Market Pulse with Dan Sheehan

Good Morning Investors,

Markets extended their record-setting run Wednesday, with the S&P 500 (+0.8%) and Nasdaq (+0.6%) posting fresh all-time highs as Big Tech earnings kicked off with mixed results. The Dow gained 1.1%, closing just four points shy of its own record, while trade momentum from the Japan deal and EU progress provided additional tailwinds. Despite elevated valuations and AI investment concerns, the underlying market structure remains constructive heading into the heaviest week of earnings season.

Markets powered higher on Wednesday, notching the 12th record close of the year for the S&P 500 and pushing the Nasdaq Composite above 21,000 for the first time, as earnings season picked up pace. The Dow finished just four points shy of a new high, with strength broadening across sectors. Once again, the market rewarded execution over headlines. Alphabet’s surge in AI investment was met with confidence, while Tesla’s delivery drag was partially offset by resilient margins.

Futures point to a modest pause after the rally: S&P 500 ($SPY ( ▲ 1.54% )) +0.1%, Nasdaq-100 ($QQQ ( ▲ 1.54% )) +0.3%, and the Dow ($DIA ( ▲ 1.94% )) down 198 points (-0.4%), as IBM’s software miss weighs on industrials. Still, tech remains bid into Intel’s results tonight, and the broader setup feels rotational, not reversal. Beneath the surface, internals remain constructive, capital is staying in the market, just finding new leadership.

The Numbers:

Segment Performance Deep Dive:

The AI Investment Reality: The market's key concern materialized: Alphabet raised 2025 capex from $75B to $85B, with CFO Anat Ashkenazi explicitly stating further increases are planned for 2026. This $10B increase reflects "strong and growing demand for Cloud products and services," but represents a staggering investment level that dwarfs most companies' entire revenues.

Operating expenses surged 20% to $26.1B, with the biggest driver being a $1.4B legal settlement charge related to Texas AG Ken Paxton's data privacy lawsuit. Beyond one-time costs, Alphabet is clearly prioritizing AI talent acquisition, with the recent $2.4B Windsurf AI coding startup acquisition exemplifying their aggressive approach.

AI Monetization Progress: The usage metrics tell a compelling story of early AI adoption:

Critically, CEO Sundar Pichai noted that AI Overview users engage 2x longer than traditional search queries, and 5% of total Search traffic now comes from AI-enhanced experiences. This suggests early monetization is occurring, though the revenue impact remains modest relative to the investment scale.

Competitive Dynamics & Risk Factors: The antitrust overhang remains significant. Judge Amit Mehta's ruling that Google violated antitrust law in search creates potential for forced divestitures, including the Chrome browser or default search agreements with Apple. Remedies are expected next month, representing a material risk to the core search monopoly.

Meanwhile, the AI search competition is intensifying. While Google maintains dominance, upstarts like Perplexity and OpenAI's SearchGPT are attempting to redefine search entirely. Google's response through AI Overviews shows they're taking the threat seriously, but risks cannibalizing their own high-margin search advertising.

Strategic Implications: Alphabet's 4% after-hours gain suggests investors are accepting the "invest now, monetize later" thesis, particularly given the strong cloud performance and search resilience. However, the company is walking a tightrope between maintaining current cash flows while rebuilding for an AI-centric future. The $85B+ capex commitment shows management believes the AI opportunity justifies massive upfront investment, but execution will be critical to avoid becoming a cautionary tale of overspending on unproven technologies.

The Numbers:

The Structural Challenges: Tesla's second consecutive quarter of declining automotive sales reflects deeper industry dynamics beyond typical cyclical weakness. Chinese EV competitors are aggressively expanding globally with lower-cost alternatives, while traditional automakers like Ford and GM have significantly improved their EV offerings. European data from ACEA showing Tesla registrations declining in June underscores the global competitive pressure.

The regulatory credit revenue halving to $439M is particularly concerning, as this high-margin income stream faces permanent pressure as legacy automakers improve their own EV compliance. This previously reliable profit source is becoming structurally impaired.

Musk's Sobering Assessment: CEO Elon Musk's warning that Tesla "probably could have a few rough quarters ahead" due to federal EV tax credit expiration represents a notable shift in tone from previous optimistic guidance. The qualifier "I am not saying that we will, but we could" suggests management is genuinely uncertain about near-term demand patterns.

More significantly, Tesla departed from its earlier 2025 growth guidance entirely, a stark contrast to the company's historical practice of providing ambitious targets. This guidance withdrawal aligns with Morningstar analyst Seth Goldstein's interpretation that "management is no longer forecasting volume growth," expecting deliveries to actually decline in 2025.

Margin Resilience Amid Volume Pressure: The one bright spot was automotive gross margin of 14.96% (excluding regulatory credits), which exceeded Wall Street estimates despite the volume decline. This suggests Tesla's manufacturing efficiency improvements and cost reduction initiatives are working, even as pricing pressure intensifies globally.

The company maintains substantial financial flexibility with its $29B+ cash position, providing runway for the robotaxi transition and continued R&D investment in autonomous driving and humanoid robots.

The Autonomy Pivot: Tesla's long-term thesis increasingly depends on successful deployment of Full Self-Driving (FSD) technology and the promised robotaxi network. The company continues to operate limited pilots in Austin with human safety operators, but the timeline for fully autonomous commercial deployment remains uncertain.

Musk's broader vision extends beyond automotive to humanoid robots and AI, positioning Tesla as a technology platform rather than traditional carmaker. However, this transformation thesis requires flawless execution on multiple fronts simultaneously.

Political and Brand Risk: The political dimension cannot be ignored. Musk's high-profile political activities, including his role in the Department of Government Efficiency (DOGE) and recent endorsement of Germany's AfD party, have created brand risk in key markets. Some investors have publicly urged Musk to reduce political involvement, fearing negative impact on Tesla's brand perception and sales, particularly among environmentally-conscious consumers who traditionally favored Tesla.

Market Reaction & Valuation Reset: The 6% premarket decline extends Tesla's 2025 underperformance to approximately 24%, making it the worst performer among mega-cap technology stocks. This represents a significant valuation reset from the company's previous premium multiple, as investors increasingly demand proof of concept for the autonomous driving narrative.

Strategic Outlook: Tesla remains a compelling long-term story if Musk can execute on the autonomous driving and robotics vision while maintaining focus on operational excellence. The company's manufacturing capabilities, charging infrastructure, and energy storage business provide diversification beyond pure automotive exposure. However, the near-term outlook has clearly deteriorated, requiring patience from investors willing to bet on Tesla's transformation from car company to AI/robotics platform.

Trump's announcement of a "massive Deal" with Japan, including 15% reciprocal tariffs, provided Wednesday's initial market lift. The agreement suggests a more structured approach to trade negotiations than initial "America First" rhetoric implied.

Financial Times reported advancing US-EU negotiations toward similar 15% tariff structures. Bloomberg confirmed diplomatic progress, with talks intensifying ahead of the August 1 deadline. Sources suggest Trump's focus on "open markets for US exports" rather than purely punitive measures.

These developments reduce tail-risk scenarios around trade wars while maintaining pressure for bilateral agreements. Auto sector relief and industrial equipment strength are emerging themes, with the market interpreting rational trade policy as a net positive for risk assets.

The heavily-shorted stock rotation shows no signs of abating:

This dynamic supports the thesis that the 25% S&P rally has been driven significantly by forced covering rather than fundamental optimism- a technically bullish but fragile foundation.

GE Vernova exemplifies the picks-and-shovels AI trade beyond semiconductors. Up 15% Wednesday and 86% YTD, the power equipment supplier is benefiting directly from data center buildout demand. This theme extends beyond traditional tech into utilities, industrial equipment, and real estate.

Financials, energy, and industrials are participating alongside tech, suggesting the market structure is healthier than the concentration metrics imply. This breadth expansion typically supports sustained bull market conditions.

I continue to maintain an overweight position in US equities heading into year-end, with a $6,500 target for the S&P 500 and potential for $7,000 by mid 2026 as AI monetization becomes more of a reality. The fundamental thesis remains intact despite near-term volatility around policy catalysts.

Key Themes:

AI Leaders with Revenue Proof: Alphabet's results validate the invest-to-grow thesis. Companies demonstrating clear monetization pathways rather than just elevated spending deserve continued overweight positioning.

Trade Beneficiaries: Japan/EU deal progress suggests a more rational policy approach than initially feared. Industrial equipment, logistics, and auto suppliers are positioned for relief rallies as trade tensions moderate.

Infrastructure/Power Equipment: GE Vernova's outperformance highlights the secular data center buildout theme extending beyond traditional semiconductors into utilities and industrial equipment.

Quality over Momentum: While meme stock rotation creates tactical opportunities, the focus should remain on companies with strong balance sheets, clear competitive moats, and sustainable earnings growth rather than speculative momentum plays.

Immediate Catalysts:

Valuation Discipline: Current S&P 500 trading at ~24x forward earnings after 25% rally requires perfect execution. Any guidance disappointments risk material corrections in individual names.

This earnings cycle is separating the wheat from the chaff. Alphabet's willingness to invest $85B+ in AI while maintaining 14% revenue growth demonstrates the scale advantages of mega-cap technology. Tesla's challenges highlight how quickly narratives can shift when execution falters, even with $29B+ in cash.

The market's continued advance despite elevated valuations reflects three key factors: 1) Short covering dynamics providing technical support, 2) Trade policy rationalization reducing tail risks, and 3) AI monetization beginning to justify investment levels.

For more on how to navigate this market and your own situation, feel free to message me.

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Dan Sheehan

[email protected]

The information contained herein is for informational purposes only and should not be construed as investment advice. Past performance does not guarantee future results.