Welcome back. Earnings are weighing on some of the biggest names on Wall Street this morning. Alphabet is sinking about 10% after the Google parent missed on profit and revenue. Search revenue fell short as AI chatbots change how people find information, and the company burned through about $9 billion in cash as it pours its money into AI. Microsoft is moving higher on strong cloud sales, and Caterpillar is down about 9% despite beating expectations. And the big conversation is about the Federal Reserve. It held rates steady yesterday with two policymakers pushing for a hike. Fed Chair Warsh called the economy strong but would not say what comes next. A lot going on this week. Here to break it down with us is Eric Criscuolo, Market Strategist at the New York Stock Exchange. Eric, thanks for joining us today.
Always a pleasure, Johnny.
Alphabet is getting hit hard while Microsoft is rallying. What separated these two reports, and is the market overreacting when it comes to Alphabet?
The concern for Alphabet, the unknown, has been what AI will do to its golden goose, its search business. Agentic AI: how is that going to work, when agents do not need to read search results or the ads that come off those search results? That question has been lingering for a while for Google. And you saw last night that search revenue fell short of expectations, and that reignited the fears of how Google is going to navigate this whole new world of AI. That is why you are seeing this strong reaction on the downside. It has to address those concerns going forward. Whether it does or not, I do not know, but that is definitely going to be on investors’ minds. It is also rolling out new models, and we will see how those are received by the Street and by users. There are a lot of moving parts, but the search business was the focus and the reason for the weakness today. Microsoft, on the other hand, had very good numbers, and like Google, very strong cloud numbers. Its Azure cloud business was very strong. They do not have this search question lingering over them that Google has. Their businesses were firing on all cylinders, except for the personal PC business. That was really low, but that was expected, and it is less of a growth driver for them than it has been historically. The main business is the cloud business, and that performed well. That is why this stock is up a little bit today.
Google says search use is growing at its fastest pace in five years, but search revenue keeps falling short. Is this a first sign that AI chatbots are eating into its core business?
Well, that is the bear thesis, and that is what the bears are digging into on the dichotomy you pointed out. Google has said it is rolling out new ways of monetising search in this new paradigm. They just started rolling it out broadly, it seems last quarter going into Q4. We will see whether those changes, how they monetise these searches for the AI era, the agent era, take hold. That is one thing investors are now laser focused on.
Alphabet’s cloud business more than doubled. All these companies are spending big money on this. How patient are investors willing to be while Big Tech continues to burn cash on AI?
Investors have been very patient. But you have seen that there are times when a company comes out with a new number or updates some number and the stock can sell off hard. The reason for the AI weakness over the past few weeks is that you have seen credit spreads widen. CDS spreads, especially for Oracle, but all the hyperscalers saw CDS spreads widen as there was growing concern about the insane amounts of spending going on. So investors have been patient. The question is how long will they be patient? Well, you saw last night, during the last part of the day, Oracle had their investor day and they said a couple of years from now we are going to have big cash flow positive results, $30 billion cash flow positive, I think, in two years. That really surprised investors, because the Street was basically modelling flat-ish free cash flow. They finished up 10% yesterday. So when investors see that spending maybe come down or cash flow go back up, they are going to reward you. I think Microsoft, Google, Amazon maybe still get a pass for a little bit, but that might cap upside at least. If you see the spending come down or you see the free cash flow return, however that materialises, then you will probably see these stocks start to work again.
I want to shift gears to the Fed. They held rates yesterday, which we had an idea would happen, and two members pushed against that. They wanted the quarter-point hike. So when is another rate hike coming? We are speculating, December. What is the game plan for the Fed at this point? Obviously this administration is a little bit different from Powell’s.
Chairman Warsh is very good at talking a lot and maybe not saying a lot.
Keeping us on our toes.
Exactly. So yes, the hold was expected. The market is at about an 80% expectation for a hike in December. The question was asked of Chairman Warsh: why did you not raise today if you had two dissenters? He basically said, listen, we are going to have a bunch more data between now and December, our next Fed meeting. We are going to get, I think, two CPI prints and two PCE prints. We get PCE and GDP in a couple of minutes today. So we are going to get a lot more data. Before this meeting a couple of Fed officials said the path is probably higher rates going forward, but there is no urgency, we do not have to hike at this meeting. So everything was set up to say this is maybe a gradual couple of raises, December, maybe one at the beginning of next year. We will see. It looks like the path is higher, but there is no sense of urgency. The Fed has telegraphed that, even though Chair Warsh does not want forward guidance. So I think we are going to see higher rates, assuming things continue as they are. Inflation is stubbornly high, maybe coming down a little bit, but certainly not on the fast track that maybe the chair wants. More than likely it is going to be higher rates unless something drastically changes, maybe oil coming down dramatically.
Kevin Warsh will not signal the next move. How much does that weigh on upcoming inflation and economic growth numbers?
The GDP numbers have been pretty solid. Growth has been pretty solid. A lot of that is the AI spend, but also just broadly consumers have been really spending. I think American Express said their consumer spending was up 10% when they reported. So consumers are still spending despite all this inflation. If that continues, then aside from maybe a giant fall in the CapEx build-out from AI, if that turns, there is really no reason to see huge bumps in the road for growth in the US anyway.
He keeps us on our toes. We kind of know, we kind of do not know. It is like being in a weird relationship.
It is definitely a weird relationship.
Eric, thanks so much for joining us.
Appreciate your time, Johnny. Anytime.
