Google Steals the Show after Fed Rate Cut

Good morning investors,

The Fed delivered its expected quarter-point cut Wednesday but Powell's warning that December "is not a foregone conclusion" temporarily spooked markets before cooler heads prevailed. Meanwhile, Big Tech's AI spending bonanza continues with Meta, Microsoft, and Alphabet all committing to "notably larger" capital expenditures despite vastly different profit margins. Today brings the Trump-Xi summit finale plus earnings from Apple and Amazon to complete the Magnificent Seven reporting cycle.

Dow ($DIA ( ▲ 0.12% )) futures fall 140 points with S&P 500 ($SPY ( ▲ 0.07% )) and Nasdaq ($QQQ ( ▲ 0.21% )) futures both down 0.2% as investors digest mixed Big Tech earnings. Alphabet ($GOOGL ( ▼ 1.06% )) surges 6% premarket after strong Q3 results with revenue beating across Search, YouTube, and Cloud. Meta ($META ( ▼ 1.55% )) tumbles 8% despite highest revenue growth since Q1 2024 due to a $15.93 billion one-time charge from Trump's tax bill. Microsoft ($MSFT ( ▼ 0.13% )) falls 2% after revealing its OpenAI investment reduced earnings by $3.1 billion, raising concerns about AI spending sustainability.

Rare earth miners including USA Rare Earth and MP Materials gain 3-4% premarket after Trump announced China would delay export restrictions for a year as part of the trade agreement. Markets ended mixed Wednesday with the S&P 500 flat, Dow down 0.2%, and Nasdaq up 0.6% after initially dropping on Powell's December uncertainty.

President Trump and Chinese President Xi concluded their South Korea summit with a limited but market friendly agreement. The US will cut fentanyl related tariffs from 20% to 10% "effective immediately," reducing overall tariffs on Chinese goods to approximately 47% from 57.6%. China agrees to delay rare earth export restrictions for a year and increase soybean purchases while working to stop fentanyl trafficking.

Trump called the meeting "amazing" and "12 on a 10-point scale," promising a formal deal signing "pretty soon" with additional details forthcoming. A state visit to China is planned for April. Capital Economics notes the de-escalation "takes the immediate threat of large tariff hikes off the table" though underlying structural issues remain unresolved, suggesting both sides will continue pursuing broader decoupling efforts.

Wednesday's earnings revealed starkly different realities among tech giants all committing to massive AI infrastructure spending. Alphabet shattered the $100 billion quarterly revenue milestone for the first time, with Google Cloud surging 34% to $15.15 billion. The company raised capex guidance to $91-93 billion, nearly doubling from last year. What makes Alphabet particularly attractive is its valuation discount to peers, you're getting dominant search, Cloud growing 34%, YouTube's irreplaceable platform, and leading quantum computing research at a compelling price.

Microsoft delivered a solid beat with Azure growing 40% versus 38.2% expected, proving enterprise AI demand is real. The OpenAI partnership clarification removes uncertainty with Microsoft's 27% stake worth $135 billion and OpenAI committing to $250 billion in Azure usage. Yet shares fell 4% as investors questioned whether massive capex increases will translate to margin expansion given persistent capacity constraints.

Meta's 8% drop despite beating estimates represents a market overreaction to accounting noise. The $15.93 billion one-time tax charge from Trump's bill actually improves future cash tax position, this is not a fundamental business issue. At just 24x forward earnings with 3.54 billion daily active users and raised capex for strategic AI investment, Meta looks oversold. The market is punishing Meta for doing exactly what it should: investing in the future while delivering strong current results.

The Federal Reserve cut rates by a quarter point Wednesday as expected, but the 10-2 vote reveals a fracturing consensus that will define monetary policy ahead. Governor Stephen Miran dissented for a half-point cut (his second consecutive dissent) while Kansas City's Jeff Schmid wanted no cut at all. Two dissents pulling in opposite directions is unusual and signals the unity that carried the Fed through Covid and inflation is breaking down.

Operating essentially blind due to the government shutdown's data blackout, the Fed acknowledged "available indicators suggest economic activity has been expanding at a moderate pace" while flagging increased downside risks to employment. Powell's shift from inflation concerns to labor market risks marks a pivot, though he emphasized December is "not a foregone conclusion."

The Fed also announced ending quantitative tightening December 1st after reducing holdings by $2.3 trillion from the $9 trillion Covid peak. I expect more dissents ahead as the dual mandate pulls policymakers in opposite directions, a divided Fed navigating conflicting signals with limited data creates uncertainty that could matter more than the cuts themselves.

Eli Lilly crushed Q3 expectations with adjusted EPS of $7.02 versus $5.69 expected and revenue of $17.60 billion versus $16.01 billion expected, up 54% year-over-year. Mounjaro generated $6.52 billion versus $5.51 billion expected while Zepbound delivered $3.57 billion, up 184% year-over-year. The company raised full-year revenue guidance to $63-63.5 billion from $60-62 billion previously.

Volume growth of 60% in the US drove results as Lilly maintains majority market share in the booming GLP-1 market. The partnership with Walmart for in-store pickup of discounted Zepbound vials expands access for cash paying patients. Meanwhile, Novo Nordisk launched a rival bid for US obesity biotech Metsera, hijacking Pfizer's offer as competition intensifies.

OpenAI is laying groundwork for an IPO potentially valuing the company at up to $1 trillion, targeting late 2026 or 2027 for the offering. The company could raise $60 billion at minimum in what would rank among history's largest IPOs. With annualized revenue approaching $20 billion but mounting losses, public markets access becomes critical for CEO Sam Altman's trillion-dollar infrastructure ambitions.

The restructuring completed this week positions OpenAI for public listing with the nonprofit foundation maintaining 26% ownership. Microsoft owns approximately 27% after its $13 billion investment now valued at $135 billion. Altman acknowledged Tuesday that going public is "the most likely path for us, given the capital needs that we'll have."

The Trump-Xi summit delivered tactical de-escalation but not strategic resolution. Markets can breathe easier with the November 1st cliff gone, yet fundamental technology competition continues. The Fed's growing division with dissents pulling opposite directions signals the consensus that guided us through crisis is fracturing. A divided Fed navigating without data creates more uncertainty than the cuts themselves provide clarity.

Big Tech earnings exposed the sustainability question around AI spending, but the market's reactions seem misguided. Alphabet crossing $100 billion in quarterly revenue while trading at a discount to peers offers compelling risk-adjusted returns. Microsoft's 40% Azure growth validates enterprise AI demand is real. Meta's 8% drop on accounting noise and strategic AI investment looks like a gift for patient investors at 24x forward earnings.

I've been bullish on Alphabet in my newsletters and this quarter reinforces why. They are positioned to lead in both AI and quantum computing at an attractive valuation. The market punishing Meta for investing in the future while delivering strong results creates opportunity. These conditions can be bullish for stocks, though much is already priced in given markets' forward looking nature.

Today's Apple and Amazon results complete the Magnificent Seven cycle. With Nvidia at $5 trillion and markets at records, execution must match extreme expectations. OpenAI's trillion-dollar IPO ambitions test whether public markets will sustain private market exuberance. As Powell noted, unlike the dotcom era, today's companies "actually have earnings and stuff like that" - though some more than others.

As always, feel free to reach out with questions about positioning for these evolving market dynamics.

Best regards,

Dan Sheehan

[email protected]

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.