Market worries grow over the AI trade, Supreme Court to hear Trump's tariff case

Key Concepts

• Market Performance: Overview of stock market indices (NASDAQ Composite, S&P 500, Dow Jones) and their performance, with technology sector leading the downside.
• US Dollar Index (DXY): Its strength and correlation with equity market pressure.
• Cryptocurrency Market: Significant downturn in Bitcoin and Ether, attributed to liquidity concerns.
• AI Stock Valuations: Investor concerns about the high valuations of AI-related stocks, impacting companies like Palantir.
• Quarterly Earnings Analysis: Detailed review of earnings reports and analyst outlooks for major tech companies (Amazon, Alphabet, Meta) and transportation companies (Uber, Lyft).
• Supreme Court Case on Tariffs: Discussion of the legal challenge to President Trump's use of emergency powers for tariffs and its potential market implications.
• Apple's Low-Cost Laptop Strategy: Apple's potential entry into the budget laptop market to compete with Chromebooks.
• Restaurant Industry Trends: Analysis of Papa John's and Denny's, including a withdrawn buyout offer and a successful go-private deal, respectively, and broader consumer spending patterns.
• Electric Aircraft Manufacturing: Beta Technologies' IPO, its business strategy, market opportunity, and regulatory environment.
• Federal Reserve Policy: Discussion on the possibility of a December interest rate cut and its impact on market volatility.
• Consumer Spending Bifurcation: The divergence in spending patterns between high-end and lower-end consumers.
• Alternative Data Sources: Reliance on non-traditional data for economic analysis due to government data gaps.
• Zoom Info's AI Strategy: The company's focus on AI products, data foundation, and its impact on customer retention and growth.
• AMD's Earnings Report: Analysis of AMD's Q3 results and Q4 guidance, with a focus on AI chip demand.
• Upcoming Economic Events: Key events to watch, including New York City mayoral election, earnings reports, and ADP employment data.

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Market Overview and Sector Performance

The market is under pressure with less than an hour to the closing bell. All three major averages are down, with the NASDAQ Composite leading the decline, down nearly 2% at its session lows. The S&P 500 is down more than 1%, and the Dow Jones Industrial Average is off about half a percent.

The strength of the US Dollar Index (DXY), which is above the 100 level and at multi-month, potentially June highs, is contributing to pressure on equities, as a stronger dollar typically correlates with weaker stock performance.

Sectors leading to the downside include Technology, Consumer Discretionary, and Industrials. Mega-cap stocks are particularly under pressure, with Nvidia down over 3.5% and Tesla down over 4%. Palantir is experiencing a significant drop of over 9% despite strong quarterly results. Apple is an outlier, trading up 0.4%.

Cryptocurrency Market Downturn

The cryptocurrency market is experiencing a significant tumble. Bitcoin is down over 5.5%, having breached the $100,000 level earlier at around $99,000. At its session lows, Bitcoin was down over 6%. It is now down approximately 20% from its all-time high of over $126,000 in early October. Ether is also down over 11%. This broad weakness in crypto is attributed by strategists to liquidity concerns or a "liquidity crunch."

AI Stock Valuations and Quarterly Earnings

Investor concerns about AI stock valuations are weighing on the technology sector, particularly as companies sift through quarterly earnings.

John Blackledge, Managing Director and Senior Equity Research Analyst at TD Cowan, provided insights on several key tech and transportation companies:

• Amazon: Had a strong quarter and recently announced a deal with OpenAI. Shares are up 14% year-to-date. Despite a slight sell-off today, Amazon is trading at 29 times earnings on 2026 estimates, with projected over 20% annual earnings growth for the next five years. Further AWS revenue acceleration is expected in Q4, driven by AI demand. Blackledge has a price target of $300.
• Alphabet (Google): Shares are up 46% year-to-date, benefiting from a positive regulatory outcome in the DOJ search case and strong AI performance across search (AI Overviews, AI Mode driving engagement) and Google Cloud (leveraging Gemini). Alphabet is trading at 25 times earnings on next year's estimates, with mid-teens earnings growth projected. Blackledge has a price target of $335.
• Meta: Shares are up 8% year-to-date but sold off after announcing significant AI-related capital and operational expenditure for next year. Meta is trading at 21 times earnings, with low-teens annual earnings growth expected over five years. Blackledge believes Meta needs to clarify its AI strategy, with more definitive guidance expected at the Q4 earnings report. The core business has been outperforming, with AI spend directly impacting it. Blackledge has a buy rating and an $810 price target.
• Uber: Despite good results and a strong guide (gross bookings beat expectations, Q3 EBITDA within guide, Q4 guide ahead of expectations), Uber shares, up 60% year-to-date, are being hit today. Blackledge points to slightly lower incremental delivery margins and Uber's investment in its grocery and retail vertical within delivery as potential reasons. This segment, though less than 15% of delivery gross bookings, is growing multiples faster than the restaurant business.
• Lyft: Blackledge also likes Lyft, which is scheduled to report earnings tomorrow. He expects mid-teens gross bookings growth and further margin expansion. Lyft shares are up 55% year-to-date but trading at less than seven times EBITDA with a 15% free cash flow yield, making it cheap relative to Uber. Lyft will benefit from California insurance relief next year, and insurance cost growth is expected to decelerate. Autonomous driving announcements are also anticipated. Blackledge has a buy rating and a $30 price target.

Blackledge's perspective is that the AI trend is intact, but investors need to "pick their spots."

Supreme Court Case on Presidential Tariffs

The Supreme Court will hear arguments regarding President Trump's use of emergency powers to impose tariffs. Ben Worko, Yahoo Finance Washington Correspondent, explains that the case centers on the International Emergency Economic Powers Act (IEEPA) of 1977, which grants the president authority to respond to "unusual and extraordinary economic threats." A key question is whether the law specifically allows for tariffs as a remedy. Another aspect is whether Trump has overstepped by declaring emergencies on various issues.

Oxford Economics estimates that Trump's tariffs currently average 13.4% globally. If these tariffs are zeroed out, this average would drop to 7.8%. The outcome of this case could significantly impact a large portion of Trump's tariffs.

Market Implications:

• Short-term: Tomorrow's arguments will involve lawyers presenting their cases and justices asking questions, but no final ruling will be made. Investors will try to gauge the justices' positions based on their questions.
• Long-term: There is no clear consensus on the ruling. Some analysts lean towards a pro-Trump ruling, given the conservative majority on the court. However, any pointed or critical questions from justices could cause market reactions. Brian Gardner of Stifel anticipates a pro-Trump ruling by the end of the year or early next year.

Trending Tickers: Apple, Papa John's, Denny's

• Apple: According to Bloomberg, Apple is preparing to enter the low-cost laptop market with a device codenamed J700, priced well under $1,000, aiming to challenge Chromebooks and entry-level Windows PCs. This would be a strategic pivot for Apple, catering to students, low-income consumers, and casual users. The Mac segment was Apple's fastest-growing hardware category last quarter, up 13% to $8.7 billion. This move also aligns with potential replacement cycles for tech purchased during the pandemic.
• Papa John's: Shares are sinking following a Reuters report that Apollo Global has withdrawn its offer to take the pizza chain private at $64 per share. This comes as consumers tighten spending and the quick-service restaurant industry faces headwinds. Papa John's is expected to report Q3 results on Thursday, with Wall Street anticipating only 1.7% same-store sales growth and lower revenue than Q2. The company is seen as falling behind competitors, despite pizza typically performing well in value-seeking environments.
• Denny's: A group of investors will acquire Denny's for $620 million, sending its stock surging over 60% and on track for its biggest intraday gain in over 20 years. Oppenheimer does not expect a competitive bidding process, and the deal is anticipated to close in Q1 2026. This is part of a broader trend of sales in the restaurant sector, including Yum Brands looking to sell Pizza Hut. Private equity firms see undervalued opportunities in companies like Denny's, which experienced a 2.9% decline in same-store sales growth but also acquired the new breakfast chain Kiki's. The environment of consumer slowdown, coupled with lower interest rates following the Fed rate cut, presents opportunities for private equity to pivot and profit.

Beta Technologies IPO

Beta Technologies, an electric aircraft maker, is going public on the New York Stock Exchange today, pricing its stock at $34 per share and trading higher after reversing early declines.

Kyle Clark, Beta Founder and CEO, discussed the company's strategy:

• Going Public: The decision to go public was a long-term plan, contingent on reaching key milestones: being in production, having known cost of bills of materials, a strong sales pipeline with deposit-backed orders, and major certifications. These milestones were met, allowing them to provide good guidance to the market.
• Capital Deployment: The capital raised will be used to further industrialization and commercialization efforts, doubling down on vertical integration in manufacturing to drive down unit economics and scale with market demand.
• Market Opportunity: The market for electric aviation is huge. By reducing flying costs through electrification (eliminating fuel costs and drastically reducing maintenance), Beta aims to unlock much larger volumes than traditional aviation has seen. The Total Addressable Market (TAM) is significant, starting with cargo and medical logistics, and expanding to passenger transport.
• Ramp-up: Beta has a large facility in Burlington, Vermont, capable of building up to 300 aircraft per year, and is ramping up production over the next few years. The capital raise is crucial to address supply-side constraints and meet demand.
• Regulatory Environment: Clark highlighted a significant improvement in working with the FAA under the current administration, describing it as "a thousand times easier." The administration is operating the FAA like a business, unblocking regulatory burdens through clear communication and policy changes. An executive order from the White House and DOT clarity on deploying pre-certified aircraft domestically are also positive developments.
• Competitive Advantage: Beta's differentiation lies in its first-principles physics approach to flight, focusing on making aircraft light, slippery, energy-efficient, and converting energy into propulsion efficiently. They have set world records in key electrification metrics. Simplification and a pragmatic approach to certification are core to their strategy.

Market Volatility and Fed Policy

David Royal, Chief Financial and Investment Officer at Thrivent, discussed the current market action and potential future trends:

• Market Trend: Royal believes the general trend is still intact but acknowledges increased volatility. He attributes some of the recent weakness to the Federal Reserve's stance on a December rate cut, which is now seen as "far from a foregone conclusion," with probabilities dropping from the mid-80s to 90% down to the mid-60s.
• Rate Cut Necessity: Royal would vote for a December rate cut, citing weakening unemployment data. He notes that the rolling three-month average of job gains has significantly decreased since August 2024.
• Inflation Concerns: The Fed's concern remains that inflation is still above target and has stalled, with a slight uptick in goods inflation keeping PCE stubbornly at 2.9%.
• AI Valuations: Royal views AI investments as being funded out of earnings and cash flow, unlike the tech bubble, which is a positive. However, he stresses the need to evaluate each company individually based on its valuation thesis, business model, and potential impact on buybacks (e.g., Meta's capex concerns).
• Investment Strategy: Royal still likes big-cap tech but suggests leaning away from more cyclical sectors like consumer discretionary and industrials due to signs of economic weakening. He notes a bifurcation in consumer spending, with the upper-end consumer performing better. He advises leaning into companies serving the higher-end consumer and those driven by product innovation rather than macro tailwinds.
• Consumer Data: The divergence in consumer spending is evident, with luxury hotels outperforming while some consumers trade down.
• Government Shutdown Impact: The lack of government data due to the shutdown makes it difficult for the Fed to make decisions and for investors to manage rates. This necessitates reliance on alternative data sources like ADP employment reports and Challenger Gray Christmas reports on hiring plans. The low holiday hiring numbers (115,000 through September, compared to a typical 600,000) and layoffs at major hiring firms like Target and UPS are concerning indicators.
• Investor Action: Based on this data, Royal suggests that if the Fed is behind the curve and economic slowing is possible, investors might consider lengthening duration.

Zoom Info's AI Strategy and Growth

Henry Shut, CEO of Zoom Info, discussed the company's Q3 results and strategic focus:

• Q3 Results: Zoom Info beat its guidance on both the top and bottom lines, achieving record revenue with 5% year-over-year growth in the business group. Growth accelerated in the upmarket segment (from 4% to 6%), and the downmarket segment is stabilizing.
• Strategic Focus: The company's key strategies are:
  1. Moving Upmarket: The upmarket business now constitutes 73% of the company's revenue, up 10 points from two years ago, providing more durable growth.
  2. Stabilizing Downmarket: This segment has stabilized.
  3. Building Best-in-Class AI Products: Customers are increasingly using Zoom Info's AI products to build AI data foundations for agents and optimize workflows.
• AI Product Impact: This quarter marked the first full year of Zoom Info's AI products being in the market. Customers leveraging these AI products are renewing at significantly higher rates than those using legacy products, indicating higher engagement and retention.
• AI Boom vs. Bubble: Shut believes AI is here to stay and that customers need to see tangible results and efficiencies from AI. He emphasizes the importance of proprietary data as a foundation for delivering effective AI solutions.
• Competitive Advantages: Zoom Info's proprietary data asset is a core advantage. Its operations business, which grew over 20% year-over-year, provides companies with the data foundation needed for AI agents and workflows. They aim to solve the "bad data in, bad data out" problem.
• Salesforce Integration: Zoom Info is integrating with Salesforce's Agentforce to ground its revenue and prospecting agents with Zoom Info data. This provides sellers with accurate, up-to-date information for identifying and ranking their next best customers.
• Capital Return: Zoom Info is aggressively buying back its shares, believing the stock is trading below its intrinsic value. They see this as the best way to return capital to shareholders, alongside continued investment in the business.

AMD's Q3 Earnings

AMD's third-quarter results showed a beat on both adjusted EPS ($1.20 vs. $1.17 estimate) and revenue ($9.25 billion vs. $8.74 billion estimate). Adjusted operating margins were 24%, slightly below the consensus of 24.8%.

For Q4, AMD is guiding for revenue between $9.3 billion and $9.9 billion, exceeding the street's estimate of $9.21 billion. Gross margin guidance is around 54.5%, in line with consensus.

Despite these positive results, the stock showed little movement in after-hours trading, likely due to its significant run-up (approximately 50% in the past month) in anticipation of these results, driven by news of deals with OpenAI and Oracle. Investors will be looking for more color on the PC market, traditional server market, and AMD's China AI business during the earnings call.

What to Watch Wednesday, November 5th

• New York City Mayoral Race: Polls close at 9:00 PM Eastern. Progressive candidate Eric Adams is favored, but former Governor Andrew Cuomo has received an endorsement from President Trump. Investors will monitor the impact of the next mayor's policies on taxes, housing, and business.
• Earnings Reports: Key companies reporting include Toyota, McDonald's, and Robin Hood. Robin Hood's Q3 results will be scrutinized for active retail trader engagement and the performance of new products like prediction markets.
• ADP Employment Data: Economists forecast private companies adding 40,000 jobs in October, a rebound from the 32,000 jobs cut in September, indicating a potential pickup in hiring.