Tesla and Meta delivered execution. Microsoft paid the bill. Apple is next.
KEY TAKEAWAYS
The FOMC meeting delivered no surprises and left markets largely unchanged
Earnings are now the dominant market driver
Tesla and Meta are being rewarded for margin execution
Microsoft is being penalized for AI CAPEX intensity
Apple’s AI roadmap is the next major catalyst
MY HOT TAKES
The Fed is irrelevant until something breaks
AI spend without monetization is a liability, not a moat
Margins are the new narrative, not growth slogans
The Mag-7 are no longer moving in lockstep–each tells a different side of the same story
Volatility is normal when markets reprice reality
You can quote me: “Microsoft is building the future; Meta is already cashing it.”
Tape worm. Ok, and just like that the FOMC meeting came and went. The result? “No big woop,” to steal a line from Mike Myers’ 1990s SNL character Linda Richman from Coffee Talk. Really it wasn’t, and we expected as much.
Rates were left unchanged and the Fed believes that the economy is firm, inflation is high but not crazy, and the labor market is stable. The labor market being “stable” is the only outlier, but it does reflect that the Fed has hunkered down in its “wait and see” strategy. I would call it a slightly hawkish but highly expected result. We had two usual suspect dissenters and one defector dove who decided to fly with the crowd. Fed Funds Futures did not move meaningfully as a result with the June meeting showing the most meaningful probability for another rate cut at around 77%. After that it's October or December for a likely second cut. Throughout the afternoon 2-year and 10-year note yields bounced around as traders sought to factor in future Fed moves, but ultimately not much changed. The 10-year is now captive of the bond vigilantes who are very much focused on the federal deficit and this new “fiat currency fiasco” PR backlash that is also playing out in Gold and Silver. There is so much to unpack with that last wordy sentence, but this morning I want to shift focus back on earnings–what we should really be thinking about today.
So last night, we got the first three Mag-7 earnings announcements, and it gave us a broad view into what investors are focused on at the moment. We got a consumer discretionary stock (TSLA), a software company (MSFT), and a communications services / media company (META). They are all tied together with artificial intelligence and all for very different reasons. The first–though it shouldn’t be–is a car company dressed in hypebeast AI clothing. Humanoid robots, self driving taxis, and now investor in xAI–Musks Twitter AI mashup. The other two are squarely in the AI space with more overlaps and both have significantly underperformed their Mag-7 peers and the S&P recently–mostly over bender-like CAPEX.
Yesterday, I gave you a high-level playbook on what to look out for in those earnings announcements. Here is how it all went down and what we need to look for going forward, starting with Apple’s earnings announcement after tonight’s closing bell.
Let’s start with Tesla because that is where the most eyes were. Tesla is trading higher today, and it is doing so because the market finally got what it was looking for in the income statement. I told you to ignore the robotaxis and the vibes and look at the margins. Total gross margins hit 20.1%–the highest in over two years. Even better, automotive gross margins excluding those regulatory credits came in at 17.9%. That is a massive jump from the mid-teens we were seeing, and it proves that pricing pressure has finally stabilized. Elon might be talking about Optimus moving the needle on US GDP, but the market is buying the fact that they can actually make money building cars again. It is a fundamental win dressed up in futuristic dreams.
Now, we turn our attention to Apple. After the bell tonight, we are looking for one thing above all else: the AI roadmap. Apple has been the laggard in the AI narrative, and tonight is the night they need to prove that "Apple Intelligence" is going to drive a fresh iPhone supercycle. Analysts are looking for $138 billion in revenue, which would be a record, but the headline number won't be as important as the guidance. Specifically, we need to hear about iPhone 17 demand and whether the integration of AI features is actually causing people to upgrade. If Tim Cook can't convince the street that Apple is a primary beneficiary of the AI era, the stock is going to struggle to maintain its premium valuation. Watch the Services margin as well. That has been the engine that kept the lights on while we wait for the hardware to catch up.
Then we have Microsoft, which is the outlier trading lower today. Why? Because what I called the "institutional litmus test" for AI monetization yesterday came back with a high price tag. Azure grew 39%, which is a phenomenal number, but it’s slightly slower than what some of the whisper numbers were looking for. More importantly, Microsoft’s CAPEX reached a record $37.5 billion in a single quarter. Investors are looking at that 66% jump in spending and asking, "Where is the immediate payoff?" CFO Amy Hood even mentioned that hardware constraints are holding back growth. So, while Microsoft is building the infrastructure of the future, the market is having a momentary freak-out over the cost of the foundation. It’s a classic case of "show me the money" meeting a very expensive reality.
Now, we turn our attention to Apple. After the bell tonight, we are looking for one thing above all else: the AI roadmap. Apple has been the laggard in the AI narrative, and tonight is the night they need to prove that "Apple Intelligence" is going to drive a fresh iPhone supercycle. Analysts are looking for $138 billion in revenue, which would be a record, but the headline number won't be as important as the guidance. Specifically, we need to hear about iPhone 17 demand and whether the integration of AI features is actually causing people to upgrade. If Tim Cook can't convince the street that Apple is a primary beneficiary of the AI era, the stock is going to struggle to maintain its premium valuation. Watch the Services margin as well. That has been the engine that kept the lights on while we wait for the hardware to catch up.
As we get more tech earnings, the theme for the rest of 2026 is clear: shift from infrastructure to inference. We know everyone is buying chips from NVIDIA, Broadcom, Micron, and AMD, and we know they are building data centers at a record pace. The question for the next wave of companies is how they are going to turn those chips and data centers into actual products that people pay for. We are looking for "AI-driven" revenue in every earnings report. This is not a new theme to watch out for but the focus is becoming more acute. If a company tells you they are spending $100 billion on AI but can't point to a single percentage point of revenue growth from it, they are going to get punished. The market is tired of the hype; it wants to see the margin.
This is an ongoing transition from the "build-out" phase to the "pay-off" phase. We are seeing it play out in real-time with Microsoft's dip and Meta's surge. One is paying for the future, and the other is already harvesting it. Apple is the big wildcard tonight because it sits at the intersection of consumer and tech. If Apple can bridge that gap with AI, the "Mag-7" rally might just have another leg. But if it waffles on the specifics, the rotation out of growth might actually start to feel real.
Don't get distracted by the "fiat fiasco" noise, and remember that earnings are the only truth that ultimately matters in this market. Don’t lose focus. Growth is not dead. It is simply being priced more honestly. The thesis is still very real, earnings are still growing, and innovation is still happening at scale. As I say so often, volatility is the cost of admission, not a signal to abandon the strategy. Remember, if the thesis still holds, don’t grow cold.
YESTERDAY’S MARKETS
Stocks had a mixed close yesterday, dominated by political grandstanding and FOMC meeting results. Add in general anxiety about geopolitics and add a dash of high-tech earnings anticipation and we get an equity market that couldn’t find direction, gold that flew closer to the sun than it ever had, and a bond yield curve that wants to steepen.
NEXT UP
Initial Jobless Claims (January 24th) came in at a higher than expected 209k, slightly lower than last week’s 210k claims.
Important earnings today: Valero Energy, Blackstone, Tractor Supply, Thermo Fisher Scientific, L3Harris, Comcast, Sherwin-Williams, Lockheed Martin, MasterCard, Royal Caribbean, Honeywell, Dow, Xerox, PulteGroup, Caterpillar, Altria Group, International Paper, Parker-Hannifin, Stryker, Apple, Sandisk, MesMed, LP Financial, Weyerhaeuser, Western Digital, Visa, Hologic, and Deckers Outdoors.