Massive Amazon Web Services outage shows signs of easing, Apple upgraded to Buy from Loop Capital

Key Concepts

• Amazon Web Services (AWS) Outage: A significant disruption affecting numerous online services and platforms due to an operational issue with AWS.
• Hyperscalers: Large cloud computing providers that form the backbone of the internet, such as AWS, Microsoft Azure, and Google Cloud.
• Earnings Season: A period when publicly traded companies report their financial results, providing insights into their performance and future outlook.
• Consumer Price Index (CPI): A key measure of inflation that tracks the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
• Cost of Living Adjustment (COLA): An annual adjustment to Social Security benefits to account for inflation.
• Artificial Intelligence (AI): The development of computer systems that can perform tasks typically requiring human intelligence, such as learning, problem-solving, and decision-making.
• K-Shaped Economy: A term describing an economy where different sectors or groups of people experience vastly different outcomes, with some thriving while others struggle.
• Cyclical vs. Defensive Stocks: Cyclical stocks tend to perform well during economic expansions, while defensive stocks are considered more stable during economic downturns.

Amazon Web Services (AWS) Outage and its Implications

A major Amazon Web Services (AWS) outage occurred overnight, impacting a wide range of websites and platforms. Companies such as Amazon itself, Robin Hood, Coinbase, Disney Plus, and airlines were affected. AWS reported that the outages were easing and showing signs of recovery, attributing the disruption to an "operational issue" that affected multiple services.

Key Points:

• Scope of Impact: The outage affected nearly 100 services, originating on the East Coast. Major online apps and services, including Coinbase, Robin Hood, Fortnite, and Snapchat, were taken down.
• Interconnectedness: This event highlights the extreme reliance of numerous businesses and services on a few dominant cloud providers, often referred to as "hyperscalers." AWS is identified as the largest hyperscaler by market share.
• Over-reliance on Single Providers: While many companies utilize multiple cloud providers (e.g., Microsoft, Google) as a backup, services exclusively accessible via AWS were rendered unavailable.
• Fallibility of Cloud Services: The outage serves as a reminder that even massive and sophisticated cloud services are fallible and can experience catastrophic disruptions.
• Investor Reaction: Despite the widespread impact, Amazon shares showed little change ahead of the market open, suggesting investors were not overly concerned.
• AWS Growth Concerns: The transcript notes that Amazon is the only stock among the "Magnificent 7" that is still lower on the year, partly due to concerns about slowing growth at AWS and a less clear AI strategy compared to competitors like Microsoft and Google.

Earnings Season and Economic Outlook

The market is gearing up for a significant week of corporate earnings reports, with investors looking past recent volatility and focusing on company performance.

Key Companies Reporting This Week:

• Netflix: Investors will be watching for insights into the media landscape, particularly the impact of live events and the content pipeline for Q4 guidance.
• Coca-Cola: Expected to show resilient demand in the US and Western Europe, though potential weakness in Latin America and China/Middle East will be monitored for consumer insights.
• Southwest Airlines: As a low-cost carrier, its performance will indicate the health of its consumer base, contrasting with the premium consumer driving revenue for Delta and United.
• Intel: This report is crucial as it's the first after Intel received a 10% stake from the US government and a stake from Nvidia. UPS expects results in line with expectations due to strong demand for PCs and servers.
• Tesla: Expected to report Q3 earnings with estimates of $26.27 billion in revenue and adjusted EPS of 53 cents. Key questions include the impact of new cheaper Model Y and Model 3 on sales, and updates on robo-taxi deployments.
• General Motors (GM): Estimates suggest revenue of $45.16 billion, down 7% year-over-year. A significant focus will be on the EV business, especially after a recent $1.6 billion hit. Investors will seek clarity on the drivers of this negativity and GM's investment strategy in the US due to tariffs.

Broader Market and Economic Themes:

• Earnings Optimism: Futures are pointing to gains, with some earnings optimism creeping in. Investors are looking past the government shutdown and easing trade tensions with China.
• Consumer Spending: Insights from earnings will provide a view into how US and global consumers are faring in the third quarter.
• K-Shaped Economy: The concept of a bifurcated or K-shaped economy is acknowledged, with some consumers tightening belts while others continue to spend. Companies like Walmart, Costco, and TJ Maxx are serving the former, while the latter's spending habits will be revealed by other earnings.
• AI Deployment: The rollout of AI across enterprise and consumer products is a significant theme, with companies like Microsoft and Google having clearer narratives than Amazon. The next wave of AI deployment is expected to focus on how average companies integrate AI for earnings revisions, margin improvement, and profitability.
• Market Broadening and Reacceleration: The outlook for 2026 is constructive, with expectations of market broadening, economic reacceleration, Fed rate cuts, and inflation tailing off.
• Volatility and Rotation: Recent market volatility has seen a rotation into defensive sectors like utilities, healthcare, and staples, with cyclical names underperforming. This could indicate underlying concerns, but earnings are seen as the ultimate driver.
• Performance Chasing: Any market pullbacks due to short-term headline risk are expected to be bought aggressively, with performance chasing likely at the end of the year.
• Investment Opportunities: Cyclical areas that have underperformed this year, such as consumer discretionary and financials, are expected to perform better in 2026.

Key Economic Data: September CPI Report

The delayed September Consumer Price Index (CPI) report is scheduled for release on Friday, providing the Federal Reserve with its last look at inflation before its next rate decision.

Key Details:

• Government Shutdown Impact: The government shutdown has prevented agencies from collecting data, making this CPI report particularly crucial.
• Social Security COLA: The September CPI data is a statutory requirement for calculating the Cost of Living Adjustment (COLA) for Social Security recipients for the following year, and must be posted before November 1st.
• Inflation Expectations:
  • Core CPI (excluding food and energy): Expected to hold steady at 3.1% month-over-month for September, the same as the prior month.
  • Headline CPI (year-over-year): Expected to pop up to 3.1% from 2.9% in the prior month.
  • Headline and Core CPI (month-over-month): Both measures are expected to hold steady.
• Fed's Target: The current inflation rate of 3.1% is well above the Fed's 2% target.
• Fed's Dilemma: While the Fed will receive inflation data, they are still operating without key employment data due to the shutdown, making it challenging to weigh the other side of the economic equation.
• Rate Cut Expectations: Investors anticipate another rate cut at the end of the current month. However, Fed Governor Waller has cautioned against expectations for further rate cuts beyond that, pending further data.

Trending Tickers and Notable News

• Apple: Received an upgrade to "buy" from "hold" at Loop Capital, citing positive iPhone demand. It was also added to Evercore's tactical outperform list. New data from Counterpoint Research indicates the iPhone 17 series outsold the iPhone 16 range by 14% in their respective first 10 days on sale in the US and China.
• Caring and L'Oreal: The luxury giant Caring is selling its beauty division to L'Oreal for $4.7 billion. This includes the sale of perfume maker House of Creed. The move signifies a reversal for Caring in its attempt to compete in high-end fragrance.
• BNP Paribas: Shares of the French bank fell to a six-month low after losing a court case. A US jury found the bank helped Sudan's government commit genocide by providing banking services that violated American sanctions. The bank was ordered to pay $20.5 million to three Sudanese plaintiffs, and lawyers for the plaintiffs suggest this verdict could open the door for over 20,000 refugees to seek billions in damages. BNP Paribas intends to appeal the ruling.

Expert Insights on Earnings and Market Outlook

Eric Clark, CIO at Acubves and Portfolio Manager of the Logo ETF:

• Earnings Outlook: Clark is bullish on earnings, expecting them to remain strong and stable with good earnings per share growth and efficiency gains, partly driven by AI deployment.
• Consumer Spending: While consumer spending has been consistent, consumers are becoming more "choiceful." The K-shaped economy is evident, with different segments of the population experiencing varied economic outcomes.
• 2026 Outlook: Clark anticipates 2026 to be a year of reacceleration for the economy and market, with Fed rate cuts, peaking and tailing inflation, and a potential lift for the average company.
• Market Volatility: The recent volatility and rotation into defensive stocks are seen as potential "de-risking" ahead of upcoming catalysts. However, earnings are the primary driver, and upward revisions are already occurring.
• Investment Strategy: For a reaccelerating economy, cyclical areas like consumer discretionary and financials are expected to perform better. Netflix is seen as a potential positive surprise this earnings season.
• AI Deployment: The focus is shifting from the semiconductor buildout to the deployment of AI across companies, which is expected to lead to earnings revisions, better margins, and expanding multiples.

Conclusion

The current market landscape is characterized by a significant AWS outage highlighting the fragility of digital infrastructure, a packed earnings season offering crucial insights into corporate performance and consumer health, and the impending release of the September CPI report which will inform the Federal Reserve's monetary policy decisions. Despite short-term volatility and concerns about inflation and economic divergence, the expert outlook for the broader market and economy in 2026 remains constructive, with AI deployment seen as a key driver of future growth and profitability. Investors are advised to focus on earnings as the ultimate market driver and consider cyclical areas for potential future gains.