It’s super Wednesday, with the Fed, and earnings data from Tesla, Meta and Microsoft to drive markets. Below we digest what they mean for market sentiment in a very volatile week.

Earnings:

Microsoft: All eyes were on Microsoft’s earnings to see if their massive investment in AI infrastructure was finally starting to pay off. Earnings beat expectations at $3.23 per share vs. $3.11 expected, quarterly revenue also beat expectations at $69.6bn, which is better than the $68.7bn expected. However, the good news ended there. Although Microsoft’s cloud revenue was $40.9bn, a 21% increase YoY, it was lower than the $41.1bn expected. Intelligent cloud revenue was also lower than expected. Azure cloud services posted revenue growth up 31%, but this also missed expectations of 31.8%. The market has been priced for perfect results from big tech, they have also been used to big tech massively outperforming expectations in recent years. Thus, although Microsoft may be able to generate nearly $70bn of revenue in a quarter, the fact that its AI units could barely meet expectations has been seen as a disappointment.  

Financial markets are particularly sensitive to AI developments this week, due to DeepSeek’s shake up of the AI space, which has led to questions about the need for mega capex spend from the big tech firms. Nvidia has been hit hard, as DeepSeek questions whether AI infrastructure needs its most expensive and advanced chips. This matters for Microsoft, since it is Nvidia’s biggest customer, and spends 40% of its capex budget with the US chip maker.

Thus, this earnings report was always going to be an uphill battle for Microsoft as it justifies its capex spend. The fact that its cloud business, which needs Nvidia chips, posted revenues short of estimates has led to a tepid sell off in the stock, it was lower by 1.8% in the after-market on Wednesday. Whether or not the sell off gathers pace could depend on how the market judges Nvidia in the days to come. If DeepSeek’s cost effective large language model leaves a permanent dent in Nvidia’s stock market valuation, then Microsoft could struggle as investors see previous capex spend as a waste of money.

Meta: These results were hotly anticipated not least because of the sell off in the AI space this week. However, Meta kept analysts waiting with a rare delay.

When results were finally released, they were better than expected, Q4 revenue was $48.39bn, easily beating the $46.98bn expected, Earnings per Share was also stronger than expected at $8.02 vs. $6.78 expected. This suggests that Meta became more profitable over the course of 2024. Net income was nearly 7% above expectations.

Meta’s share price was volatile in the after-market, initially sold off sharply before rebounding by more than 5%. It seems that an area of concern was with the Q1 outlook. The company predicts that revenues will be between $39.5bn - $41.8bn, the average estimate was for revenue this quarter to come in at $41.7bn. There was no full year 2025 outlook, and the company’s AI business, Reality labs continues to post chunky losses of $4.97bn in Q4. This is a part of the business that looks like it is some distance from turning a profit, especially since sales were roughly in line with a year ago.

Although user activity and ad prices were positive, this reinforces that ad sales remain the company’s life blood, and all its investment in AI is yet to meaningfully pay off in a stand-alone unit. This will lead to tough questions about Meta’s $60bn - $65bn of capex for this year, and whether Meta’s AI bet will pay off.

The share price whipsawed in the immediate aftermath of the results; however, it was higher ahead of the earnings call. If Zuckerberg cannot persuade analysts and investors that its AI business is worth the money, it may hard for Meta to sustain this upside and its place as the best performing Magnificent 7 stock so far this year.

Lastly, while DeepSeek’s R1 model has thrown a spanner into the works of the AI trade, we would note that Meta is a consumer of GPUs, so if products can work well with less expensive chips, this should be good for Meta’s bottom line down the road, and it may be why the stock is rallying after this earnings report.  

Tesla: Being friends with Donald Trump can buy you power, but it can’t make people buy your vehicles, as Elon Musk is finding out. Ahead of this earnings report, we already knew that vehicle deliveries had fallen last quarter, however, revenue and profit growth also missed estimates. Tesla reported revenues of $25.7bn for last quarter, earnings growth was $0.73, lower than the $0.77 expected. Full year revenue rose by 1%, but growth lost momentum at the end of 2024. However, this did not make a dent in Tesla’s share price, which was higher by 3% in after hours trading.

This is a much less volatile reaction than normal. The implied 1 day move after a Tesla earnings release for the last eight quarters is more than 8%, but why have Tesla shares rallied even though the numbers were weak?

Elon Musk said that deteriorating profit levels were down to the company ‘moving between two growth waves’, and it appears that the market is taking this message at face value. The company has also said that production of more affordable EVs will start in the middle of this year. However, investors in Tesla need to confront the fact that the company’s biggest revenue driver was energy generation and battery storage, and not in cars.

Revenue per vehicle fell below $40k last year, and gross margin per vehicle was the lowest level since 2018. The earnings report attributed this to working through an inventory backlog.  However, the outlook for 2025 is brighter. New vehicle production is expected to grow to Tesla’s max capacity of 3 million vehicles, which would be 60% above 2024 levels.

Musk may also be on a collision course with Trump, who has threatened to end incentives for home solar energy systems, which is one of Tesla’s fastest growing businesses. Overall, Tesla’s earnings report was disappointing, however, its forward guidance was strong. Where Tesla’s share price goes next could be dependent on Musk’s confidence in his new strategy and the new raft of vehicles and AI tech that he has in the pipeline.

FOMC: Resolutely data dependent in the age of Trump  

The Federal Reserve halted its rate cutting cycle at this meeting, and did not commit to future policy decisions, instead saying that they will not be in a hurry to `adjust our policy stance`, according to Fed chair Jerome Powell. This isn’t ruling out future rate cuts, however, it does suggest that the Fed is back to wait and see mode, and to data watching. The Federal Reserve’s statement that was released alongside the rate decision, caused the most controversy, since it omitted a reference to the economy making progress towards the 2% inflation target. While we think this was a considered change, Powell downplayed it in his press conference, and said that this was not designed to send a signal to the market, however, we don’t buy that.

Although all FOMC members voted to remain on hold, we expect that there was robust debate around the outlook for inflation that centred on the strength of the labour market. Powell did mention during the press conference that the committee wanted to see further progress towards inflation, so the next few months’ worth of labour market data and CPI will be crucial for financial markets.

Trump loomed large over this Fed meeting, and Powell sidestepped any questions about how Trump’s policies including tariffs, deportations and DEI policies could impact the Fed’s decision making. Powell refused to answer some questions on Trump’s policies. To avoid being dragged into a political spat with Trump, we think this is the main reason why the Fed is going back to being data dependent, with both inflation and the labour market in focus.

Overall, the impact on financial markets from this meeting was small. The dollar index is a touch higher on the day, while US stocks have closed lower. The S&P 500 closed down by 0.5%, although the index was also weighed down by a 4% decline in Nvidia. The Fed only marginally impacted bond yields, and 2-year Treasury yields were higher by just over 2 basis points on Wednesday. The interest rate futures market priced in a slightly tighter stance for monetary policy. The Fed Fund Futures market now expects interest rates to end the year at 3.86% vs. 3.83% on Tuesday. The market is still expecting less than two interest rate cuts this year, with the first cut expected by June. However, this is highly uncertain since the Fed is resolutely data dependent. Ultimately the next 2-3 months’ worth of data will determine what the Fed does for the rest of the year, and we expect the Fed to remain on hold until then.

Donald Trump’s reaction to the Fed meeting is also worth watching. His initial comments centred on accusing Jerome Powell that he had created inflation. In fairness, Powell has a strong argument against this. Inflation was a global phenomenon, and the Fed governor has said that US rates remain well above neutral, to stamp out inflation pressures in the US economy. Thus, unless Trump does something more than berate the Fed chief, we doubt that his words will have a meaningful impact on the economy, unless it leads to a large fall in long term interest rate expectations, which it is yet to do. 

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