Markets Navigate Volatility Amid AI Spending Concerns and Fed Hawkishness

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🧠 Corporate Overview

Markets delivered a volatile week with a dramatic reversal pattern:

• Despite a 27-day government shutdown draining $7 billion per week from the economy, major indexes held near record levels with the S&P 500 finishing the week essentially flat around 6,890

• Tech stumbled hard on Thursday as Meta plunged 11% on AI spending concerns and Microsoft disappointed, before Amazon's Friday blowout (up 10%) revived the AI narrative with 20% AWS growth

• The Fed cut rates 25 basis points Wednesday but Chair Powell's hawkish tone suggesting this could be the last cut of 2025 sent bond yields spiking above 4.10%

• Thursday's Trump-Xi meeting produced a one-year trade truce: tariffs on China drop from 57% to 47% immediately, with Beijing pausing rare earth export controls

The message is clear: When AI infrastructure spending produces results (Amazon), markets rally. When spending appears unchecked (Meta), multiples compress fast.

At Daly Asset Management, we don't chase headlines. We track capital flows, earnings velocity, and structural dislocations. Right now, those signals show a bifurcating market—winners proving ROI on AI spending while laggards face valuation compression.

💡 Stock of the Week: Microsoft (MSFT)

Sector: Technology | Market Cap: $4.1 trillion | Dividend Yield: 0.7%

Why Now

This week Microsoft finalized the most significant AI partnership restructuring in history, though the stock fell 3% on Thursday before recovering Friday:

• Secured a 27% stake in OpenAI valued at $135 billion while extending exclusive access to OpenAI's models through 2032, including post-AGI systems

• Locked in a $250 billion Azure services contract from OpenAI, securing massive recurring revenue for the next decade

• Despite the strategic wins, shares dipped Thursday as investors worried about increased AI spending guidance and whether capex would translate to near-term profits

Microsoft isn't just participating in the AI buildout—it's the landlord. Every ChatGPT query, every enterprise AI deployment, every startup chasing AGI runs on Azure.

Tactical positioning:

• Trading at 32x forward earnings—elevated, but justified given 15%+ revenue growth driven by Azure and AI services

• Generating $90 billion in annual free cash flow with operating margins above 45%

• Sits at the intersection of falling discount rates (Fed cutting) and exploding infrastructure demand (AI capex)

Risks to Watch

• Antitrust scrutiny mounting globally, especially around Azure's bundling practices

• Massive capex (over $50 billion annually) leaves little room for execution missteps in data center buildouts

• If regulators force structural separation of cloud and AI divisions, margins could compress

Verdict

We're long because this is essential infrastructure for the next decade. That's pricing power in an inflationary, tariff-heavy world where scarcity drives returns. The OpenAI partnership removes competitive uncertainty.

📉 Market Snapshot (Week of October 27-31, 2025)

• Volatility returned: Thursday selloff in mega-cap tech (Meta -11%, Microsoft -3%) followed by Friday's Amazon-led recovery (+10%)

• Bond market revolt: 10Y yields spiked 14 bps after Powell's hawkish comments, breaking back above 4.10%

• Small caps quietly outperform: Russell 2000 up 1% as rate-sensitive names benefit from lower Fed expectations

This is a stock-picker's market betting on AI execution, not a liquidity-driven broad rally

📊 Market Commentary

The Government Shutdown: Maximum Theater, Minimal Market Impact

Washington entered week four of the longest shutdown in recent history:

• Over 2 million federal workers impacted, with 750,000 furloughed daily and 1.4 million working without pay

• Economic data releases frozen—no September jobs report, no CPI, no retail sales

• CBO estimates $7 billion per week in lost GDP, with $140 billion in total losses through Day 27

Yet markets barely blinked. Why?

Because investors have learned to price around government dysfunction. Markets now operate on the assumption that Washington is structurally incapable of governance, so they focus on what matters: corporate cash flow and central bank liquidity.

Real damage on Main Street:

• Small businesses can't close SBA loans

• Import businesses drowning in tariffs with no tax credits coming through

• Military contractors face project delays

• SNAP benefits paused in at least 25 states

These aren't market-moving in aggregate, but they're death by a thousand cuts for Main Street—which Wall Street stopped caring about years ago.

Fed Cuts Into Darkness—Then Signals Stop

The Fed delivered its expected 25 basis point cut Wednesday:

• Brought the Fed funds rate to 3.75–4.00%, the second cut of 2025

• But Chair Powell's hawkish tone shocked markets: "there's a growing chorus now of feeling like maybe this is where we should at least wait a cycle"

• Translation: This may be the last cut of 2025, with December increasingly uncertain

The problem: With the shutdown, they're flying blind. No September payrolls, no October CPI, no retail sales figures. The Fed relied on ADP private payroll data (which showed a 32,000 job decline in September) and vibes from FOMC members' conversations with business leaders.

It's monetary policy by proxy. Markets initially sold off hard before Friday's Amazon rally provided relief.

The risk: Inflation re-accelerates while the Fed already hit pause. Core CPI is still above 3%, and tariffs are layering in structural cost pressures. If the Fed is forced to hike in Q1 2026, expect violent repricing across risk assets.

The Microsoft-OpenAI Deal: AI's Defining Moment

Microsoft's $135 billion stake in OpenAI isn't just a deal—it's the structure that will define AI economics for the next decade:

What Microsoft gets:

• 27% ownership stake worth $135 billion

• Exclusive access to OpenAI's models through 2032, including post-AGI systems

• $250 billion Azure services contract from OpenAI

• IP rights to OpenAI's models and products (excluding consumer hardware) through 2032

Why this matters: By securing exclusive access to OpenAI's models through 2032 (including post-AGI systems), Microsoft effectively cornered the market on frontier AI. This is the computing equivalent of Standard Oil controlling 90% of U.S. refining capacity in 1900.

The flywheel:

• OpenAI gets compute capacity → Makes model breakthroughs → Needs more compute

• Microsoft gets guaranteed revenue → Builds more data centers → Increases AI moat

• Both companies entrench their lead over Google, Amazon, and Meta

From an investment standpoint, this de-risks Microsoft's AI strategy significantly. The company can now monetize AI through Azure services, Office Copilot, and enterprise deployments without worrying about OpenAI pivoting to a competitor.

Amazon's 14,000-Person AI Realignment—Then Blowout Earnings

Amazon announced 14,000 corporate layoffs earlier this week—the largest single reduction in company history. Then Friday, the company reported blowout earnings that sent shares up 10%.

The official line:

• Part of CEO Andy Jassy's push to "operate like the world's biggest startup"

• Framed as a shift toward AI efficiency and removing bureaucracy

• Follows internal documents showing Amazon expects to avoid hiring 600,000 workers by 2033 through robotics

What the earnings showed:

• AWS revenue up 20%, beating estimates and signaling strong AI infrastructure demand

• Operating margins expanding as AI-driven automation scales

• The layoffs weren't about cost-cutting from weakness—they were about margin expansion from strength

Market reaction: Stock jumped 10% Friday, largest single-day gain since 2022. Investors see margin expansion ahead as AI-driven automation scales while revenue growth accelerates.

The dark side nobody talks about: This is a preview of what's coming across every sector—aggressive workforce reductions masked as "digital transformation." Companies that fail to cut will get punished on valuation multiples. Welcome to the new normal.

Trade War Détente (For Now)

President Trump and Chinese President Xi Jinping met Thursday in South Korea:

What's agreed:

• Tariffs on Chinese goods drop from 57% to 47% immediately (10% fentanyl-related cut)

• Preliminary framework reached on rare earth exports, fentanyl cooperation, and agricultural purchases

• China to make "substantial" soybean purchases, delay rare earth export controls by one year

Classic Trump dealmaking: Threaten maximum escalation to extract concessions, then declare victory when both sides step back from the brink.

Why this isn't durable:

• Underlying tensions remain unresolved: technology transfer, semiconductor restrictions, Taiwan

• China is still building out domestic supply chains to reduce U.S. tech dependence

• U.S. is still onshoring critical industries

• The next flare-up is when, not if

Earnings Season: The Great AI Divergence

Q3 earnings season confirmed a new reality: AI spending only matters if you can prove ROI

Thursday's disappointments:

• Meta: -11% despite strong results. Why? Increasing AI capex guidance with unclear near-term payoff

• Microsoft: -3% on similar concerns about ballooning infrastructure spending

Friday's validation:

• Amazon: +10% after AWS growth accelerated to 20%, proving enterprise AI adoption at scale

The takeaway:

Mega-cap tech is bifurcating:

• Winners: Companies showing AI spending translates to revenue growth (Amazon, potentially Nvidia)

• Laggards: Companies spending billions on AI infrastructure without clear monetization path (Meta, question marks on Microsoft)

The "Magnificent Seven" now account for nearly 32% of S&P 500 market cap, up from 28% a year ago. If you're not overweight mega-cap tech, you're underperforming the index. But which mega-caps matters more than ever.

The sustainability question: Can AI infrastructure spending justify these valuations?

• Microsoft guiding for $50+ billion in annual capex

• Meta spending $40 billion

• Amazon and Google in similar territory

• That's over $200 billion annually flowing into data centers, chips, and energy infrastructure

As long as enterprises keep adopting AI at scale (as Amazon proved Friday), the flywheel continues. But if adoption slows or ROI becomes unclear, these multiples will compress violently.

🧭 Tactical Map: Where to Lean In

1. AI Infrastructure Names – Microsoft, Nvidia, Broadcom, Oracle. But only those proving revenue conversion. Amazon's Friday performance validates the buildout is real, budgets are being approved, and enterprises are deploying at scale.

2. Defense & Aerospace – Northrop Grumman, RTX, Lockheed. Geopolitical instability + budget increases = multi-year tailwind. Trade tensions may ease temporarily but structural defense spending continues.

3. Energy Dominance Plays – U.S. producers with pricing power in a tariff-constrained world. EQT, Devon Energy, Cheniere. Note: WTI at $60 is creating opportunities.

4. Reshoring Beneficiaries – Companies with U.S.-based manufacturing. Think industrials, automation, logistics. Tariff volatility makes domestic supply chains premium.

5. Short Duration Credit – With Fed cuts pausing (not accelerating), short-term corporate bonds offer yield without duration risk. Powell's hawkish turn makes long-duration a dangerous bet.

🔍 Theme to Watch: The Great AI ROI Sorting

Amazon's 10% Friday surge versus Meta's 11% Thursday collapse tells you everything about the next market phase: AI spending only works if you prove returns.

This isn't about automating factory floors—that's been happening for decades. This is about:

• Eliminating white-collar middle management (Amazon cutting 14,000)

• Replacing HR functions, customer service layers, administrative roles that were considered "safe" from automation

• Proving enterprise adoption at scale (AWS up 20%)

The investment opportunity:

This creates a barbell:

• Long AI enablers – Companies building the tools AND proving revenue conversion (Amazon, Salesforce, ServiceNow, UiPath)

• Short labor-intensive service providers – Consulting firms, staffing agencies, call centers that haven't automated

• Avoid AI spenders without ROI proof – Companies spending billions on infrastructure without clear monetization (Meta's 11% Thursday drop is a warning)

This is a multi-year structural shift. Early movers will compound alpha. Laggards will see their cost structures become uncompetitive. Watch for mass layoffs masked as "digital transformation" across every sector in 2026.

AI capex is no longer automatically rewarded. Markets now demand proof that spending translates to either revenue growth (Amazon) or margin expansion (Microsoft). Companies that can't show both will face multiple compression.

📅 Forward View: Week of November 3–7, 2025

Key Events:

Monday, November 3:

• ISM Manufacturing PMI (10:00 AM ET) – Watch for impact of ongoing shutdown on factory activity

Thursday, November 6:

• Trump-Xi meeting aftermath – Markets digest trade deal framework details

• Bank of England rate decision – Could signal global easing cycle trajectory

Friday, November 7:

• Monthly Employment Report (8:30 AM ET) – For October 2025 (if shutdown ends)

  • Critical data after September's delayed release

  • ADP showed -32K in September—watch for confirmation

Wednesday, November 13:

• CPI (Inflation) Report (8:30 AM ET) – October 2025 data

  • Fed's decision-making hinges on this print

  • Core CPI still above 3%—watch for re-acceleration

Tuesday, November 19:

• Nvidia Q3 earnings (After Market Close) – The most important earnings release of Q4

  • Revenue forecast: $54.55B

  • Jensen Huang's commentary on Blackwell platform demand will move markets

  • After Amazon validated AI infrastructure spending, all eyes on whether semiconductor demand holds

Technical Levels:

• S&P 500: Support at 6,750 (50-day MA), then 6,650 | Resistance at 6,900 (psychological), then 7,000

• 10Y Treasury: Support at 3.85% | Resistance at 4.25% (Powell's hawkish tone broke 4.10% resistance)

• VIX: Currently 16.91—elevated from recent lows, watch for spike above 20 if shutdown drags or inflation surprises

What to Watch:

If the shutdown ends:

• Expect dovish repricing if delayed data confirms labor market weakness

• Watch for catch-up volatility as markets digest backlog of economic data

• Small-cap catch-up bid likely as Main Street concerns ease

If the shutdown continues:

• Markets will increasingly price in Q4 GDP contraction

• Fed December cut becomes less certain (Powell already signaled pause)

• Small-cap underperformance continues as Main Street bleeds

Base case: Continued mega-cap strength, but high dispersion based on AI ROI proof. Amazon's Friday performance shows the market will reward AI spending that translates to revenue. Meta's Thursday collapse shows it will punish spending without clear payoff.

💬 Final Words

The market is telling you something important: AI spending must now prove ROI, the Fed has paused (not pivoted), and earnings quality matters more than ever.

Thursday's selloff followed by Friday's Amazon-led recovery wasn't noise—it was a regime change. Markets are no longer blindly rewarding AI capex. They're demanding proof that billions in infrastructure spending translates to revenue growth and margin expansion.

The Fed cut 25 bps Wednesday, but Powell's hawkish tone shocked markets: this may be the last cut of 2025. The government has been shut down for 27 days. Trade wars are flaring. Yet the S&P 500 finished the week essentially flat near all-time highs.

That's not irrational exuberance. That's capital reallocating to where the returns are: companies with pricing power, margin expansion, and exposure to AI infrastructure that's actually driving revenue (Amazon up 10% Friday validates this).

At Daly Asset Management, we don't bet on macro forecasts or chase AI spending narratives. We position in structural winners who prove ROI and systematically manage risk. Our strategies are now live on Surmount—no AUM fees, no advisory theater, just disciplined capital allocation in what actually works.

Markets reward the prepared, not the panicked. And increasingly, they reward the profitable over the speculative.

We'll see you next week.

Disclosures: This newsletter is for informational purposes only and does not constitute investment advice. Past performance is not indicative of future results. Always conduct your own due diligence or consult with a financial advisor before making investment decisions.