Google's Cloud Doubled. Its Stock Tanked 📉

Welcome back to the Day Trading newsletter 📈

Alphabet's record post-earnings plunge is dragging tech stocks lower Thursday, even as a strong GDP report shows the economy running hot.

Let’s get into it 👇️ 

📈 The Fed held interest rates at 3.75% to 4% Wednesday, but two officials wanted another hike. Governor Lisa Cook and Cleveland Fed President Beth Hammack dissented in the 10-2 vote, preferring a quarter-point increase. Futures traders now put the odds of a December hike at roughly 85%.

💼 The U.S. economy grew at a 3.4% annual pace in the third quarter, beating forecasts. But the Fed's preferred inflation gauge, the PCE price index, rose 3.6% from a year earlier in September, up from 3.4% in August, with core PCE at 3.1%. Hot growth and sticky inflation help explain why traders expect more rate hikes.

🤝 DoorDash agreed to buy Instacart for about $17 billion, or $65 per share. Both boards have approved the deal, which would bring the two delivery apps under one roof. The companies expect it to close toward the end of 2027 or in the first half of 2028 and will operate separately until then.

🔻 ServiceNow shares plunged roughly 25% Thursday after the software maker guided to slower growth in future contracts. The drop deepened from an 18% slide in after-hours trading. Its current remaining performance obligations, contracted revenue due within a year, are forecast to grow 18.5% next quarter versus 21% now, even as it raised its full-year subscription outlook.

🐛 Caterpillar shares slid about 9% in early Thursday trading despite a profit beat. Adjusted earnings were $7.20 a share versus $7.03 expected, but revenue of $20.68 billion, up 17%, landed a hair short of estimates. The company also reported a record order backlog.

🛢️ Oil climbed Wednesday after Houthi forces claimed a missile strike on Saudi Arabia's Ras Tanura export terminal. U.S. crude settled at $102.78 a barrel and Brent at $115.32, with a terminal fire reportedly following the attack. U.S. commercial crude inventories also fell 1.9 million barrels.

🚗 Carvana's revenue jumped 42.4% to $8.04 billion in the third quarter, and the stock surged more than 10% Thursday. The online used-car seller sold 217,385 vehicles at retail, up 39.4%, and net income rose to $483 million from $263 million a year earlier.

📊 Stocks closed modestly higher Wednesday after the Fed held rates, with the S&P 500 up 0.3% at 7,743. The Dow rose 0.2% to 52,475 and the Nasdaq gained 0.3% to 26,549. The 10-year Treasury yield ticked up to 5.02%, a level that keeps mortgage and corporate borrowing costs elevated.

Alphabet and Microsoft reported earnings Wednesday after the close, and the market treated them very differently.

Google Cloud revenue jumped 103% to $30.7 billion, but Alphabet spent $51.4 billion on capital expenditures (capex, meaning data centers and chips) in one quarter, up 114% from a year ago.

That pushed free cash flow, the cash left over after those investments, to negative $9.1 billion, the second straight negative quarter. 

Revenue and earnings also missed: profit came in at $2.12 a share versus roughly $3 expected, and Search revenue grew a slower 12%.

Alphabet shares fell about 12% to 13% Thursday, CNBC reported the stock was on course for its biggest post-earnings drop on record, and the slide erased close to $500 billion in market value.

Microsoft's Azure cloud grew 48% and its shares jumped about 4% after hours as it reported $18.6 billion in free cash flow.

Microsoft spent $45.2 billion on capex, below the roughly $50 billion it had projected, and its stock slipped about 1% in Thursday trading.

The AI build-out is clearly producing revenue: Google's cloud business more than doubled and its profit margin there rose to 36.2%. But investors are now asking who can fund the spending.

Microsoft is paying for its build-out out of cash it generates, while Alphabet is burning cash and has sold tens of billions of dollars in bonds this year to help cover it. With the 10-year Treasury yield sitting near 5% and the Fed leaning toward another rate hike, borrowing to build AI capacity is getting more expensive.

What to watch:

• Amazon reports after the bell Thursday, and its AWS cloud growth, which analysts expect around 38%, and any capex update will show whether the divide between self-funded and borrowing-funded AI spenders is widening.

• Alphabet reiterated its 2026 capex guidance of $195 billion to $205 billion and said spending will rise further in 2027, so the cash question isn't going away. Microsoft guided Azure growth of 49% to 50% next quarter.

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⚠️ Disclaimer: Not financial advice. Do your research before making any trades.