Fed holds steady, MSFT selivered, GOOG crashed, markets await PCE, GDP and AMZN

Stocks edged higher yesterday as we waited for results from MSFT and GOOG…. the FED, not so much – the consensus view was in…the FED wasn’t going to do anything….and they did not…. more below.

Key earnings helped set the mood before the opening bell. Vertiv surged 16.5% after revenue jumped 61%, orders more than doubled and management raised its outlook. Flex jumped nearly 12% after beating expectations and lifting guidance, while GE HealthCare added 6.6% on a beat and raise. Overnight, strong results from SK Hynix gave the memory-chips another reason to run - helping Micron gain nearly 6% and the DRAM ETF added 7.1%!

And then there was the FED and as expected they held rates steady. The vote was 10–2, with Governor Lisa Cook and Cleveland Fed President Beth Hammack voting to hike, So the decision wasn’t unanimous and that gave the bond market plenty to say….

Treasuries were all over the place as they tried to interpret what Warsh was saying…. The 2-year yield traded as high as 4.78% and as low as 4.67% only to settle at 4.70% - down 3 bps. The 10-year traded between 4.98% and 5.04% to finish at 5.01% - up 2 bps while the 30-year traded between 5.29% and 5.37% to settle at 5.33% - up 2 bps.

In the end - short-term yields fell while long-term yields rose - Recall what I told you yesterday……

“Watch the bond market. If the Fed holds rates steady but longer-term yields (10’s/30’s) rise, that tell us that inflation remains the bigger concern. If yields fall, that will give stocks some breathing room, but you still need to understand why they are falling…. Is it because inflation is improving or are investors worried about the economy”?

My gut says inflation remains the bigger concern and that is what the market said as well.

Kevin Warsh pointed to healthy consumer spending, solid business investment and stronger economic activity. He upgraded the Fed’s description of growth to “strong,” while acknowledging that inflation remains elevated. Officials left the idea of a December hike on the table but made it clear that they will wait for more information. Let’s be clear - there was nothing in that statement that the market wasn’t expecting.

When the closing bell rang – we saw that the Dow gained 0.2%, the S&P added 0.3%, the Nasdaq gained 0.3%, the Russell up 0.4%.

The Transports lost 505 pts or 2.5% - and here you can blame the ‘trucking – ODFL-7.3% and freight logistics companies like CHRW -11.1% and LSTR – 17% (we discussed this on Monday – rails vs. trucking).

The Equal Weight S&P ended unchanged, while the Mag 7 lost 0.4%.

Now oil did not help…. WTI jumped $2.88, or nearly 2.9%, to settle at $102.78, while Brent added $1.44, or about 1.3%, to end at $115.32. Renewed Middle East supply concerns drove the buying. Rumors of a Houthi strike on a Saudi refinery and worries about potential U.S. military action against Iran either right before or right after the midterms were responsible for the move.

We also learned that US crude supplies fell by 1.9 million barrels, gasoline inventories rose by 3.9 million, and distillates - which include diesel and heating oil - fell by 1.5 million barrels. Pay attention to the distillates….. Transports need diesel and homes and businesses need heating oil as we move into the winter and tighter supplies will keep prices elevated. This morning – WTI is trading down 1% at $101.65.

Gold traded in a $60 range…. $4,025/$4,085- only to settle at $4,066. This morning it is down $40 at $4,026 – continuing to be stuck in the $4,000/$4,250 trading range.

And then came MSFT and GOOG – and it was a tale of two cities…

MSFT delivered. Revenue rose 19% to $92.28 billion, beating expectations of $90.63 billion. Adjusted earnings came in at $4.89 a share versus $4.73 expected. Azure revenue grew 48% to $33.2 billion, exceeding the 45% growth investors had been expecting. Commercial backlog reached $677 billion, up 73%. That number speaks to the substantial commitments for future business.

But the number that helped answer the spending question was CASH FLOW. Microsoft generated a whopping $18.6 billion in free cash flow versus expectations of $8.54 billion. Capital spending came in at $45.2 billion, below its roughly $50 billion projection, partly because third-party capacity deliveries were delayed. Azure growth of 49%–50% is the expectation for next quarter. This morning it is trading up 3% in the pre-mkt at $547.10.

Now GOOG, well it wasn’t so pretty and traders and some investors are tossing it out the kitchen window. It is down more than 10% in premarket trading, helping to pull Nasdaq futures down 300 pts. erasing more than $395 billion in market value.

Sundar – GOOG CEO acknowledged that Google’s AI search engine is weighing on its core advertising business. The company is spending enormous amounts of money to transform search…and now that transformation is generating LESS advertising revenue per query than the business it is replacing. Now Sundar believes it can improve that over time by adding more ads, but investors aren’t buying it this morning.

Sales excluding payments to distribution partners came in at $111.2 billion, below expectations. Google Services revenue of $96.3 billion missed the $98.4 billion estimate. Search advertising grew at its slowest pace in five quarters, and YouTube advertising also fell short.

That matters because advertising IS the CASH ENGINE. It helps finance the data centers, chips, computing power and energy needed to compete in AI. When that engine misses expectations while the spending commitments keep climbing, investors start doing the math….and the math isn’t working.

In addition – Sundar made it clear that his commitments are substantial. He disclosed more than $1 TRILLION in future obligations. ($924 billion in purchase commitments and $152 billion in leases).

Meanwhile, free cash flow was negative $9.1 billion - the second consecutive quarter of cash burn even as he signaled a significant increase in capital spending next year.

But it wasn’t all bad…. there WAS a bright spot. Google Cloud revenue more than doubled to $30.7 billion, beating expectations of $29.1 billion, while operating profit of $11.1 billion exceeded the $9.8 billion estimate. Demand for cloud and AI infrastructure remains strong.

In the end - the market is rewarding financial discipline and evidence of a payoff. Spending remains the issue—particularly when the business funding that spending begins to disappoint.

Eco data today includes Personal Income – exp of +0.3%, Personal Spending of +0.6%, the very important September PCE report (FED favored inflation read) and that is expected to be up 0.5% m/m and 3.6% y/y – both reads HIGHER than the August report. Core PCE – excluding food and energy- of +0.3% m/m and +3.1% y/y – again higher than the August read. 3^rd Qtr. GDP is expected to run at a 3.2% annualized rate.

There will be more than 50 companies reporting today…and so far the 10 that have reported have all beaten…. MRK – one of my favorites and a name that I frequently discuss – just reported and they CRUSHED it…they beat the estimates, they raised guidance and their immunotherapy drug Keytruda along with a new injectable version – called Qlex – posted $830 million in sales - stronger than expected and the highest in any quarter since 2025. The stock is trading up 3% in the pre-mkt and is up 34% ytd.

AMZN is the one to watch after the bell…. Expectations call for $202 billion in revenue, earnings of $1.96/sh (whisper number is as high as $2.34), Revenues of $202 billion – up 12% y/y, AWS growth approaching 40%. But after Google’s stumble, strong cloud growth alone may not satisfy hungry investors. All eyes will be on margins, free cash flow and whether Andy Jassy raises the roughly $220 billion capital-spending plan AGAIN. The question is simple: How much cash is this growth producing—and how much more will it cost?

The options market is pricing in a 7% move in either direction depending on what they say…. This morning the stock is down 1% in the pre-mkt…and is up 10% ytd….

European markets are mixed…Spain and Italy under a bit of pressure while France and Germany are both up 1%.

US futures are mixed…. Dow futures up 190 pts, S&P’s down 24 pts, the Nasdaq down 300 pts (think GOOG) while the Russell is up 11 pts.

The S&P closed at 7,743, up 21 pts. Now if you look at the chart between Aug and now – you see that the S&P has been in a 7500/7800 trading range…. Each time it breached short term support it tested intermediate term support and held and bounced…. That tells you buyers are still defending those lower levels…but sellers are also showing up near the top of the range. Plenty of movement, plenty of headlines, but no decisive breakout or breakdown - until we clear 7,800 or breakdown below 7,500, the broader trading range remains intact.

The key is identifying what headline will cause that next move…Will it be the mid-terms? Will it be an end to the conflict in the middle east or an end in the Ukrainian/Russian war? Well, we’re about to find out…Hold onto your hats….