Big Tech AI Bets Diverge as Alphabet Tumbles; Fed Holds Rates but Hints at December Rise

Market Sees Decisive Shift from Growth to Defensive Stocks

A notable rotation is taking place in the market, as investors question how long a handful of technology giants can continue to drive performance. After a long period of underperformance, less volatile stocks are now pulling ahead of their high-growth counterparts. The idea of the 'Magnificent Seven' tech titans trading as a single group appears to be over, forcing investors to be more selective.

Over the past four weeks, low-volatility shares have outperformed by 13 percentage points, reversing a trend that had been in place since April 2025. This move has benefited areas of the market that had been left behind during the tech rally, such as the Dividend Aristocrats and Pure Value indexes. Sector performance highlights this shift:

• Energy has been the standout leader, gaining roughly 20% over the last three months.
• Health Care followed with a respectable 10% gain.
• In contrast, the once-dominant Technology sector rose only 5%, while the Semiconductor group actually fell by 4%.

This unwinding of the 'crowded trade' in technology was accelerated by rising government bond yields, which make expensive stock valuations harder to justify. Hedge funds have responded by making their fastest reduction in technology exposure since records began in 2016.

Big Tech's AI Bill Comes Due

Investors witnessed a sharp split in the fortunes of two technology titans, highlighting a new period of scrutiny over Artificial Intelligence spending. While both Microsoft and Alphabet are investing tens of billions in AI infrastructure, the market is no longer rewarding spending alone; it now demands results that bolster the main business.

Microsoft's Cloud Shines

Microsoft’s shares climbed after it reported that its Azure cloud platform accelerated its growth to 48%, up from 43% in the prior quarter. For the first time, the company provided a specific revenue figure for Azure, which stood at an impressive $33.2 billion. The company also projected continued strong growth between 49% and 50% for the current quarter, demonstrating to investors that its AI investments are successfully drawing more customers to its most important division. Investors also welcomed a breather on spending, as the company's capital expenditure guidance for the full year fell to $170 billion, partly due to delays in third-party data centre capacity.

Alphabet's Search Slows Dramatically

In stark contrast, Alphabet's shares plummeted by about 10% in premarket trading. If the stock falls more than 9.77% during the main session, it will mark the company's worst-ever reaction to an earnings report. The sell-off was triggered by a double miss on both profits and revenue for the first time since late 2022. The main cause for concern was a slowdown in its core Search business, which grew by only 12%, down from 17% in the previous quarter. Analysts voiced concerns that this is the quarter they "feared," where AI-powered chatbots and agents are beginning to steal a meaningful share of Google's search traffic.

Although its Google Cloud division's revenue more than doubled to $30.71 billion, this was not enough to offset worries about its primary profit engine. The company's results were also hurt by an $8.6 billion loss on its private investments. Alphabet indicated that currency fluctuations and the rising use of less profitable AI-driven searches contributed to the slowdown, leading to concerns that, for now, AI could be cannibalising its most profitable operations.

Ripple Effects in the Cloud Space

The lower-than-expected spending forecast from Microsoft had a negative knock-on effect on smaller cloud infrastructure firms known as 'neoclouds'. Because Microsoft is a major customer, shares in companies like Coreweave, Nebius, and IREN all came under pressure in premarket trading.

US Federal Reserve Signals Patience but Keeps Door Open

The US central bank decided to hold interest rates steady in a range of 3.75% to 4.00%, but the decision was not unanimous. The 10-2 vote revealed a split among policymakers, with two officials, Governor Lisa Cook and Cleveland Fed President Beth Hammack, favouring an immediate quarter-point increase to combat persistent inflation. This dissent signals a more aggressive tilt within the committee than seen previously.

Language and Market Reaction

In its official statement, the Fed softened its language, removing a previously firm commitment to returning inflation to its target. Instead, it noted that gathering "more information" would guide future decisions. Fed Chair Kevin Warsh described the meeting as a "serious, sober discussion" and mentioned potential plans to overhaul the central bank's meeting schedule in the future. In response to questions about the economy's strength, he remarked, "Is the economy running too hot? ... That isn’t the judgment of most of my colleagues."

Despite the pause, market participants still believe a December rate rise is probable. Futures markets are now pricing in a 76.5% chance of a hike. The next critical piece of data will be the upcoming Personal Consumption Expenditures (PCE) inflation report, the Fed's preferred measure, which is expected to show core inflation at 3.1%.

UK Budget: A Quiet Affair for Markets

Chancellor John Healey's first Budget delivered a net tax increase of approximately £4.3 billion per year by 2030, a relatively modest sum that was received calmly by financial markets.

Key measures for investors included:

• Bank Surcharge: The tax surcharge on bank profits will rise from 3% to 6% for a 15-month period starting in January 2027. This was a smaller increase than many lenders had feared, prompting a rally in banking shares like NatWest and Lloyds.
• Cash ISA Limit: A planned reduction to the tax-free Individual Savings Account (ISA) limit was scrapped. The annual allowance will remain at £20,000, a welcome development for UK savers.
• Housebuilders Suffer: Despite the announcement of a new £4.7 billion equity loan scheme, shares in major housebuilders like Taylor Wimpey and Persimmon fell sharply, reflecting broader economic anxieties.

The gilt market, where UK government debt is traded, remained stable, with the 10-year yield edging slightly lower. This muted reaction suggests bond investors were reassured by the Chancellor's fiscal restraint.

US Economic Indicators

Recent data paints a mixed picture of the American economy. After a seven-week decline, mortgage applications rose by 4% as borrowing costs eased slightly, with 30-year fixed loan rates dipping to 7.37%. However, the US goods trade deficit widened to a record $344.1 billion in September, driven by a surge in imports of capital goods and technology hardware, partly linked to business investment in AI infrastructure.

Sector Spotlights

Cybersecurity Hit by Spending Fears

Fortinet, a major cybersecurity firm, saw its shares plunge by roughly 26% in after-hours trading. The drop was triggered by a narrow miss on its third-quarter profit margins and a trimmed forecast for service revenue, signalling a potential slowdown in customer spending. The problem appears to be sector-wide, as competitor F5's shares also sank over 20% after it issued soft profit guidance. The news had a contagious effect, with other firms like Palo Alto Networks, CrowdStrike, Zscaler, and Rubrik also falling sharply in sympathy.

Energy Sector Stays Strong

Energy giant Shell announced its highest quarterly profit since 2022, earning $10.81 billion. Buoyed by strong refining margins, the company rewarded shareholders by increasing its share repurchase programme to $5 billion for the quarter. This strength is also visible in refinery stocks like Valero Energy and Marathon Petroleum, which have benefited from tight fuel supplies.

Consumer Spending Diverges

The latest earnings reports reveal a widening gap in consumer behaviour. Businesses catering to premium buyers or value-seekers are thriving, while those in the middle are being squeezed.

• Garmin reported record revenue of $1.99 billion, as shoppers continued to pay for high-end fitness watches.
• eBay saw merchandise volume climb 15%, benefiting from consumers looking for value in secondhand goods.
• Chipotle, however, managed just 2.1% same-store sales growth, as higher operating costs ate into its profits.

Other Corporate News

• Amazon Earnings Preview: Investors are bracing for Amazon's results, due after the market closes. Analysts are watching cloud growth closely, but expect another quarter of negative free cash flow.
• Marvell & Lumentum: Chipmaker Marvell Technology is reportedly in advanced discussions to acquire optical components firm Lumentum. However, the market reacted poorly to the rumoured $83 billion deal, sending Marvell's shares lower.
• Takeover Target: Shares in fast-food chain Wendy's surged 15.1% after Trian Fund Management submitted a $1.4 billion proposal to take the company private.
• Indian Tech Listing: Jio Platforms, backed by Meta and Google, became the second most-valued firm in India following a stellar stock market debut that saw its shares list at a premium of over 25%.
• Quick Hits: Ford Motor raised its annual profit guidance. Norwegian Cruise Line beat earnings expectations despite higher fuel costs. Wingstop shares soared on strong quarterly results. Apple launched its first-ever MacBook Pro with a touchscreen. Conversely, ServiceNow issued a weaker-than-expected revenue forecast for the fourth quarter.
• Samsung's Disappointing Record: Samsung Electronics reported a record operating profit of 107.4 trillion won, yet its shares fell over 4%. Investors were disappointed by the lack of a specific number for its planned share buyback programme.

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NOTE: This content is for informational and educational purposes only and does not constitute financial advice. Always do your own research. Not financial advice (NFA).