Good morning investors,
ADP's shocking 32,000 job loss sent rate cut odds soaring to 89% as bad news becomes good news once again. The S&P closed at 6,850 while small caps surged 1.9% on rate cut euphoria, yet Microsoft's AI sales target reduction reminds us that monetization remains elusive. Salesforce surprised with actual AI revenue hitting $500 million annualized while Alphabet's TPU chips could unlock a $900 billion opportunity. The pieces align perfectly for December's rally as labor weakness gives the Fed cover to cut.
Opening Bell: Futures Steady
Dow ($DIA ( ▲ 1.36% )) futures up 45 points with S&P ($SPY ( ▲ 0.23% )) futures flat and Nasdaq ($QQQ ( ▼ 0.32% )) futures marginally lower. Salesforce ($CRM ( ▼ 0.7% )) jumps 5% premarket after beating earnings and raising guidance while Five Below gains 2% on strong results. Bitcoin ($BTC.X ( ▼ 0.05% )) is holding at the $93,000 level. The calm before today's jobless claims data belies yesterday's dramatic moves.
Treasury yields tick higher with the 10-year at 4.082% as markets digest the labor market deterioration. The 2-year at 3.504% suggests confidence in near-term Fed easing despite economic resilience elsewhere.
ADP Shocker Changes Everything
November's 32,000 private job losses versus 40,000 gains expected marks the worst reading in over two years. Small businesses led the cuts, validating K-shaped recovery dynamics where larger companies thrive while smaller struggle. This gives the Fed perfect cover for December easing.
Markets immediately priced the implications with financials surging on loan growth expectations. Wells Fargo and American Express led gains as lower rates promise expanded lending. The Russell 2000's 1.9% surge shows small caps celebrating their rate-sensitive salvation.
Microsoft's AI Reality Check
Microsoft falling 2.5% on reports of lowered AI sales quotas exposes the monetization challenge plaguing the sector. The company's denial helped shares recover from session lows, but damage was done. Nvidia and Broadcom fell in sympathy as AI reality confronts hype.
Scott Welch at Certuity nailed it: "They're all investing in each other, and the market hasn't seen the results yet." The circular revenue worry persists while debt accumulates for data center buildout. Winners and losers emerge as patience wears thin.
I wouldn't bet against Microsoft here just because of one headline, I think their still in a good spot to be amongst the leaders, but they are firmly behind Google now.
Salesforce's AI Validation
Salesforce delivered the AI proof markets desperately needed. Q3 earnings of $3.25 beat $2.86 expected while revenue guidance surprised higher. More importantly, Agentforce AI revenue jumped 330% year-over-year to $500 million annualized, among the fastest product ramps in company history.
The acquisitions of Regrello and Waii show aggressive AI integration beyond promises. Issuing a $60 billion 2030 revenue target ahead of consensus demonstrates confidence. After lagging 29% year-to-date, Salesforce proves AI can generate real revenue, not just capex.
Alphabet's Secret Weapon
Google's TPU chips emerge as the stealth AI winner. The stock's 31% Q4 rally reflects growing recognition these custom chips could capture 20% of AI markets, potentially worth $900 billion. Meta considering billions in TPU spending validates the technology beyond internal use.
TPUs offer cheaper alternatives to Nvidia's GPUs while maintaining performance for specific workloads. If Alphabet monetizes external sales, the chip business could exceed Google Cloud's value. Even without external sales, better chips mean more efficient cloud operations and higher margins.
Bitcoin's Recovery Continues
Bitcoin pushing above $93,000 marks recovery from Monday's worst day since March. Rate cut expectations plus crypto-friendly Kevin Hassett as likely Fed Chair provide macro tailwinds. BlackRock's Larry Fink admitting his "thought process has evolved" on Bitcoin shows institutional acceptance accelerating.
Bank of America's endorsement for Bitcoin in their clients portfolios and BlackRock's IBIT becoming the largest U.S. Bitcoin ETF validate mainstream adoption. With government and institutions aligned, only retail buying remains to complete the trifecta.
I still believe Bitcoin will hit 100k again before the end of the year.
Today's Critical Data
Initial jobless claims at 8:30 AM could confirm or contradict ADP's weakness. Economists expect 220,000 versus 216,000 prior. Any upside surprise might dent rate cut certainty while confirmation of weakness locks in December easing.
Challenger's November layoff data provides additional context on labor market deterioration. Dollar General and Ulta Beauty earnings offer consumer health checks from opposite ends of the spectrum.
Final Thought
The market sits at an inflection point with the S&P at 6,850, having recovered November's losses and approaching year-end targets. We're witnessing bad economic news drive rallies on rate cut hopes while good company news gets scrutinized for sustainability.
The breadth improvement beneath the surface tells the real story. Small caps outperforming, financials rallying, and defensive sectors lagging shows risk-on returning despite AI skepticism. This rotation from narrow tech leadership to broader participation typically precedes sustained moves higher.
December's setup couldn't be clearer: Fed cuts locked in at 89% probability, labor market weakness providing perfect cover, seasonality overwhelmingly positive, and sentiment still skeptical enough to fuel gains. The only question is magnitude, not direction.
My 6,800 year-end target already exceeded leaves room for my upside target of 7,000 if momentum accelerates. The ingredients for that final push align: rate cuts, broadening leadership, and institutional positioning for year-end. Use any weakness from profit-taking as opportunity.
We're entering the sweet spot where policy turns accommodative, earnings remain resilient, and skepticism provides fuel. This is how bull markets extend beyond expectations.
As always, feel free to reach out with questions about positioning for year-end opportunities.
Best regards,
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.