Blasting Off
Stock markets rebounded this week on lower oil prices coming on the heels of a temporary cessation of Middle East tensions. Oil prices dropped about 10% this week, and corporate profits have been coming through stronger than expected. The 10-year Treasury yield has cooled off as well toward 4.6%. July was actually a slightly down month for major stock market indices. However, in August equity markets are once again rocketing to new all-time highs. All sectors of the S&P 500 are now in positive territory for the year, led by energy and industrial stocks, with the technology sector not far behind. Even five of the Magnificent 7 stocks, which had struggled in the first half of the year, have rebounded on better than expected earnings reports.

Hyperscaler companies are still spending significant sums of capital for AI data centers, but some are reaping the rewards in terms of growth in their cloud businesses. Google Cloud revenue grew 82% in the second quarter to nearly $25 billion. Margins in this business expanded also. Amazon’s# Cloud revenue grew 37% to $42 billion. Microsoft’s# Intelligent Cloud business increased 32% to $39 billion. While these are heady growth rates on large revenue bases, the question remains whether the returns will be worth all of the capital spending in the long run.

SpaceX Earnings
SpaceX# reported its maiden voyage quarterly numbers last night, ahead of lofty expectations. However, SpaceX’s first earnings release as a public company failed to impress many, with shares indicated down about 10% today. Higher than expected spending on its artificial intelligence business has raised some concerns. Before the earnings report, SpaceX shares were on a four-week losing streak, down 7% from its IPO price, but down 43% from an all-time closing high of over $200 per share. This is despite a 92% increase in second quarter revenue to $7.8 billion, a doubling in Starlink subscribers, and revenue from the artificial intelligence business tripling. Both the Space and AI segments continued operating at a loss during the quarter, while Starlink remains profitable.

SpaceX signed AI data center rental agreements with Anthropic and Alphabets’# Google. The Google agreement has not started yet, but the Anthropic agreement, valued at $1.25 billion per month, was ramping up already in May and June. Starlink now has 12 million subscribers, up from 5 million a year ago. The company expects an annualized revenue run rate of $100 billion by December 2026. A $1 trillion revenue goal is targeted as early as 2029-2030. It all sounds good until one realizes that SpaceX has a market capitalization of $1.6 trillion, but may only generate revenue of $72 billion in 2027, and is currently losing money. On the plus side, SpaceX ended the second quarter with $100 billion of cash, though some of this is earmarked for continued investment. Further share supply lies ahead as lockup expirations continue in the second half of this year.

Manufacturing Launches Higher
The Institute for Supply Management manufacturing index increased in July to its highest level since May of 2022. New orders expanded for the seventh consecutive month and the employment component swung back into expansion territory. Prices paid were little changed, but still elevated.
Respondents to the survey noted that demand was decent and continued to highlight strong orders from AI infrastructure, semiconductors, data centers, and defense customers. However, companies also flagged renewed geopolitical tensions, tariffs, and shipping disruptions as drivers of higher freight, energy, and sourcing costs. On the lending front, the Federal Reserve’s Senior Loan Officer Opinion Survey (SLOOS) for July found basically unchanged standards for commercial and industrial loans to firms of all sizes. Demand was stronger from large and middle market firms, but was little changed from smaller firms. Some banks did report weaker demand for auto loans, though demand for credit card and other consumer loans remained unchanged. Steady as she goes, captain.

Over 60% of S&P 500 companies have now reported for the second quarter, indicating a 47% growth rate over the prior year. Even excluding outsized extraordinary gains from Alphabet and Amazon, earnings growth would still be 29%. Eight sectors actually reported double-digit earnings growth, led by Energy, Communication Services, Consumer Discretionary, and Technology. While geopolitical issues, energy prices and inflation remain wildcards, corporate earnings are providing enough fuel to boost equity markets into higher orbit. Escape velocity is another matter, so periodic pullbacks in equity markets would not be abnormal after such a great run.

Hall of Fame basketball player Patrick Ewing turns 64 today and actor Mark Strong of Sherlock Holmes and Kingsman fame turns 63.

Christopher Crooks, CFA®, CFP® 610-260-2219

Tower Bridge Advisors manages over $1.5 Billion for individuals, families and select institutions with $1 Million or more of investable assets. We build portfolios of individual securities customized for each client's specific goals and objectives. Contact Nick Filippo (610-260-2222, nfilippo@towerbridgeadvisors.com) to learn more or to set up a complimentary portfolio review.

# – This security is owned by the author of this report or accounts under his management at Tower Bridge Advisors.

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