GOOGLE & MICROSOFT EARNINGS RESULTS, SEMIS DOWN | MARKET OPEN

SUMMARY

Amit Kukreja provides a comprehensive breakdown of the latest earnings from Google and Microsoft, highlighting market reactions, sector rotations, and the evolving narratives around AI, cloud, and capex. The discussion covers the impact on semiconductors, software, and broader macroeconomic factors, with insights from analysts and live market data.

MAIN POINTS

• The Federal Reserve pauses rate hikes with an 82% chance of a December hike, shifting market focus to upcoming data and midterms. [1:01]
• Semiconductor and software stocks experience sharp pre-market declines, with ServiceNow and Fortinet leading losses amid renewed concerns about software sector health. [2:02]
• Rumors circulate about Marvell potentially acquiring Lumentum, raising questions about vertical integration in the optics and laser stack. [3:00]
• Palantir's institutional sovereignty event underscores the importance of AI sovereignty and enterprise-specific AI governance. [5:01]
• JP Morgan initiates positive coverage on Palantir, citing strong revenue growth and operating margins, and anticipates upside in upcoming earnings. [6:00]
• Google's 11% decline is attributed to concerns about search revenue growth and the potential disruption from AI agents, despite strong cloud and YouTube performance. [8:01]
• Market participants debate the future of Google's search business as AI-driven agents threaten traditional ad-based search models. [10:01]
• Google's EPS miss is largely attributed to SpaceX mark-to-market losses, while core business segments like cloud and YouTube continue to grow. [12:00]
• Both Google and Microsoft signal significant increases in capex for 2027, benefiting semiconductor suppliers despite short-term capex misses. [15:00]
• Microsoft launches its first major bond sale since 2017 to fund capex, diverging from Oracle's self-funded approach and raising questions about future dilution. [17:00]
• Analysts debate whether Alphabet should split its search and cloud businesses to address investor concerns about search disruption from AI. [20:00]
• Stanley Druckenmiller's endorsement of Hyperliquid and perpetual futures highlights the growing importance of tokenized financial products. [24:01]
• Microsoft's earnings beat expectations, with Azure growth exceeding 49% and strong guidance for continued cloud expansion. [26:01]
• Google's search revenue falls below 50% of total revenue for the first time, indicating diversification but raising margin concerns. [29:01]
• Despite bullish capex signals from Google and Microsoft, semiconductor stocks like Micron and Marvell face selling pressure due to cyclical fears and acquisition rumors. [32:00]
• ServiceNow's gross profit growth slows to its lowest rate since 2018, with operating leverage turning negative and margins compressing. [35:02]
• Broader software sector weakness emerges as CrowdStrike, Palo Alto, and others decline, with the market reacting strongly to guidance and margin concerns. [39:00]
• Market opens with Google down nearly 13%, ServiceNow down over 24%, and semiconductors broadly in the red despite positive capex outlooks. [43:00]
• Eli Lilly surges on strong GLP-1 drug results, while Mastercard and Visa rally on robust earnings, contrasting with tech sector volatility. [47:01]
• DoorDash reportedly moves to acquire Instacart, presenting potential arbitrage opportunities amid regulatory uncertainty. [51:01]
• Google's decline weighs on the S&P 500, with concerns that further weakness could trigger broader index declines. [56:00]
• Microsoft highlights surging CPU demand in capex, positioning Intel and AMD as potential beneficiaries ahead of their earnings. [1:01:01]
• Brazil's political developments impact New Bank's volatility, while Bitcoin rebounds above $80,000, influencing related equities. [1:05:01]
• Micron's persistent underperformance despite strong fundamentals puzzles investors, with cyclicality and macro risks cited as possible factors. [1:10:00]
• Bond yields rally as oil prices fall and AI capex concerns recede, with the market interpreting Fed Chair Worsh's comments as less hawkish. [1:21:01]
• Market sentiment remains fragile ahead of midterms, with the potential for a Santa Claus rally or a sharp year-end downturn hinging on geopolitical developments. [1:30:01]
• Google suffers its second-largest single-day market cap loss, erasing $500 billion, as search fears resurface and macroeconomic risks persist. [1:40:03]
• Debate intensifies over the sustainability of AI model revenue growth, with Anthropic's leadership predicting trillions in revenue by 2030. [1:54:03]
• ServiceNow's post-earnings selloff is attributed to acquisition-related margin impacts and profit-taking, with analysts divided on long-term prospects. [2:12:00]
• Google's diversification into cloud and subscriptions is acknowledged, but concerns linger about capex intensity and future cash flow allocation. [2:20:00]
• Analysts recommend a diversified index approach, favoring equal-weighted exposure and bonds to hedge against volatility in mega-cap tech. [2:36:00]
• Token pricing models for AI services face scrutiny, with industry leaders debating the sustainability and transparency of token-based billing. [2:53:01]
• The word of the day, 'tautological,' is introduced to describe circular investment arguments, reflecting on the importance of substantive analysis. [3:01:01]

DETAILED ANALYSIS

The trading session following the earnings releases of Google and Microsoft was marked by heightened volatility, sector rotation, and renewed debate over the future of big tech and AI-driven business models. The Federal Reserve's decision to pause rate hikes, with an 82% probability of a December increase, set a cautious macroeconomic backdrop. Market participants interpreted the Fed's stance as data-dependent, with upcoming economic prints and the midterm elections likely to influence further policy moves.

The FOMC's dovish tone provided temporary relief, but attention quickly shifted to corporate earnings and sector-specific narratives.

Google's earnings report triggered a sharp selloff, with shares dropping over 12%—the company's second-largest single-day market cap loss, erasing $500 billion. Despite robust growth in cloud (over 100% year-over-year), YouTube, and premium subscriptions, the market fixated on the deceleration in search revenue growth. For the first time in Google's history, search fell below 50% of total revenue, signaling diversification but also raising concerns about the sustainability of high-margin cash flows.

The emergence of AI-driven agents, such as ChatGPT, Claude, and Google's own Gemini, has begun to disrupt traditional search behaviors, threatening Google's dominance in commercial queries and ad monetization. Analysts from Barclays and DA Davidson highlighted investor anxiety over the pace of this transition, with some suggesting a structural split between search and cloud businesses to address divergent growth trajectories.

The EPS miss reported by Google was largely attributed to mark-to-market losses on SpaceX holdings, a non-operational factor that nevertheless contributed to negative sentiment. Additionally, the company faced a European Commission fine, further weighing on free cash flow. While these items were largely non-recurring, their impact on headline numbers exacerbated concerns about the core business.

Google's guidance for significantly increased capex in 2027, while bullish for suppliers like Nvidia, Broadcom, and Micron, failed to offset worries about near-term monetization of AI queries. The company acknowledged that AI search monetization remains below expectations, prioritizing user experience over immediate revenue—a stance that, while strategically sound, left investors uncertain about the timeline for margin recovery.

Microsoft, in contrast, delivered a strong quarter with Azure cloud revenue growing 49% year-over-year, beating consensus by 5%. The company maintained guidance for continued high growth in cloud, and its decision to launch a $25 billion bond sale—the first since 2017—underscored its commitment to funding capex expansion while remaining free cash flow positive. Microsoft's diversified business model, less reliant on search, insulated it from the narrative-driven selloff affecting Google.

However, even Microsoft could not escape broader market weakness, with shares giving up pre-market gains as sentiment soured across the tech sector.

Semiconductor and software stocks experienced significant volatility. Despite Google and Microsoft both signaling increased capex for 2027, suppliers such as Micron, Marvell, and Broadcom faced selling pressure. The market appeared to discount the positive long-term demand outlook, instead focusing on short-term capex misses and cyclical fears.

Micron, in particular, puzzled investors by failing to rally despite strong earnings, robust free cash flow, and buybacks. The persistent discount applied to Micron and similar names was attributed to concerns about the sustainability of memory demand, potential supply-demand imbalances, and macro risks such as geopolitical tensions and the outcome of the Iran conflict.

ServiceNow became a focal point for the software sector's challenges. The company reported its slowest gross profit growth since 2018, with operating leverage turning negative and margins compressing. CEO Bill McDermott's public statements, emphasizing the company's 'rule of 57' growth, were met with skepticism, as analysts pointed to other enterprise software firms achieving higher growth at scale.

The lack of a clear explanation for margin compression and missed EPS guidance fueled a 25% decline in the stock, dragging down the broader IGV software index. The episode highlighted the market's sensitivity to even minor disappointments in high-multiple software names, especially as narratives about the death of software and the rise of AI-native competitors gained traction.

The session also saw renewed interest in financial innovation, with Stanley Druckenmiller endorsing Hyperliquid and the tokenization of perpetual futures. This development was framed as a transformative shift in financial infrastructure, with implications for trading, leverage, and capital access. The move toward on-chain financial products was seen as a potential tailwind for related equities, including Robinhood and Coinbase, as well as for the broader adoption of tokenized assets.

Macro factors continued to influence sentiment. Bond yields rallied as oil prices fell, alleviating some concerns about an AI capex-driven overheating of the economy. The Fed's reduction in the number of interest rate decision meetings for 2027 and 2028 was interpreted as a move to reduce market volatility and provide greater policy flexibility. However, uncertainty around the Iran conflict, midterm elections, and the potential for renewed escalation kept risk appetites in check.

Analysts and commentators throughout the session emphasized the increasing importance of narrative over traditional valuation metrics. The rapid evolution of business models among the so-called 'Mag 7' (mega-cap tech firms) has rendered historical multiples less relevant, as companies shift toward capex-intensive, AI-driven growth strategies. The debate over the sustainability of AI model revenue, particularly for frontier labs like Anthropic and OpenAI, was highlighted by leadership predictions of trillions in revenue by 2030—a claim met with both optimism and skepticism given the commoditization risks and escalating R&D costs.

The market's reaction to earnings was further complicated by sector rotation. While tech and software names suffered, healthcare and payments companies like Eli Lilly, Mastercard, and Visa rallied on strong results. M&A activity continued, with DoorDash reportedly moving to acquire Instacart, presenting potential arbitrage opportunities amid regulatory scrutiny.

In the closing segments, the discussion turned to portfolio strategy. Analysts recommended a diversified approach, favoring equal-weighted index exposure (RSP) over market-cap-weighted (SPY), and incorporating bonds as a hedge against equity volatility. The potential for a Santa Claus rally or a sharp year-end downturn was seen as contingent on geopolitical developments, particularly the resolution of the Iran conflict and the outcome of the midterms.

The session concluded with a reflection on the role of circular reasoning in investment arguments, introducing the term 'tautological' to describe superficial analysis that merely restates conclusions without substantive support. The overarching message was that while structural fundamentals for big tech remain intact, perceptual headwinds around AI monetization, capex, and business model transitions will continue to drive volatility and narrative-driven trading in the months ahead.

LINKS

• Amit Kukreja's Twitter/X account for market commentary and updates.
• Amit's Deep Dives Substack for in-depth stock and market analysis.
• Free news terminal for real-time financial news and data.

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