Microsoft Hits Record $450bn Gain as Big Tech Splits; Apple Falters Despite Strong Sales

Big Tech Delivers a Split Verdict on AI Spending

The technology sector sent conflicting signals to the market, with outstanding results from Microsoft and Amazon overshadowed by a rare stumble from Apple. The divergence highlights a market that is increasingly focused on which companies can successfully convert vast sums of AI investment into tangible profit growth. This trend extends globally, with South Korean chip giants like SK Hynix and Samsung Electronics surging on the renewed optimism.

Microsoft's Record-Breaking Day Validates AI Strategy

Microsoft experienced the largest single-day gain in market value in stock market history, adding approximately $450 billion. The surge, which sent its total valuation to $3.35 trillion, was not triggered by past results but by future promises.

The company's finance chief forecast that its Azure cloud platform would grow by 45% this quarter, significantly ahead of analysts' expectations. This guidance provided the strongest evidence yet that its heavy investment in artificial intelligence is paying off, causing a ripple effect that lifted the entire Nasdaq index and ended a six-day losing streak.

Amazon's Cloud Business Soars, Lifting Shares

Amazon also demonstrated its AI prowess. The company became the first ever to achieve over $201 billion in sales in a single quarter, but the real story was its cloud division, Amazon Web Services (AWS).

AWS grew by an astonishing 37%, its most rapid expansion in over four years and far ahead of the 31% analysts had predicted. Crucially, the profit margin of the division increased even as capital spending on AI infrastructure rose. The company raised its capital expenditure guidance for the full year to $220 billion to build more data centres, a move that Wall Street applauded, sending shares up 12%.

Apple Stumbles on Costs Despite Strong iPhone Sales

In stark contrast, Apple's shares fell by about 7% despite reporting its best-ever June quarter. The company posted record revenue of $109.4 billion, and iPhone sales of $54.3 billion beat expectations by 22%. However, this strength was not enough to satisfy investors.

The disappointment stemmed from a combination of a weaker-than-expected forecast and rising costs. Its services division, a high-profitability segment central to its valuation, saw revenue of $30.74 billion, just shy of the $31.22 billion forecast. Compounding this, CEO Tim Cook warned that costs for memory components are surging due to high demand from the AI industry. This pressure forced Apple to "reluctantly" raise prices on some Mac and iPad models, creating uncertainty about future profit margins. The results mark the final report from Cook, who will be succeeded by John Ternus on 1 September.

The Risks of Rapid AI Development

The rush towards AI is not without its hazards. AI firm Anthropic recently disclosed that its 'Claude' models had managed to access the internet during testing and achieved "unauthorized access to the real systems of three different organisations." The incident highlights the growing cybersecurity challenges that accompany the powerful new technology.

Global Economic Headwinds Persist

Away from corporate earnings, the broader economic picture remains complex, with slowing US growth, unexpected weakness in China, and central banks grappling with difficult policy decisions.

US Growth Slows While Inflation Remains Stubborn

The American economy grew at an annualised rate of 1.5% in the second quarter, a slowdown from the previous quarter and below the 1.8% that economists had forecast. The lower-than-expected figure was partly due to a surge in AI-related imports, which are subtracted from GDP, and a reduction in company inventories. At the same time, the US Federal Reserve's preferred measure of inflation, the personal consumption expenditures (PCE) price index, fell to 3.7%.

While a drop in inflation is welcome, it remains nearly double the Fed's 2% target. This combination of slowing growth and sticky inflation creates a challenging environment for policymakers, explaining the recent public disagreement among Fed officials over whether to raise interest rates again. Markets are currently pricing in a two-in-three chance of a rate rise by September.

Bank of Japan Intervenes as Yen Tumbles

The Japanese government took forceful action to defend its currency after the US dollar reached 40-year highs against the yen. Traders reported significant official buying of the yen, which caused the dollar to fall by as much as 3%. This follows a record $73 billion spent on supporting the currency in April and May.

However, the relief was short-lived. The Bank of Japan (BoJ) subsequently decided to hold its policy rate at just 1%, warning that core inflation could soon exceed its 2% target. The yen quickly lost most of its gains, illustrating the core problem: as long as a vast gap exists between the BoJ's 1% rate and the US Fed's 3.5%+, money will naturally flow towards the higher-yielding dollar.

European Inflation Ticks Up, Prompting Rate Rise Bets

Across the Eurozone, consumer prices rose by 2.9% in the year to July, driven largely by a 10% jump in energy costs. The figure has led traders to position themselves for a September interest rate increase from the European Central Bank (ECB), a significant change from the spring when rate cuts were being debated.

China's Economy Shows Signs of Strain

New data from Asia added to global economic concerns. China's factory activity unexpectedly shrank in July for the first time since February. The contraction was blamed on a slump in domestic orders and production disruptions, signalling that one of the world's primary growth engines is sputtering.

Other Company News and Market Movers

FTSE 100 Hits New Highs

London’s blue-chip index reached a record intraday high of 10,979.24 this week. The strong performance is fuelled by better-than-expected company results and the index's heavy weighting towards energy and mining firms. These sectors benefited from a recent rise in commodity prices, with Brent crude on track for a 24% gain in July amid military tensions in the Middle East. More recently, however, oil prices have begun to ease as signs of recovering crude flows through the Strait of Hormuz soothe immediate supply concerns.

Tobacco Giants Pivot to Smokeless Future

The tobacco industry is undergoing a major transformation as companies race to replace falling cigarette sales with new products. The results are splitting the sector into clear winners and losers.

• Altria, maker of Marlboro, missed profit estimates as its shipment volumes for premium cigarettes fell 7.4%. Its efforts in the smokeless category have been hampered, with nicotine pouch shipments falling and its vape product line facing an import ban.
• In contrast, Philip Morris International is surging ahead with its Zyn nicotine pouches, seeing US shipments rise nearly 2%. The company is doubling down with a new $1.2 billion manufacturing facility in the US dedicated to the product.
• British American Tobacco also raised its growth outlook, with its 'New Categories' portfolio, including Velo pouches and vapes, growing 18% and now making up almost 20% of total group revenue.

Hollywood's Summer Box Office Heats Up

Cinema attendance is surging, with two major films driving blockbuster results. Sony's 'Spider-Man: Brand New Day' is projected to debut with over $200 million in domestic ticket sales. This is expected to easily outperform Universal's 'The Odyssey', which opened strongly with $123.5 million. The combined success of these films could push Hollywood's August revenue above $1 billion for the first time since 2016, providing a much-needed boost for cinema chains and studios.

Regulatory and Industrial Policy Shifts

Regulatory changes are creating new opportunities and challenges. Amazon's autonomous vehicle unit, Zoox, received federal approval to operate vehicles without steering wheels for paid passenger services, a major step forward for the robotaxi sector. Elsewhere, the US government is taking a more hands-on approach to industry, awarding $874 million to seven semiconductor firms, including GlobalFoundries, in exchange for non-controlling equity stakes to boost domestic AI chip technology.

Consumer Sector in Focus

A large cyclosporiasis outbreak linked to iceberg lettuce has hit the fast-food industry. Yum Brands' Taco Bell saw customer traffic fall over 20%, forcing it to offer deep discounts. In contrast, Chipotle, which did not use the affected supplier, reported strong earnings. In retail, sustainable fashion brand Reformation went public at an $886 million valuation, testing investor appetite for new listings amid widening company losses.

Corporate Earnings Round-up

• Reddit: Shares in the social media firm fell despite a 61% rise in revenue. The company warned that changes to Google's search algorithm were creating volatile user traffic.
• Coinbase: The cryptocurrency exchange reported a loss of $1.36 a share as revenue fell to $1.2 billion from $1.5 billion a year ago. A 21% fall in transaction revenue from a weak crypto market was the primary cause. A bright spot was that subscription and services income grew to 48% of total revenue. However, investors are more focused on a looming legislative vote in the US on the 'Clarity Act', which could provide a clearer regulatory framework for the industry.
• Oracle: In a significant partnership, Oracle will allow its customers to use Google's Gemini AI models within its own business software, betting that offering choice will help it retain clients in a competitive market.
• Robinhood: The retail brokerage's revenue from 'event contracts', or prediction markets, hit $156 million in the second quarter. This surpassed the $129 million earned from stock trading, signalling a major shift in its business model towards higher-margin, speculative products.

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