US economic resilience lifts spirits

Core Insights - The week has been significant for AI, with strong earnings reported by major U.S. tech firms, although share prices have shown some volatility [1][6] - Private sector payrolls in the U.S. rebounded sharply in October, indicating a robust economy, which has influenced market expectations regarding Federal Reserve interest rate cuts [2][6] - The ongoing U.S. government shutdown has limited economic data availability, yet recent figures suggest stronger underlying growth than anticipated [3] Stock Market Performance - Wall Street stocks rose, while Japan and South Korea saw declines of 2.5% and 3% respectively; Brazil's Bovespa reached a new high above 152,000, and the FTSE 100 closed at a record high [4] - The Philadelphia semiconductor index increased by 3%, reflecting positive sentiment in the tech sector [4] AI Investment and Valuation Concerns - Despite the AI boom, there are growing concerns about the sustainability of returns from significant investments made by U.S. tech giants [5][10] - Major tech firms are expected to spend a combined $350 billion on AI this year, with global AI-related infrastructure spending projected to reach $4 trillion by 2030 [10] - The high capital expenditures (capex) are consuming a record 60% of operating cash flow for major firms, raising questions about future profitability [13] Financial Performance and Expectations - Amazon's free cash flow has decreased nearly 70% over the past year, despite strong earnings, indicating potential financial strain [13] - Analysts predict a more than 40% decline in free cash flow for hyperscalers in the first quarter of next year compared to the same period this year [14] - The pressure to generate high returns on AI investments is increasing, with concerns that non-AI-related activities may also need to deliver significant returns [14] Market Impact and Future Outlook - The performance of major tech companies significantly influences the broader economy, with the "Magnificent Seven" tech giants accounting for a record 37% of the S&P 500 market cap [15] - Investors are cautious about the high valuations of these companies, as the Philadelphia Semiconductor Index has more than doubled since April [16] - Smaller businesses are reportedly faring better with generative AI investments, with 74% indicating positive returns, contrasting with the challenges faced by larger tech firms [19][20]