Good morning investors,
Netflix just struck a blockbuster $82.7 billion deal to acquire Warner Bros Discovery's studios and HBO Max, ending the dramatic bidding war and reshaping entertainment forever. Stocks barely budged overnight despite this seismic shift, with futures up modestly ahead of critical PCE inflation data. Meta surged 3.4% Thursday on reports of 30% metaverse budget cuts, finally admitting the $60 billion experiment failed. With jobless claims at three year lows yet layoffs trending higher, the labor market sends mixed signals into next week's Fed decision where 87% odds favor a cut.
Opening Bell: Mega Deal Morning
Dow ($DIA ( ▲ 1.36% )) futures rise 57 points with S&P ($SPY ( ▲ 0.23% )) futures up 0.2% and Nasdaq ($QQQ ( ▼ 0.32% )) futures gaining 0.4%. Netflix ($NFLX ( ▲ 1.49% )) falls 3% premarket on the WBD acquisition while Warner Bros drops 1% and Paramount Skydance slides 2%. The $27.75 per share deal values the transaction at $82.7 billion, creating an entertainment colossus.
Ulta Beauty jumped 4% after hours following another earnings beat with EPS of $5.14 versus $4.64 expected on $2.86 billion revenue. The retailer raised full year guidance for the second straight quarter, proving beauty remains recession resistant.
Netflix-Warner Bros: Deal of the Decade
The $82.7 billion acquisition combines Netflix's streaming dominance with Warner's century of content including HBO, DC Comics, and legendary film franchises. Warner Bros keeps cable networks TNT and CNN for spinoff while Netflix gets the crown jewels. Deal closes Q3 2026 after the separation completes.
This reshapes entertainment permanently. Netflix eliminates its biggest quality content competitor while gaining production capabilities and intellectual property treasure trove. The combined entity controls unprecedented market share, raising regulatory questions that markets seemingly ignore.
Meta's $60 Billion Admission
Zuckerberg finally pulling the plug on metaverse ambitions with 30% budget cuts validates what investors knew for years, virtual worlds don't generate returns. The unit burned $60 billion since 2020 with nothing to show. Thursday's 3.4% surge shows relief at capital reallocation toward AI.
I called Meta ($META ( ▲ 0.4% )) below $600 at Thanksgiving, now up over 10% as fundamentals reassert. Eliminating metaverse waste gives cover for AI spending that spooked investors last quarter despite strong earnings. The stock pushing $700 sooner than expected as the story clarifies.
Labor Market Contradictions
Jobless claims hit three year lows at levels consistent with minimal job losses, yet Challenger reports November layoffs up 24% year over year at 70,000. ADP's shocking 32,000 private job losses concentrated in small businesses. These contradictions defy simple narrative.
The explanation might be structural: white collar workers don't file claims immediately or at all, small businesses cut deeper than corporations, and DOGE related federal cuts distort patterns. Without official data until December 16, markets operate on incomplete information.
Today's Critical PCE Test
September's PCE inflation data at 10 AM becomes the Fed's final inflation reading before Wednesday's decision. Expected at 2.8% year over year and 0.2% monthly for core, any upside surprise could derail rate cut certainty. This stale data from three months ago suddenly matters immensely.
University of Michigan sentiment expected to tick up to 52 from 51, still deeply pessimistic levels. The combination of inflation expectations and consumer mood provides context for Fed deliberations despite the dated nature.
Bond Market's Hassett Skepticism
While stocks celebrate Kevin Hassett's likely Fed Chair appointment, bonds express concern. PGIM's Gregory Peters bluntly stated "I don't think he has credibility" on Bloomberg TV, noting bond markets' message. Hassett's aggressive easing stance might struggle gaining FOMC consensus, potentially leading to rare majority votes with dissents.
This disconnect between equity euphoria and fixed income skepticism suggests markets price different scenarios. Stocks see accommodation, bonds fear inflation resurgence. Both can't be right.
Retail's Resilient Reality
Record Black Friday sales and strong earnings from most major retailers paint a consumer hanging tough despite pressures. Target remains the outlier while Walmart, Ulta, American Eagle, and others beat and raise. Beauty particularly defies gravity with prestige up 4% and mass up 5% year to date.
The K-shaped recovery persists with affluent consumers driving results while lower income cohorts struggle. Retailers successfully navigating this divergence through targeted offerings and experience differentiation capture share.
Final Thought
The market stands at 6,850 having digested November's volatility and approaching my year end targets with conviction building. We're witnessing classic late cycle behavior where mega deals accelerate, unprofitable ventures get cut, and quality differentiates from speculation.
Netflix's Warner Bros acquisition marks peak consolidation as winners cement dominance before the cycle turns. Meta admitting metaverse failure while pivoting to AI shows discipline returning. These aren't bearish signals but natural evolution as markets mature.
Investors remained bearish 75% of weeks in 2025 per AAII, missing the best days that typically cluster year end. With 85% of S&P companies beating earnings on solid revenue, fundamentals support further gains despite sentiment skepticism.
The near term trend remains bullish with leadership broadening into industrials, financials, energy, and small caps. This rotation from narrow tech leadership validates sustainable advance rather than exhaustion. Use any PCE driven weakness as opportunity.
My conviction strengthens for pushing through 7,000 as December dynamics align: Fed cutting despite mixed data, mega deals confirming corporate confidence, unprofitable ventures getting cut, and seasonality overwhelming sentiment. We're in the sweet spot where skepticism fuels gains and positioning remains defensive enough to drive chase.
The final weeks of 2025 often deliver the year's best days. Don't miss them worrying about contradictions in backward looking data.
As always, feel free to reach out with questions about positioning for year end strength.
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.