Amazon stock falls following earnings, where labor market cracks are emerging

Key Concepts

• Market Selloff: A period of widespread decline in stock prices, particularly in the tech sector.
• VIX (Volatility Index): A measure of market expectations of near-term volatility, often referred to as the "fear gauge."
• Capex (Capital Expenditure): Funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, and equipment.
• AWS (Amazon Web Services): Amazon’s cloud computing platform.
• JOLTS (Job Openings and Labor Turnover Survey): A survey by the U.S. Bureau of Labor Statistics that measures job openings, hires, and separations.
• Federal Reserve Rate Cuts: Reductions in the federal funds rate by the Federal Reserve, intended to stimulate economic activity.
• Bifurcated Consumer: A consumer base divided into distinct segments with differing spending patterns and economic conditions.

Market Overview & Earnings Reports (Amazon)

The stock market closed lower, with a deepening tech selloff. The Dow Jones Industrial Average fell 1.2% (approximately 600 points), the S&P 500 declined 1.4%, the NASDAQ Composite dropped 1.6%, and the Russell 2000 experienced the largest decline, closing near its low at a loss of approximately 2.67%. Micro caps also saw a significant drop of 2.67%. Dow Transports were relatively stronger, while the semiconductor index showed resilience. The VIX reached 20 earlier in the day, signaling increased market volatility, and closed at 20.69. Utilities were the only sector to gain, rising by a mere 10 basis points. Materials, consumer discretionary, and tech sectors underperformed the S&P 500, falling 2.33%, 2%, and 1.8% respectively.

Microsoft and Amazon experienced substantial losses, down over 4% each. Software stocks were generally weak, while semiconductors showed more green. Defensive stocks like Procter & Gamble, Coca-Cola, and Johnson & Johnson performed well.

Amazon’s Q4 earnings were released, resulting in an initial 8% stock drop. Key figures included:

• Q4 EPS: $1.95 (vs. estimate of $1.96)
• Q4 Net Sales: $213.39 billion (vs. estimate of $211.49 billion)
• Q4 AWS Net Sales: $35.58 billion (up 24% - vs. estimate of $34.88 billion)
• Q4 Operating Margins: 11.7% (in line with estimates)
• Q1 Net Sales Guidance: $173.5 - $178.5 billion (vs. estimate of $175.54 billion)
• 2026 Capex Forecast: $200 billion (vs. estimate of $146.1 billion)

The significant increase in the 2026 capex forecast to $200 billion, up from previous estimates of $146.1 billion, was the primary driver of the stock’s decline. Despite 95% of analysts maintaining a “buy” rating on Amazon, investors expressed concerns about the increased capital expenditure.

Analyst Commentary on Amazon Earnings

CFR Research Senior Equity Research Analyst Arun Sundarum and Futurum analyst Daniel Newman discussed Amazon’s earnings. Sundarum highlighted the positive acceleration in AWS growth (24% vs. expected 21-22%) but acknowledged the market’s reaction to the higher capex guidance. He noted that the increased spending was not entirely unexpected, given Alphabet’s similar announcement. He emphasized the importance of continued AWS growth and maintaining AWS margins as key metrics to watch.

Newman strongly defended Amazon’s increased capex, arguing that it’s a necessary investment to secure compute capacity in the competitive AI landscape. He stated, “These companies need it for their moes and Amazon got it wrong in the beginning. They underspent.” He believes that underestimating capex needs has been a recurring issue for analysts. He pointed to the continued high demand for GPUs, even older generations, as evidence of the need for increased investment. He also highlighted Amazon’s potential to leverage AI within its own businesses (advertising, commerce) to drive margin expansion.

Sundarum identified key metrics to monitor: continued AWS growth acceleration and preservation of AWS margins.

Labor Market Analysis

The labor market is showing signs of weakening, with Challenger reporting the highest number of job cuts since 2009 and initial jobless claims exceeding expectations. The JOLTS report also indicated a decline in job openings to levels not seen since September 2020.

Interactive Brokers Senior Economist Jose Torres explained the complex dynamics at play. He attributed the weakness to a combination of factors:

• Demographic Shifts: An aging population and restrictions on immigration are limiting the labor supply.
• AI Impact: AI is beginning to impact hiring in white-collar industries like finance and professional services.
• Rate Cuts: Potential rate cuts by the Federal Reserve could stimulate economic activity and boost hiring in sectors like manufacturing and construction.

Torres emphasized that despite the weakening indicators, the unemployment rate remains low, and continuing claims are still relatively stable. He believes the traditional relationship between unemployment rate increases and recession is less reliable in the current post-COVID economic environment. He suggested investors should focus on consumer spending and productivity as key indicators of economic health.

Torres noted a “bifurcated consumer,” with higher-income consumers driving much of the spending. He also discussed the impact of student loan forgiveness and credit card usage on consumer spending.

Federal Reserve & IPO Market

Torres expressed a cautious positive view on a potential Federal Reserve leadership change, specifically mentioning Donald Trump’s interest in Kevin Walsh. He noted Walsh’s traditionally hawkish stance on inflation but acknowledged his recent shift towards a more dovish position, which may have appealed to President Trump.

The IPO market was also discussed, with Jennifer Garnerback food company, Once Upon a Farm, and Blackstone-backed Liftoff Mobile slated to begin trading. These IPOs will be closely watched as tests of investor appetite for new companies, particularly with larger IPOs like SpaceX and OpenAI potentially on the horizon. Liftoff CEO Jeremy Bondi is scheduled to appear on Yahoo Finance to discuss the IPO.

Conclusion

The market is experiencing a tech-led selloff, driven by concerns about valuations and increased volatility. Amazon’s earnings, while largely positive, were overshadowed by a significantly higher-than-expected capex forecast. The labor market is showing signs of cooling, but remains relatively resilient. The Federal Reserve’s monetary policy and the evolving IPO market will be key areas to watch in the coming weeks. Investors are navigating a complex economic landscape characterized by shifting dynamics and evolving expectations.