Value, defensives and SMID’s power the rally while AI spending debate continues, SPCX crushed it

Stocks found their footing yesterday as investors, traders and algos decided that maybe, just maybe, some of the recent selling had gotten a bit overdone.

The Generals (TECH) took a breather, while the Troops (everything else) led the charge. Buyers recognizing that there is plenty to like OUTSIDE of tech. In fact – advancers outnumbered decliners yesterday on both the NYSE and the Nasdaq by a margin of 2.5 to 1.

Of the 11 sectors – ONLY 1 ended the day lower…and it was TECH – down 0.3%.

The other 10 ended higher - with Healthcare +2.3% (you can thank LLY, JNJ, PFE, AMGN and ABBV), Real Estate + 1.7% & Utilities +1.3%, Financials up 1%, Consumer Discretionary added 0.9%, Consumer Staples +0.6%, Basic Materials + 0.55%, Communications and Industrials were up 0.7% while Energy gained 0.25%.

Down the chain – Homebuilders gained 2.2%, Retailers +1%, Airlines +2%, the Value Trade (SPYV) up 0.9%, Oil & Gas Exploration + 0.3%, Big Pharma +2.5% (you can thank LLY +3.5%, JNJ +2%. MRK +3.2%, BMY +4.8%), Biotech +3.6%...

Many of the names that advanced yesterday were the big divy payers - think about NOBL—the Dividend Aristocrats ETF—which gained 1.1%. The appeal? Companies with at least 25 consecutive years of dividend increases. Through recessions, wars, financial crises and changing administrations…Names like CVX, XOM, EMR, IBM, CAH, BDX, MDT – ETC

And THAT is exactly what we’ve been talking about.

Now, don’t misunderstand me. I am NOT selling my technology. Not even close. In fact, on any pullback, I (me personally) am buying more of the tech names I own…. ….. But that doesn’t mean every new dollar has to go there. You should consider directing some NEW money toward value, quality and more defensive names. Defensive names – for sure - are not sexy, they can be boring, but sometimes boring is good.

As the bell rang – the Dow gained 530 pts, the S&P added 20 pts, the Nasdaq ended the day down 6 pts, the Russell up 45 pts – by far the best performer up 1.7%, the Transports added 184 pts, the Equal Weight S&P gained 86 pts or 1% while the Mag 7 gave back 160 pts.

And what helped turn the mood? EARNINGS…We heard from industrials, defense, autos, energy services and regional banking. RTX & GE came in strong, 3M, NOC, HAL KEY and GM were good – although GM had a cautious outlook.

Then came SPCX after the bell…and it CRUSHED expectations.

Revenue surged 161% to $14.58 billion versus $12.72 billion expected. AI revenue reached $7.56 billion versus the $6.3 billion estimate, while Starlink revenue rose 69% to $5.25 billion. Net income reached $4.4 billion, and EPS of 35 cents topped the 14-cent estimate.

But the spending was enormous, too: $19.6 billion in capital expenditures, including $16.4 billion for compute. There’s the AI debate in one earnings report—explosive growth alongside an enormous investment bill.

Now the options market was pricing in a +/- 7% move after the announcement – traders took it up 5.3% in the after-hours and this morning it is up 9% at $160.70.

Today we will hear from – SF, ABT, MCO, DHR, T, TMO, PM, all before the bell, while after the bell – we’ll hear from ROL, LRCX, TSLA, KMI, LUV, TXN, CSX AND META….

They represent Financials, Healthcare, Communications, Consumer Staples, Industrials, Info Technology, Consumer Discretionary & Energy.

Now, while they are all important – all eyes will be on META and here is why…. It’s where the AI spending story meets the advertising business that pays the bills. Investors want to know whether AI is helping advertisers reach customers, improving engagement and generating enough additional revenue to justify the billions being poured into infrastructure.

How much more does Zuckerberg plan to spend? What does that mean for expenses, margins and free cash flow? And is the advertising outlook strong enough to keep funding those ambitions?

In this market, what management says about the NEXT quarter and the next round of spending – will determine the reaction. META lost $12 yesterday and this morning it is up $5 at $690.75.

Now if Zuckerberg shows investors that profits can grow alongside the spending, then META will restore confidence in the whole AI trade. If he gives us a bigger spending bill without a convincing earnings outlook…and it will be a recipe for disaster. I’m guessing that won’t be the case.

Which brings us to the biggest debate in the market today.

AI. For months now, the conversation has centered on the extraordinary amounts of money being spent to build out AI. Amazon, Microsoft, Google and Meta are collectively planning to spend more than $700 BILLION this year on capital expenditures and related infrastructure investment. That’s NOT a typo.

We have already seen what happens when investors begin questioning the economics of the AI trade. Look at the pressure on Core Weave, concerns over debt financing and the repricing we’ve seen in the semiconductor and technology space.

But here’s where the story gets interesting.

Bank of America Global Research published an interesting chart showing revenue per worker across S&P 500, adjusted for inflation, going all the way back to 1986.

And guess what? That number has surged to a new high in 2026. We saw productivity gains associated with personal computers in the 1980s, the internet in the 1990s, mobile data in the 2000s and cloud computing in the teens. And now we’re watching the next technological revolution unfold with AI, big data and automation.

The chart shows S&P 500 companies generating approximately $230,000 in inflation-adjusted revenue per worker, well above the prior peaks.

Now, is every dollar of that improvement directly attributable to AI? Of course not. Workforce reductions, business mix, pricing and other efficiencies also play a role.

But the trend is difficult to ignore. Companies are finding ways to generate more revenue with fewer employees relative to their sales base. And THAT creates the potential for improved operating leverage, stronger margins and ultimately higher profits. It also suggests that some of the benefits of technological investment are beginning to appear in corporate operating metrics.

And THAT brings us right back to the hyperscalers.

The question is no longer simply whether AI has economic value. The question is WHO captures that value, HOW MUCH they capture and whether it’s enough to justify the valuations investors are paying today.

Ok – let’s talk oil….it lost 0.4% to end the day at $98.18 reports suggesting a possible deal between Washington and Tehran helped take some of the immediate pressure off energy. This morning oil is trading at $98.52 up 70 cts. Remember – until we get an end to this conflict- Oil will remain elevated and until the Houthi’s stop attacking Saudi Arabia and tankers in the gulf the risk premium will not go away.

Bonds moved up. The TLT gained 0.8% while the TLH gained 0.6% and higher bond prices means lower yields. The 10 yr lost 3 bps to end the day at 5.10% while the 30 yr lost 4 bps to end the day yielding 5.41%. This morning yields are unchanged.

But let’s look at why yields fell. September Pending Home Sales plunged 7.3% - the lowest level since 2001. Housing Starts and Building Permits also declined – now you can’t ignore higher mortgage rates – currently 7.5% ish and high home prices as reasons for the decline, but let’s be honest, it is also the time of the year….

And that creates a dilemma for the Fed. Inflation remains stubborn. Oil remains elevated. But parts of the economy are showing signs of slowing. So, what does the Fed do? Continue tightening to fight inflation and risk putting more pressure on growth? Or acknowledge the deterioration in rate-sensitive sectors (housing/building) and take a more cautious approach? My guess is, if they keep hiking housing will start to break, and maybe it should – a reset would help resolve so many issues.

Fed Fund futures are now pricing in a 17% chance of a rate hike next week, while it is putting an 85% chance of hike in December – with a 71% chance of another hike in March 2027.

Eco data today – Mortgage apps. So expect the market to focus on earnings.

European markets are all slightly higher…. Italy up 0.4% while Germany is flat. The UK bouncing around between barely up and barely down.

US futures are up…… Dow futures are UP 25 pts, the S&P is +18, the Nasdaq is up 210 pts (think SPCX) while the Russell is flat..

My gut says the tone today will be driven by the excitement around SPCX and what that might mean for the broader tech industry. We’ll get META & TSLA tonight and then AMZN, MSFT, GOOG, AAPL next week. NVDA is not until November 19^th.

The S&P closed at 7,712, up 21 pts. and above trendline resistance at 7705. This morning, S&P futures are suggesting we are going higher…. but we all know how that can change. In any event – 7705 is the level to watch – a failure to hold will see us test lower again. Should it hold then street analysts will once again talk about S&P 8000 by year end. You know me - I think we continue to test and end the year around 7850 ish…