Three Things (7/31)

Disappointing Microsoft earnings

Microsoft reported better-than-expected earnings and revenue for the fiscal fourth quarter but the stock dropped in extended trading as investors focused on disappointing Azure revenue. Revenue from Azure and other cloud services grew 29% during the quarter against expectations of growth closer to 31%. Microsoft’s cloud business is of particular importance, as the company is battling with Amazon Web Services and Google for artificial intelligence workloads. All three companies are investing heavily to boost AI capabilities and to try and lure startups and big companies as generative AI models rapidly advance.

Earnings for Microsoft were solid but anxiety about heavy spending on artificial intelligence data centers has weighed on tech stocks of late, and the Nasdaq more broadly. Lackluster results from one of the AI leaders will likely cast a broader shadow on these worries moving forward. As capex continues to grow, investors are looking for the investment to translate to the bottom line, but one thing is being made clear: the risk of underinvesting far outweighs the risks of over investing at this point in AI adoption curve and we don’t expect Big Tech to slow down any time soon.

Fed meeting

The Fed comes front and center today and the big question heading into the meeting comes down to how strongly officials signal their desire to cut rates. The central bank is widely expected to hold its benchmark short-term interest rate steady—in a range between 5.25% and 5.5%, a two-decade high—while setting the table to begin a series of reductions at the next meeting in mid-September. Language that acknowledges recent improvement in inflation and a more equal balance of risks, together with any changes to the forward guidance, will set the stage for Powell’s press conference.

Many expect Powell will open the door wider to a September cut without explicitly committing to any course of action and we wouldn’t be surprised by this result. If news on inflation remains constructive between now and September, it could be enough to signal that a rate cut won’t have adverse effects. Markets are, of course, a forward looking mechanism, so what happens after September? Fed officials won’t present new projections this week but once they make their first move, they could cut rates by a quarter percentage point roughly once every quarter as new data allows.

Amazon expands ecosystem

Amazon is expanding its one- to two-day delivery capabilities throughout the country as it seeks to boost sales in less-populated regions. It’s a move that signals that the company is ready to tackle rural regions after years of fine-tuning its logistics systems in more densely populated areas of the country. The strategy means customers in small towns will receive Amazon packages faster, and fewer of those deliveries could be handled by the U.S. Postal Service.

The goal is simple: increase shipping volume and have more control over deliveries. The new initiative will likely allow the company to become not only the largest retailer in the country but also surpass UPS in package volumes too. It also signals that logistics-as-a-service should come front and center when it comes to growth as the company could see an incremental 50-100 million parcels come online every year. It’s a monstrous feat for a company that started as an online bookstore.

Disclosures:

As of writing GOOG, AMZN, and MSFT are holdings in Titan's Flagship strategy.

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