Quite a lot going on this week! Tuesday is midterm elections, on Friday we get October employment data, and we get earnings from AMD and Qualcomm.
Patience has run out for excessive AI spending. Alphabet reported spending $51 billion last quarter, and even though the revenue growth story was strong, the stock still fell almost 13% the next day. Intel fell the most ever in one day: almost 27%!
Bottom line: big company spend on the AI buildout is running in the $740 – $800 billion for this year, and investors are officially demanding that they see some return on that investment.
Our take is that this rotation seems a bit overdone. While AI spending is quite high, Alphabet, Microsoft, and Amazon have about $1.7 trillion in order backlogs for compute. Compared to $600 billion of spending for 2026, this looks to us more like them trying to keep up with fulfilling the orders that have already been placed, rather than a purely speculative bet.
From our portfolio posiitoning, we don’t see last week’s large move as the precursor to something more dramatic (at least, not yet). Profit-taking and skittishness from rate-hikes are reasonable reactions in a market like this. That said, our baseline case is still stagflation — slower growth + higher inflation. This week will help us update that view. If the labor market stays strong, we see the economy continuing to chug along, even if it is a little slower. It is also worth watching negotiations with Iran closely. A durable deal would go a long way to bringing down oil prices which leads to lower prices generally. Lot’s to keep an eye on!
Chart of the Week
Spending $100 to $225 billion in six months seems very aggressive for any company, until you stack up the contracts the company has agreed to fill. Microsoft, for example, has $677 billion in contracted backlog. Spending $170 billion to fulfill those contracts is just good business. Of course, there are risks those contracts don’t pay out — and that will be the thing to watch in coming quarters. Are the contracts turning into actual revenue?
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