Fed cuts, but doesn’t provide all-clear for more

The Fed announced a 25 basis-point rate cut, bringing its target federal funds rate down to the 3.75 %–4.00 % range, marking the second cut of 2025.  In its statement, the Committee flagged elevated uncertainty about the outlook and noted that downside risks to employment had increased in recent months.  Chair Jerome Powell emphasized that while a 10-2 vote supported the move, there is considerable debate among policy-makers about how much further to ease, and no path is guaranteed.  For consumers and borrowers, the cut suggests somewhat cheaper short-term borrowing costs, but savings yields and longer-term loan costs may not drop in lock-step.  In sum: the Fed is easing, but signaling caution, reflecting a balancing act between a cooling labour market and inflation that still hasn’t firmly returned to target.

• While the Fed cut, Chair Powell warned that another cut was not a done deal
• This is likely due to the fact that the Fed has had limited visibility into the economy, given the ongoing government shutdown
• Regardless of the lack of data, the Fed is caught in a bit of a tight spot
• Inflation, as measured by CPI, is stubbornly high at 3%, north of the Fed’s 2% target
• While the job market has been showing, we have not had clear visibility over the last month or so
• Anecdotally, just in the last 30 days ,we have seen many layoff announcements by major employers across many industries
• The 10-year yield rallied back above the crucial 4% level on the back of this announcement
• This doesn’t help with interest rate-sensitive sectors, in particular, real estate

Amazon’s AWS shows dominance

Amazon reported a strong third quarter, with revenue topping consensus and its cloud business (AWS) showing a particularly robust recovery — growth rates the company hasn’t seen since 2022.  Analysts had been somewhat cautious ahead of the print, noting that Amazon’s share price had lagged many of its large-cap peers and that AWS growth had decelerated in recent quarters.  The company also provided guidance for Q4 net sales in the range of about $206 billion to $213 billion, which is slightly above street expectations.  Market reaction was positive: the better-than-expected cloud growth and forward guidance helped restore investor confidence that Amazon can compete in the AI/cloud race and turn around its underperformance.  

• While most consumers know Amazon as the leader in e-commerce, a fast-growing and important part of their business is Amazon Web Services (AWS)
• AWS is the cloud computing business of Amazon, founded in 2006
• AWS allows companies, large and small, to rent data storage and computing power on demand in the cloud
• Along with Microsoft’s Azure and Google’s GCP, it has become the backbone of today’s internet infrastructure
• With the continued growth of AI adoption, AWS has capitalized by hosting Large Language Models (LLMs) on its servers for its clients
• The AWS business has much higher margins than the company’s e-commerce business
• Even though Amazon has continued to be a beneficiary of the AI boom, its cash flow situation has deteriorated, declining by 66% year over year

Nvidia hits $5 trillion market cap

Nvidia made history this week by becoming the first company ever to reach a $5 trillion market capitalization, cementing its position as the undisputed leader of the artificial intelligence boom. The rally was fueled by continued demand for its high-end AI chips, which power everything from data centers to autonomous systems, and by optimism following the company’s latest announcements about U.S.-based manufacturing and expanded partnerships. Investors are treating Nvidia not just as a chipmaker, but as the backbone of the global AI infrastructure build-out. While some analysts warn of stretched valuations, few dispute that Nvidia’s growth has become emblematic of the broader AI revolution transforming global markets.

• The market is completely enamored by the AI boom
• And no other company has been a bigger beneficiary than Nvidia
• As the hyperscalers (Microsoft, Google, and Amazon) continue to invest hundreds of billions of dollars a year in AI chips, Nvidia has seen its revenues surge
• There are reasons to be cautious, however, as Nvidia’s valuation does appear to be getting into stretched territory
• Additionally, as Nvidia is approaching 8% of the total capitalization of the S&P 500, the risk of a pullback is potentially very bad for the overall market

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