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On Anthropic’s IPO, P/Es & Quantum Computing
After digesting Anthropic’s recent IPO filing, Jackie highlights the company’s plan to reduce its dependency on cloud providers and produce more compute itself, leasing the data center capacity and semiconductor chips needed. The contracts signed will mean huge upfront capex and lease payments with little to show for it in the immediate future. …Also: With the S&P 500’s price index up less dramatically than its fast-growing earnings outlook, its forward P/E multiple has taken a nosedive. Multiples have contracted the most for the S&P 500 Consumer Discretionary and Information Technology sectors and expanded for Health Care. … And in our Disruptive Technologies segment: An update on strides made improving quantum computing.
AI Jitters Continue While Fed Pauses Hiking Rates
I. The AI Boom Versus The AI Trade AI jitters will be back tomorrow after taking a breather so far this week, as encouraging developments surrounding the AI investment boom helped restore confidence and lift technology stocks. The S&P 500 rose 0.3% on Wednesday, moving back above its 50-day moving average (chart). The Nasdaq-100 advanced 0.6%, recovering toward its 50-day moving average while remaining above its 200-day moving average (chart). Among chipmakers, Micron jumped 5.9%, AMD gained 3.2%, and Broadcom rose 2.8% (chart). SK Hynix shares surged as much as 9.4% in Seoul following blockbuster earnings. Three recent developments helped revive confidence in the AI trade: (1) More spending. $235 billion in prospective AI financing emerged this week, including Anthropic's expected $100 billion IPO raise, Meta's plans to raise up to $95 billion through equity issuance, and SpaceX's $40 billion debt deal to purchase GPUs. These developments suggest capital remains available for the AI buildout, with equity markets providing an alternative if debt financing tightens. (2) Encouraging AI economics. Anthropic's S-1 filing offered five encouraging signals about the sustainability of compute demand. First, H1 revenues surged from $1.2 billion to $16.3 billion y/y. Second, operating losses narrowed from $2.1 billion to $693 million, with Q2 marking its first quarterly operating profit. Third, 11,900 customers now spend at least $100,000 annually, up from roughly 950 a year earlier. Fourth, revenue per dollar of compute expense increased more than fivefold to $2.08. Fifth, Anthropic held $131.7 billion in cash and short-term investments to finance expansion. (3) Strong semiconductor earnings. SK Hynix's Q3 results reinforced confidence in AI infrastructure demand. Operating profit surged more than sevenfold y/y, while the company announced roughly $75 billion in shareholder returns. Most encouragingly, management expects memory shortages through 2030, with production effectively sold out through 2029, suggesting durable demand and pricing power. These developments reinforce our view that the AI investment boom is here to stay. But that doesn't mean that the AI trade won't remain jittery. This evening, Alphabet shares are down about 10% after the company missed Q3 consensus revenues and earnings estimates. Free cash flow was also more negative than expected, while the company remains committed to significant capex of over $200 billion this year and $300 billion in 2027. Long-term debt rose to $125.1 billion, up from $21.6 billion a year earlier. There was some good news. Cloud revenue more than doubled to $30.7 billion. Google said its Gemini app reached 1 billion users, making it the fastest-growing product in its history. Furthermore, Microsoft shares rose 4% in extended trading this evening after the company reported better-than-expected quarterly results, driven by 48% growth in its Azure cloud infrastructure business. II. The Fed Pauses Before Midterm Elections The FOMC voted 10-2 Wednesday to hold the federal funds rate at 3.75%-4.00%, with Lisa Cook and Beth Hammack favoring a 25bps hike. Chair Kevin Warsh acknowledged robust economic growth, a healthy labor market, stubborn inflation, and financial conditions that aren't tight. Yet he cited tightening financial conditions, anchored inflation expectations, and improving productivity as reasons for patience. Here's more: (1) Economic activity. Warsh observed that "economic growth has strengthened." Consumer spending remains robust and business investment is growing at a double-digit pace. The capex story, he said, is "not just robust, not just strong, but it is broadening." (2) Labor market. Unemployment is lower than a year ago, payroll growth has improved, and initial jobless claims remain near historic lows. Employment conditions are "quite positive," Warsh said, with FOMC discussions focused primarily on price stability. (3) Inflation. "Inflation is too high," Warsh acknowledged, warning that rising energy prices could spread through the economy. He rejected a higher implicit inflation target: "There's no soft inflation target, there's no implicit inflation target." Still, he believes inflation expectations remain anchored. (4) Financial conditions. Warsh noted that tighter financial conditions are prompting more selective capital allocation. Rejecting claims that AI investment is insensitive to interest rates, he observed that "interest rates get in the cracks" as credit spreads have widened for some borrowers. Nevertheless, "while overall financial conditions are tighter, I'm unwilling and unable to call them tight." (5) Productivity. Warsh disputed that robust growth necessarily implies overheating: "That isn't the judgment of most of my colleagues." Improving productivity, much of it predating recent AI advances, may have raised potential growth without fueling inflation. (6) Revamping the Fed. Warsh reiterated his opposition to forward guidance outside crises. Yet other officials' comments shifted market expectations away from an October hike despite hotter-than-expected September CPI and PPI inflation reports, suggesting forward guidance remains intact. He also plans to dedicate one FOMC meeting in 2027 and two in 2028 to monetary policy strategy. In our view, stronger productivity growth will let the economy expand faster without adding inflationary pressure. That could be an argument against restrictive monetary policy, but not against returning to neutral, which we estimate at 4.25%-4.50%. We agree that September's hike “removed a dose of accommodation,” but believe another 50bps is needed to remove the rest. The Fed doesn't need to throw sand in the economy's gears. It just needs to take its foot off the accelerator. We wouldn't rule out a 50bps hike in December.
On Housing’s Recession, Brazil’s Election & Rising Profit Margins
The US housing market has entered a downturn. Sales activity is low, depressed by low demand given high mortgage rates and affordability constraints. Homebuilders have been hit hard, but the downturn hasn’t yet depressed prices for existing homes, Melissa reports. They’ve been supported by low inventories, as would-be home sellers with low mortgages have been opting to stay put. … Also: William discusses what may be ahead for Brazil’s economy and markets now that left-leaning President Lula has been reelected. … And: Is AI adoption improving corporate profit margins yet? Joe’s data suggest so.
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