaled aggressive spending will continue into 2026, with Microsoft planning $30 billion in Q1 capex and Meta raising its range to $66–72 billion.
Opening Bell
Stock futures surged Thursday morning on AI earnings validation. S&P 500 ($SPY ( ▼ 0.17% )) futures jumped 0.9% while Nasdaq 100 ($QQQ ( ▼ 0.09% )) futures climbed 1.31%, driven by Microsoft and Meta's blockbuster results. Dow ($DIA ( ▼ 0.25% )) futures advanced 155 points as markets celebrated Azure's $75 billion milestone and Meta's upbeat Q3 guidance.
Wednesday's mixed session (S&P 500 -0.12%, Nasdaq +0.15%) following Powell's hawkish Fed comments reinforces our thesis: AI execution matters more than macro headwinds for sector leaders.
Market Framework: The $4 Trillion Validation
Microsoft's jump to $4.1 trillion market cap crystallizes the new paradigm where AI monetization justifies premium valuations. The software giant's 18% revenue growth, its fastest in over three years, came entirely from Azure's dominance in AI infrastructure.
Meta's results were equally compelling. CEO Mark Zuckerberg's $14.3 billion Scale AI investment and talent poaching from OpenAI, Apple, and GitHub demonstrate commitment to AI leadership. His comment that AI drove "greater efficiency and gains across our ad system" proves massive capex generates immediate returns.
The market's binary response rewards execution over caution. While broader indices fell on Fed hawkishness, AI leaders surged after hours, validating my April thesis that infrastructure winners compound while laggards stagnate.
Corporate Framework: Capex Arms Race Accelerates
The Magnificent 7's $320+ billion projected capex reached new validation Wednesday night. Microsoft's $30 billion Q1 spending (vs $24.23 billion estimates) and Meta's raised guidance signal we're still early in AI buildout.
Microsoft's 46.6% operating margin despite massive capex showcases available operational leverage. Meta's projection that 2026 expense growth will exceed 2025 levels confirms sustained investment momentum.
Key insight unchanged: companies spending aggressively now are building multi-decade moats. Nvidia's revenue per employee benchmark continues resetting efficiency expectations for AI leaders.
Fed Framework: Powell's Caution Creates Opportunity
The Fed's 9-2 hold decision (Bowman and Waller dissenting for cuts) initially pressured markets but created buying opportunities in AI names. Powell's September cut probability dropped from 64% to 46%, but this benefits companies with pricing power and growing share.
Two governors dissenting for easier policy signals underlying dovish pressure. Powell's acknowledgment that tariff effects could be "short-lived" maintains September as a likely pivot point.
For AI leaders, Fed policy matters less than execution. Microsoft and Meta's massive cash generation while investing heavily provides rate policy insulation.
Trade Framework: Systematic Progress Continues
Trump's South Korea deal (15% tariffs vs threatened 25%) demonstrates systematic negotiation reducing tail risk. Similar to Japan and EU frameworks, this creates business planning clarity.
China's security concerns over Nvidia's H20 chips create near-term uncertainty but validate our focus on diversified AI revenue streams like Microsoft, Meta, and Amazon with less China dependence.
Tonight's Critical Test for AI Leadership
Amazon reports with analyst expectations of $162.2 billion revenue (+9.6% YoY) and $1.31 EPS. The real story: AWS growth, AI service adoption through Bedrock and SageMaker, and progress on its $100 billion annual capex.
I expect Amazon to deliver strongly. The company has beaten revenue in seven of eight recent quarters, exceeding estimates by 0.9% on average. AWS remains the foundational layer where enterprise AI workloads live, while proprietary Trainium and Inferentia chips provide cost advantages.
Apple faces different scrutiny over its measured AI approach versus the "spend to win" mentality rewarded by markets.
Strategic Outlook: AI Capex Validation Accelerates
Last night's results vindicate my sustained bullish stance since April. Accelerating AI revenue, expanding margins despite massive capex, and continued aggressive investment guidance create the perfect setup for outperformance.
Microsoft's $4 trillion milestone alongside Nvidia proves AI leaders support massive valuations through execution. Meta's Reality Labs loss narrowing to $4.53 billion shows even experimental divisions approaching profitability.
The market rewards aggressive AI spending through multiple expansion, validating the thesis of a generational technology shift where early infrastructure leaders build decades-long moats.
Key Events Today
8:30 AM: Core PCE (2.7% expected – Fed's preferred inflation gauge)
8:30 AM: Initial Jobless Claims (224,000 expected)
After the close: Apple, Amazon, Bristol Myers, Coinbase, CVS, Mastercard
Final Thought
Last night marked an AI investment inflection point. Microsoft's $4 trillion milestone and Meta's explosive growth validate that aggressive capex translates into sustainable advantages. The market's execution-over-caution preference continues favoring infrastructure leaders.
I maintain my constructive outlook with increasing confidence. Accelerating AI revenue, expanding operational leverage, and sustained investment commitment create compelling opportunity for selective investors. Tonight's Amazon and Apple results provide the next chapter in this generational transformation.
The opportunities multiply for those focused on AI infrastructure winners building tomorrow's competitive moats.
Dan Sheehan
This newsletter is for informational purposes only and should not be considered as investment advice. Please consult with your financial advisor about your specific situation.