Looking out the Window
Summary: The Fed met last week and held interest rates steady. Big tech companies reported earnings, with strong revenue growth but negative free cash flow. Anthropic filed its S-1. There’s a lot going on in the world. Editor’s Note: We have made this week’s newsletter available to all subscribers. If you’re not already a premium subscriber, please consider subscribing. Share The Transcript Macro Warsh is looking out the window “At each policy meeting, my colleagues and I assess the economy by looking out the window—it’s what we call “interrogating reality”—to gauge what’s really going on. It is not a task that has grown easier.” - Federal Reserve Chair Kevin Warsh The economy is strong, inflation still high “What exactly do we observe? Economic growth has strengthened...And yet Americans, of course, are still dealing with inflation that has been running above the Committee’s objective for close to 6 years. It’s our responsibility to get inflation down. That’s the reason the FOMC’s discussion over the last couple of days focused mainly on the price stability side of our remit.” - Federal Reserve Chair Kevin Warsh “...we continue to see strength. The underlying business is very strong. Consumers and businesses are spending. The overall environment remains very supportive.” - Mastercard ( ) CFO Ling Hai “Fourth quarter U.S. credit grew 11% year-over-year, and debit grew 9%...We did not see signs of the lower-spend consumer weakening in our volumes.” - Visa ( ) CFO Chris Suh “I want to touch on inflation. It has proven stubborn, and elevated energy prices continue to push input costs higher.” - IDEX ( ) CEO Eric Ashleman Warsh’s Fed will not tolerate inflation above 2% “...there’s no lack of clarity in our purpose at the Fed...We’ve made clear our readiness to act as circumstances require, and we have shown our willingness to act...we doubled down on the 2 percent inflation target...if you think that we’re tolerating some inflation target somewhere in the 2’s, let us disabuse you of it.” - Federal Reserve Chair Kevin Warsh Market conditions have gotten tighter but not tight “Since our policy action in September, we have started to see some changes in financial and credit conditions. They have tightened for some businesses and households, much as we would expect. Market participants are becoming somewhat more discerning in their capital allocations. And while overall financial conditions are tighter, I’m unwilling and unable to call them tight.” - Federal Reserve Chair Kevin Warsh The Fed is not surprised by volatility “We observed—but were not surprised—that financial markets showed bouts of volatility and shifting correlations.” - Federal Reserve Chair Kevin Warsh Interest rates matter to tech “Since early September, what we’ve seen inside of the technology complex, outside of the technology complex...Interest rates have had an effect. You’ve seen market participants that are discriminating between the kinds of investments they want to make. You’ve seen credit spreads for certain assets widen out, gap out. For others you’ve seen some tightening in financial conditions, but not significantly. So on the thrust of your question of -- with respect to the new technology and this investment surge, do interest rates matter? I believe they do. And I don’t believe that they’re somehow divorced from the rest of the economy” - Federal Reserve Chair Kevin Warsh Markets are pricing in rate hikes “In September, the Fed raised rates for the first time since 2023. The ECB and the Bank of Japan raised rates the same month, taking Japan’s policy rate to its highest level since 1995. Inflation re-accelerated to 3.7% in September, and markets are now pricing more hikes, not cuts.” - Welltower ( ) CIO Nikhil Chaudhri A lot is happening in the world “The period right in front of us is information rich. There is a lot that’s happening in the world.” - Federal Reserve Chair Kevin Warsh Anthropic is preparing to IPO “Today, Anthropic, PBC filed a registration statement on Form S-1 with the U.S. Securities and Exchange Commission relating to its proposed initial public offering of its Class A common stock. Anthropic intends to list its Class A common stock on the Nasdaq Global Select Market under the symbol “ANT.” - Anthropic International Middle East conflict poses less risk to markets than it did earlier this year “The way we look at the world, we had more risk a year ago than we do today. It does not mean we will not have continued hostilities, but we’ve now seen the region adapt. We’ve seen what is possible. We’ve seen how this region will behave under a variety of circumstances. My own view, we have less risk today.” - Apollo Group ( ) CEO Marc Rowan European consumers remain resilient “I would say if I take a look at the macro environment right now, the European consumers are very resilient. That’s probably the best description.” - Mastercard ( ) CFO Ling Hai Warsh is watching the Korean economy “I would say I pay probably more attention to the Korean economy than you might think, because when I’m looking at the feedstocks effectively for this new surge in technology, a lot of it’s coming from Japan and Korea, some from Singapore. So I’m particularly interested in what’s happening in the Korean economy, usually because it’s telling me what’s on planes and ships coming this way” - Federal Reserve Chair Kevin Warsh Chinese policy is weighing on new real estate construction “...it did not get improved in the third quarter. It was still down 10% the market. The reason for that is something called the 828 Rulebook. It happened on August 28 when the central government basically -- and I believe for all the right reasons - came out with guidance for high-quality development. It’s going to be very good structurally for China over the medium and long term. But what it did to developers was said that they should favor selling and finish completing units right now versus presales. And for any presales they do, for the first time in 2 decades, those down payments have to go to escrow, so they can’t be used to finance the next project, which, as you know, had been done for many years.” - Otis Worldwide ( ) CEO Judy Marks Financials The Fed is reducing the number of rate-setting meetings on its calendar “...we have decided on a change in our FOMC schedule starting next fall. We believe 8 meetings per year is the right number for the FOMC. But in 2027, one meeting will focus exclusively on broad monetary policy strategy, with neither a vote on the federal funds rate nor a policy statement anticipated. The rest will be regular FOMC policy-setting meetings. I expect that in 2028, we will have 2 meetings dedicated to discussions of strategy and 6 for setting policy.” - Federal Reserve Chair Kevin Warsh Warsh still believes in forward guidance in a crisis “I don’t believe in forward guidance, absent exigent circumstances, absent a crisis. I have to give that caveat because, in the darkest days of the 2008 financial crisis...that kind of forward guidance is actually quite helpful. But in normal, ordinary times, especially times where the underlying real economy is this strong, I don’t believe in it. I don’t favor it.” - Federal Reserve Chair Kevin Warsh The Fed is not just Warsh “I’ve got 18 quite independent colleagues. If you were inside that room the last couple of days, you would come to believe that to be true.” - Federal Reserve Chair Kevin Warsh AI companies are raising significant amounts of capital “These Offerings are part of a financing plan that consists of approximately $35 billion of underwritten public offerings...and...approximately $60 billion at-the-market (”ATM”)....The Company intends to fund these investments through a balanced mix of operating cash flow, investment-grade debt, strategic partnerships, and equity capital...Meta’s planned investments will support its continued momentum across its core business and emerging AI opportunities” - Meta ( ) AI financing is reaching into non-investment grade markets “I think what we have been experiencing is that as the CapEx numbers have continued to scale, they went from largely equity-funded to then high-grade funded and now you’re starting to see some of that funding demand flow through into the leveraged finance and private credit market. So there’s an evolution here. But even as spreads are widening in certain parts of the market, it’s still accretive relative to the cost of equity capital. And so I don’t think that the weight of this demand is necessarily going to stop because of rate sensitivity.” - Ares Managemen t ( ) CEO Michael Arougheti Conditions are tightening for the smaller players “If a customer comes in and they’re unwilling to provide a corporate guarantee for an SPV, we’re just -- we’re kind of at a point where, like, appreciate your interest in the product, but if we can’t get comfortable with who the parent company is and we can’t get some level of guarantee around that for purposes of us underwriting the credit for a project, and we’re not going to do it.” - Generac ( ) CEO Aaron Jagdfeld Capex expectations aren’t being impacted by capital availability “To the contrary, we’re seeing very strong demand from our customers. As I said, if I look at our largest customers, they’re basically all investment-grade companies, right, generating very strong cash. We’re not seeing any impacts from any credit issues whatsoever if they are out in the market. Demand from our customers is, if anything, strengthening versus what it was a quarter ago.” - Sandisk ( ) CFO Luis Visoso Consumer Consumers continue to spend “And most importantly, I think, is that the consumer is resilient. It’s really interesting to look at what’s happening with the consumer spend. It’s a bit of a K curve for sure. If you have assets, you’re spending. If you don’t, you’re stretched. But as long as the employment rate stays fairly stable and it appears to be fairly stable in our country, consumers are going to spend because they have assets” - United Parcel Service ( ) CEO Carol Tomé Labor markets are low hire, low fire “I think it still is a relatively low hire, low fire environment. As I mentioned in my prepared remarks, our clients are continuing to hire at a steady pace. ...So I don’t really think a lot has changed.” - Automatic Data Processing ( ) CFO Peter Hadley Starbucks has returned to annual comp growth “Global comps grew 7.2%, our fifth consecutive positive quarter... U.S. comps grew 7.7%, with a healthy balance of transactions up 2.4% and ticket up 5.2%.” - Starbucks ( ) CFO Cathy Smith Cruise demand remains strong “Demand for our leading vacation experiences remains strong, and while it is still early, 2027 bookings are pacing ahead of historical levels at higher rates.” - Royal Caribbean Group ( ) CEO Jason Liberty The global lifestyle footwear market is difficult “And then, yes, the white elephant in the room, the lifestyle footwear market is currently difficult. And yes, you see a lot of discounts.” - adidas AG (ADDYY) CEO Bjørn Gulden It’s still early days for agentic commerce “...the quarter was a bit of a tipping point...where you can actually have an agent who can go out on your behalf and execute not just shopping but real transactions and do it either with or without a human in the loop...it’s still very early in terms of the number of consumers that are doing this.” - Visa ( ) CEO Ryan McInerney “It is still early days, and the numbers are not yet significant in the grand scheme. But as the AI agentic assistants have emerged, agentic transactions are ramping up at impressive weekly growth rates. We’re now seeing the early stages of consumer adoption.” - Mastercard ( ) CEO Michael Miebach Few consumers are actually using agents for purchasing for now “A natural question is whether agentic shopping from external horizontal agents is meaningfully impacting Amazon Ads. The answer is no. Few customers are doing much shopping this way yet, as the experience is still not great nor more convenient than coming to a retailer directly to research or one-click order there.” - Amazon ( ) CEO Andy Jassy Technology Big tech delivered strong revenue growth “Our results exceeded expectations across revenue, operating income and earnings per share, driven by strong demand across the Microsoft Cloud. This quarter, revenue was $92.3 billion, up 19%.” - Microsoft ( ) CFO Amy Hood “We are reporting $201.9 billion in revenue, up 12% year-over-year. Operating income was $28.1 billion, up 61% year-over-year. Q3 was another strong quarter for Amazon.” - Amazon ( ) CEO Andy Jassy “We had a strong third quarter delivering our 13th consecutive quarter of double-digit revenue growth. Consolidated revenues were $127.6 billion, up 25% in both reported and constant currency.” - Alphabet ( ) CFO Anat Ashkenazi Their cloud business is surging “Google Cloud revenues grew 103%. Our AI infrastructure and solutions are the major drivers for Cloud growth, and our customers see us as the leading provider here, so there’s huge demand.” - Alphabet ( ) CEO Sundar Pichai “AWS grew 39.3% year-over-year, accelerating for the sixth straight quarter, our fastest growth in nearly five years. Backlog is $578 billion, growing triple digits year-over-year and well-diversified...We believe that AWS can grow north of 40% in each of 2027 and 2028 and be a trillion-dollar revenue business in the next 5-10 years.” - Amazon ( ) CEO Andy Jassy “Azure revenue was ahead of expectations and increased 48%...Foundry revenue more than tripled year-over-year with upside driven by efficiency gains across our GPU fleet...as well as higher revenue per token” - Microsoft ( ) CFO Amy Hood But free cash flow has turned negative “We had negative free cash flow of $9.1 billion in the third quarter, driven by our investments in CapEx.” - Alphabet ( ) CFO Anat Ashkenazi “I think next year is an investment year for us as we look at the year. Probably not a dynamic where we’re going to have positive free cash flow next year.” - Intel ( ) CFO Dave Zinsner Capex is huge and expected to grow in 2027 “Our full year 2026 CapEx guidance range of $195 billion to $205 billion remains unchanged. We continue to expect our CapEx to increase significantly in 2027, and we’ll provide further details on our Q4 call.” - Alphabet ( ) CFO Anat Ashkenazi “We still expect 2026 cash CapEx of approximately $220 billion, the majority for AWS, and expect to spend meaningfully more in 2027 with a clear line of sight to attractive financial returns, as I laid out on our last call.” - Amazon ( ) CEO Andy Jassy “In Q2, we expect CapEx spend will be over $50 billion. Therefore, for the calendar year, spend should be approximately $170 billion...In the second half of the fiscal year, we currently expect CapEx spend to accelerate primarily from CPUs, inclusive of higher memory and storage costs and GPUs as well as the 3P capacity deliveries that shifted to H2.” - Microsoft ( ) CFO Amy Hood Demand justifies the spend “...this is a once-in-a-lifetime opportunity. I think what we are seeing with AI, it is the biggest transformation in our lifetime...Would it be more convenient if this type of acceleration and opportunity happened over 25 years, and you could spread the CapEx over 25 years? Yeah, it might be more convenient, but that is not the world that we live in, and that is not the opportunity. We can fund this plan, and I think it will forever change the size of Amazon. It will forever change our revenue, it will forever change our free cash flow, and we are going to invest and we are going to pursue it to continue to be the significant leader like we are today.” - Amazon ( ) CEO Andy Jassy Hyperscalers have $3 Trillion in RPOs “RPOs, or remaining performance obligations, remain quite high. The latest Visible Alpha sell-side estimates there for those hyperscalers is just under $3 trillion for 2027.” - S&P Global ( ) CEO Martina Cheung “Commercial remaining performance obligation grew 73% to $677 billion...Our RPO has a weighted average duration of 2.3 years and roughly 30% will be recognized in revenue in the next 12 months, up 29% year-over-year.” - Microsoft ( ) CFO Amy Hood “At the end of the third quarter, we had future purchase commitments of $924 billion and pre-commencement leases and other obligations of $152 billion. These dollar amounts reflect the maximum contractual obligations. However, a number of these agreements have variable pricing and volume flexibility, which could result in lower spend.” - Alphabet ( ) CFO Anat Ashkenazi Labs are growing revenue much faster than cost “Revenue per dollar of compute has expanded meaningfully, even as we have accelerated research and product velocity and expanded our internal Claude usage. For example, our revenue grew 1,368% year over year for the three months ended June 30, 2026, compared to our compute and infrastructure expenses that grew 300% during the same period.” - Anthropic The trend for compute demand is only going one way “There are going to be moments of irrational exuberance. There are going to be moments of bust. There are going to be moments of constraint, and glut, and up, and down. But I think the trend is toward... We always just want more compute. The demand for sufficiently capable models at a sufficiently low price, I think that trend only goes one way.” - OpenAI CEO Sam Altman Inference costs will keep falling “I think if we all want enterprises to be able to use inference the way we all believe they will, we have to keep working on taking the cost of inference down.” - Amazon ( ) CEO Andy Jassy Token production will keep rising “On our AI models, customers are using our models more than ever. Our first-party model APIs are now processing nearly 32 billion tokens per minute, 40% more than last quarter and more than 4x what we processed a year ago.” - Alphabet ( ) CEO Sundar Pichai The internet as we knew it is dying “...we’re witnessing something that is no less than an earthquake on the Internet or the web as we know it. And I’ve been talking about this for over a year. And I think that we’re starting to see this. The Internet, as we’ve known it for the past 20-plus years, is going away. And it’s going to completely change. It’s dying” - Fiverr International ( ) CEO Micha Kaufman Search traffic is going away “Our search referral traffic was down meaningfully in Q3, with the decline accelerating later in the quarter...The biggest one is the AI Overviews or AI Mode. Both have evolved a lot. And particularly recently, they appear to be expanding them quite aggressively both in the U.S. and outside. So what started as a feature is now the full search experience. And at the minimum, it pushes everyone down the search page. And then on top of that, the experiences themselves are not traffic drivers” - Reddit ( ) CEO Steve Huffman Google is starting to scale ads within AI mode “...it’s worth noting that the strong growth in AI Mode queries had an impact because of the lower monetization we were seeing in AI Mode. To be clear, we feel very good about our trajectory here. Our ad experiments have shown promising results, and we’re now scaling ads within both AI Overviews and AI Mode to more users and more queries” - Alphabet ( ) Chief Business Officer Philipp Schindler High memory prices are hurting PC and smartphone sales “In recent weeks, our customers began signaling a PC slowdown based on the memory prices and availability...The pace of this PC correction has accelerated over the last 2 months, as our OEM partners are aggressively managing inventory to match the softer sell-through. We expect the current environment to persist until memory availability and prices begin to normalize...we see TAM declining in ‘26 by about 12% on a unit basis.” - Intel ( ) CEO Lip-Bu Tan “In Q3, continued memory price increases led to a quarter-on-quarter decline in smartphone market volume, mainly in the mid-to-entry segments, while market revenue grew driven by higher ASP and a greater mix of premium products.” - Samsung Electronics (SSNLF) VP of MX Division Daniel Araujo Memory shortages will likely persist through 2028 “...tight supply conditions are expected to continue in 2028… Thanks to strong performance in the industry in 2026, CapEx is expected to see a significant increase in 2027 across the broad market. However, due to various factors, it will likely be difficult for this higher CapEx to drive a bit of production growth.” - Samsung Electronics (SSNLF) EVP of Memory Business Jaejune Kim Memory makers have been burned in the past “For a very long time, if you were a producer of DRAM, you would invest $20 billion of CapEx to make $19 billion. And you would go through these booms and busts. Maybe some years you would make $21 billion, some years you would make $18 billion. But until right now, I don’t think making memory has ever been a great business over a long period of time. And then, all of a sudden, these guys are each going to make like $100 billion of free cash flow in a year. Unbelievable. But I think they all remember their history. How many times they almost went bankrupt by making too many fabs and being promised this time it was different.” - OpenAI CEO Sam Altman Eventually, the robots will build their own capacity “We made a chip that is an incredible performance at units of intelligence, performance of units of intelligence per watt. We are learning how to build our own data centers. We have a robotics program that we’re going to point at making lots of data centers.” - OpenAI CEO Sam Altman Health Eli Lilly’s GLP-1 medicines reach just 1 in 10 eligible U.S. patients and 2 in 100 internationally “You look at the U.S., and we’re talking about 1 out of 10 patients that we are reaching nowadays. And even OUS, we are talking about 2 patients out of 100 patients. So it’s actually a really low base. So the number seems really big, $16 billion this quarter of incretin business.” - Eli Lilly ( ) CFO Lucas Montarce Obesity medicine demand is spreading to middle-income consumers internationally “And the other was the depth of the consumer purchasing internationally and whether we were really just skimming very high net worth individuals in these out-of-pocket markets or if more middle-income households would be interested in improving their health and losing weight at scale.” - Eli Lilly ( ) CEO Dave Ricks AI models need more data to scale in biology “AI models need a large amount of data to learn from. And in biology, those models only work if the data is accurate, standardized, and reproducible. But these data sets don’t exist at scale. There is no Internet of biology.” - Illumina ( ) CEO Jacob Thaysen Industrials and Transport European industrial barometers are improving “Then you look at PMI, when you look at, let’s say, industry barometers, especially here in Europe, you see some positive trends. So leading indicators look rather more positive than what we have seen 3 months ago. I would expect a certain positive momentum now for the rest of the year, especially in industrial sectors, but of course, coming from a low base.” - BASF SE (BASFY) CEO Markus Kamieth The industrial economy is in expansion “And obviously, we’ve continued to see the industrial economy with positive ISM through the year. It’s been in, kind of, the low to mid-50s, but it’s been in expansion territory. So that’s been good.” - Old Dominion Freight Line ( ) CFO Adam Satterfield Freight demand is improving “We feel like we’re seeing some good market share opportunities as we go through bids and seeing customers asking about multiyear contracts, things that when you read the tea leaves are more indicative of an improving demand environment.” - Old Dominion Freight Line ( ) CFO Adam Satterfield Caterpillar is seeing strong order rates “...backlog continues to grow due to strong order rates, and we’re now taking some large reciprocating orders as far out as 2029 and turbine orders into 2030...as we’re extended pretty far out, I mean this is going to be -- this is unusual for us. Typically, we’ve only had 12 months or less line of sight to our backlog. And now in particularly this situation, customers are placing orders pretty far out there. We have a lot of quoting activity in ‘29, ‘30.” - Caterpillar ( ) CEO Joe Creed Verizon estimates SpaceX would need $300B–$500B and 4–6 years to build a competitive terrestrial network “There is no magic wand. There’s no secret sauce. There’s no shortcut. There’s no radically lower structural cost advantage. If they build one, they’re going to look at 65,000 to 80,000 macro sites. They’re going to need backhaul, some combination of fiber and maybe some satellite. They’re going to need RAN. They’re going to need a tremendous amount of spectrum. And assuming that’s the case and assuming they try to go do that, it’s going to take a minimum of 4 to 6 years to fully build that out. It’s going to cost hundreds and hundreds of billions of dollars, I assume somewhere between $300 billion and $0.5 trillion over the next like 7 or 8 years. And then they need to build retail, customer service, back-office systems, et cetera. And all of that gets them basically the same network and same capabilities and same cost structure as what we have today. And then sometime over the next 4, 6 years, they have the possibility of becoming the sixth, not the fourth, the sixth competitor in the market. And frankly, at that point, I welcome the opportunity to compete against them. It’s very hard to throw a punch against something that doesn’t exist, but once they come into the market, we will be ferociously competitive.” - Verizon ( ) CEO Dan Schulman Materials & Energy U.S. data center expansion could require ~100 GW of additional capacity “In the U.S. alone, approximately 100 gigawatts of incremental data center capacity is expected by 2035, requiring roughly 18 Bcf per day of incremental gas supply to meet the associated electricity demand.” - Baker Hughes ( ) CEO Lorenzo Simonelli Gas turbine prices have risen approximately 50% in one year “...our orders in ‘26 relative to ‘25, pricing is up directionally 50%. So that kind of -- with any 1 quarter, mix can move those numbers, but I think that year-over-year marker is important.” - GE Vernova ( ) CEO Scott Strazik Energy security and reserve depletion are reigniting global oil and gas exploration “Ongoing disruptions continue to reinforce the importance of energy security and the need for reliable geographically diverse sources of supply. At the same time, the industry continues to face the structural challenge of offsetting natural decline and replacing reserves following several years of limited exploration.” - SLB N.V. ( ) CEO Olivier Le Peuch U.S. drilling contracts are lengthening as energy producers prepare for a tighter rig market “The first part of this year, I think we were in a 0 -- call it, spot to 6-month type market with the occasional 1-year contract. And then throughout the middle of this year, it’s kind of gone into a 6-month to 1-year contract. And now we’re having more conversations in the 1- to 2-year range. And it’s certainly not where the broad market is. I think the broad market is really kind of in a 6-month to 1-year type range, but we are having more conversations in that 18-month to 2-year range with customers.” - Precision Drilling (PD:CA) CEO Carey Ford