Good morning investors,
The AI spending bonanza continues with Amazon's $38 billion OpenAI deal sending tech stocks higher Monday, but Tuesday's pullback reminds us that even the strongest narratives face valuation reality checks. Palantir's 63% revenue growth couldn't prevent a selloff as investors question whether 700x P/E ratios make sense. With Goldman and Morgan Stanley CEOs warning of 10-20% corrections ahead and the government shutdown tying records at 35 days, November's chop is arriving on schedule.
Opening Bell: AI Valuations Face Reality Check
Dow futures fall 338 points with S&P futures down 1% and Nasdaq futures falling 1.3% as AI darlings face profit-taking. Palantir drops 6.8% premarket despite crushing estimates and guiding above expectations, a classic case of "good but not good enough" at extreme valuations. Oracle falls 2% and AMD slides over 2% as investors reassess paying 100x+ earnings multiples.
The selloff follows warnings from Wall Street's top brass. Goldman's David Solomon sees a "likely 10-20% drawdown" within 24 months while Morgan Stanley's Ted Pick welcomes "10-15% drawdowns" as healthy. With the S&P 500's forward P/E above 23, approaching 2000 levels, and breadth deteriorating (more stocks fell than rose in October), the setup for consolidation strengthens. Drawdowns are more common on a intra year basis than people think, and its easy to forget we had a 20% drawdown this year. While I do feel we will have a drawdown in the next year, I'm still bullish and expect us to be higher at the end of 2026.
Amazon's $38B OpenAI Bombshell
Amazon has landed a blockbuster $38 billion cloud agreement with OpenAI, cementing AWS as a serious AI infrastructure contender alongside Microsoft and Google. The deal grants OpenAI access to hundreds of thousands of Nvidia GPUs and establishes Amazon as a critical partner in building the backbone of frontier AI compute.
The scale is staggering. When combined with OpenAI’s $300 billion Oracle commitment and $22 billion CoreWeave deal, the company’s infrastructure contracts now approach $400 billion. Analysts project total compute costs could exceed $1 trillion by 2030, effectively giving OpenAI nation-state scale through partnerships rather than owned assets.
For Amazon, this is a turning point. AWS had long been seen as lagging behind Azure and Google Cloud in AI-specific workloads. Securing OpenAI as a major tenant reverses that narrative, validating its capability to deliver at the highest performance tier. The market responded accordingly: Amazon stock surged 4% Monday to a record close, while Nvidia gained another 2% as the ultimate beneficiary of every hyperscaler build-out.
The dynamic is self-reinforcing, OpenAI raises capital, channels it into compute, fuels Nvidia demand, and accelerates the next AI cycle. For now, that feedback loop keeps the AI boom alive and AWS right back in the center of it.
Palantir's 63% Growth Not Enough
Palantir delivered everything bulls wanted: 63% revenue growth, tripling net income to $476 million, U.S. commercial revenue up 121%, and Q4 guidance of $1.33 billion versus $1.19 billion expected. CEO Alex Karp called the commercial business "an absolute juggernaut" while landing contracts up to $10 billion with the U.S. Army.
Yet shares fell 6.8% premarket. Why? At 700x current P/E and 200x forward earnings, perfection is priced in and then some. When a stock trades at dotcom-era valuations, beating by 8% isn't enough. You need to obliterate expectations to justify the premium.
The reaction signals a shift in market psychology. Investors are becoming selective about which AI plays deserve extreme multiples. Palantir's 170% year-to-date gain may have simply run too far, too fast. Government shutdown resilience is impressive, but valuations this stretched leave no room for disappointment.
Uber's Platform Dominance Accelerates
Uber crushed Q3 estimates Tuesday with revenue jumping 20% to $13.47 billion versus $13.28 billion expected, while gross bookings surged 21% to $49.74 billion. Net income nearly tripled to $6.6 billion including a $4.9 billion tax benefit and $1.5 billion from equity revaluations. CEO Dara Khosrowshahi called it "our strongest growth since the end of 2023" with the company logging 3.5 billion trips, up 22% year-over-year. The mobility segment generated $25.1 billion in gross bookings while delivery hit $23.3 billion, both beating estimates. Q4 guidance of $52.25-$53.75 billion in gross bookings topped the $52.1 billion consensus. At 189 million monthly active users growing 17%, Uber proves the platform economy remains robust despite consumer headwinds elsewhere. The results validate pricing power and market share gains as competitors struggle with profitability.
Starbucks' $4B China Exit
Starbucks is selling control of its China operations to Boyu Capital for $4 billion, one of the largest China divestments by a Western consumer company. The Seattle giant retains a stake but essentially admits defeat against local rivals Luckin and Cotti, who sell lattes for $1.40 versus Starbucks' $5+ pricing.
The deal values the total China business at $13 billion including retained stake and licensing income. It's a face-saving exit that lets Starbucks claim ongoing participation while removing operational headaches. CEO Brian Niccol can now focus on fixing the U.S. business without China dragging results.
This follows a trend of Western brands retreating from China as local competition intensifies. The days of premium pricing for foreign brands are over. Starbucks joins a growing list of companies discovering that China's middle class prefers value over prestige.
Kimberly-Clark/Kenvue: Defensive Mega-Merger
Monday's $48.7 billion Kimberly-Clark/Kenvue combination creates a $32 billion revenue consumer health giant combining Huggies, Kleenex, Tylenol, and Neutrogena. Kenvue shares soared 18% while Kimberly-Clark dropped 12.5% on dilution concerns.
The deal represents classic late-cycle consolidation. When organic growth slows, companies buy scale. Kenvue has faced strategic review pressure, leadership turnover, and litigation risks since spinning from J&J. Kimberly-Clark gets diversification beyond paper products into higher-margin healthcare.
At $21.01 per share, buyers pay a 28% premium for a challenged asset. But in a world of persistent inflation and weakening consumer demand, scale provides negotiating power with retailers and suppliers. Expect more defensive mergers as consumer companies chase cost synergies over growth.
Tesla's Trillion-Dollar Pay Battle
Norway's $2 trillion sovereign wealth fund voted against Elon Musk's proposed compensation package worth up to $1 trillion at Tesla's shareholder meeting. The fund, holding 1.14% of Tesla worth $11.6 billion, cited concerns about "total size of the award, dilution, and lack of mitigation of key person risk."
The package would grant Musk unprecedented equity if Tesla hits aggressive milestones over 10 years. But with Tesla shares down 2.5% premarket and major institutional investors rebelling, the vote faces headwinds. Musk has threatened to step down without the package, creating a governance crisis.
Norway's opposition matters because sovereign wealth funds often lead on governance issues. If other institutions follow, Musk's pay package could fail, forcing a renegotiation or potentially his departure. At a trillion dollars, even Tesla bulls question whether any executive is worth 15% of U.S. GDP.
Consumer Earnings: The Other Story
While AI dominates headlines, consumer earnings paint a darker picture. RBC Capital notes 81% of S&P 500 companies beat EPS estimates but momentum is slowing. Consumer companies describe "price-sensitive and value-conscious" customers with no near-term catalyst for relief.
The Kimberly-Clark/Kenvue merger partly reflects this weakness. Pizza Hut's strategic review after same-store sales fell 6% shows restaurant struggles. Yum Brands exploring options suggests the chain needs outside help after years of market share losses to Domino's.
With partial SNAP payments during the shutdown and ongoing affordability challenges in housing and dining, lower-to-middle income consumers remain stressed. The K-shaped recovery continues with AI wealth creation at the top while mainstream America struggles with everyday costs.
Final Thought
Tuesday's selloff is a healthy pullback, and one we have been talking about for a couple of weeks. Bull markets need pullbacks. When Palantir can't hold gains despite 63% growth, it signals froth coming off, not fundamentals breaking. Goldman and Morgan Stanley CEOs calling for 10-20% corrections aren't bearish, they're realistic, as we see these drawdowns annually. People will however read the articles assume that they are saying the economy is bad and recession is coming, which is not what they are saying.
The Amazon/OpenAI deal proves AI infrastructure spending has years to run. OpenAI committing $400 billion across multiple cloud providers shows demand isn't slowing. But at 23x forward earnings for the S&P 500 and AI stocks trading at triple-digit multiples, selectivity matters more than momentum.
Bitcoin breaking below $106,000 support adds to risk-off sentiment. The correlation between crypto and high-multiple tech stocks remains tight. If Bitcoin tests $100,000, expect more pressure on speculative names.
I maintain my view: November brings chop with an ultimate move higher into year-end. I do see a drawdown at some point in 2026, but at this moment, I think we finish higher at the end of 2026 as AI monetization takes the headlines. That drawdown will be the buying opportunity of the year.
As always, feel free to reach out with questions about navigating this transitional market.
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.