Elementor #25105
There is a lot to cover today, with SK hynix delivering another strong set of results, major technology companies preparing to report earnings, and the Federal Reserve set to announce its latest policy decision.
The broader picture is becoming more constructive. AI infrastructure spending continues to show strength, market breadth is improving, and some of the stress in the bond market is beginning to ease. However, options positioning suggests we are not yet in a lower-volatility environment.
My longer-term outlook for AI remains bullish, but with several major catalysts converging over the next two days, I prefer to reduce exposure and reassess once we have more clarity.
SK hynix Reinforces the Case for an AI Investment Cycle Through 2031
I’ll start with SK hynix’s earnings, which add another piece to the AI infrastructure story and reinforce my view that the investment cycle could extend into 2031.
The company reported operating profit of 83.3 trillion won ($62.5 billion), more than seven times last year’s level and over 7% above expectations. It also announced an additional $45 billion in shareholder returns.
More importantly, SK hynix confirmed that its DRAM and high-bandwidth memory production is effectively sold out through 2029, with shortages expected to persist into 2030.
What I find very important is the outlook for infrastructure spending.
According to estimates cited by SK hynix, global cloud service provider capital expenditure is projected to increase by more than 60% in 2027, while secured power capacity could more than double year over year.
Beyond that, the AI data center infrastructure market is expected to grow at roughly 40% annually through 2030.
These are not numbers I would associate with an investment cycle nearing exhaustion.
Market Internals Are Beginning to Improve
Turning to the broader market, we’re finally starting to see some improvements beneath the surface.
The Nasdaq McClellan Summation Index is beginning to turn bullish, suggesting that market breadth is improving and participation in the recovery is expanding.
This matters because sustainable rallies generally need more than a handful of mega-cap stocks doing all the work.
Volatility in the Treasury market is also beginning to calm down, as reflected in the MOVE Index, which is essentially the bond market’s equivalent of the VIX.
The index remains elevated, so we’re not out of the woods yet. Nevertheless, a reduction in bond market volatility is a constructive development for risk assets, particularly after the turbulence we’ve seen recently.
Another development worth noting is that hyperscalers and memory stocks are moving together again, reversing the negative correlation we saw previously.
This is important for the broader AI trade.
Higher memory prices were previously viewed as a margin headwind for hyperscalers, even as they benefited memory producers. Now, with both groups advancing, the market appears more comfortable rewarding both sides of the AI infrastructure trade.
That suggests the AI trade may be broadening rather than remaining concentrated in a relatively small group of beneficiaries.
Earnings Could Reshape the Volatility Landscape
Speaking of correlations, the next two days could bring an important change in options positioning.
Once we get through the major earnings reports on Wednesday and Thursday, uncertainty around individual companies should begin to ease, potentially bringing single-stock implied volatility lower.
If that happens while the VIX remains relatively stable, implied correlation could rise as the options market prices less company-specific risk relative to broader index risk.
That distinction matters because lower single-stock volatility doesn’t necessarily translate into lower index volatility.
For now, despite yesterday’s volatility crush, I’m not seeing a convincing shift toward a sustained lower-volatility regime.
We still have the Fed decision, major earnings reports through the end of the week, and the midterm elections ahead of us.
The options market is also pricing meaningful moves around the upcoming results.
Earnings Moves Priced by the Options Market
| Company | Implied Earnings Move |
|---|---|
| Microsoft (MSFT) | ±4.8% |
| Alphabet (GOOGL) | ±5.7% |
| Amazon (AMZN) | ±6.0% |
| Intel (INTC) | ±8.0% |
Given the weight of these companies in the major indices, their earnings reactions could have a considerable impact on broader market performance.
Looking at Microsoft’s previous eight earnings reports, the stock exceeded its implied move five times, which is another reason not to underestimate the potential volatility surrounding this week’s results.
Microsoft: Bullish Positioning Above $525
Microsoft is heading into earnings with a relatively bullish options positioning setup.
The immediate support sits at $525, and as long as the stock remains above that level, market-maker hedging flows should remain supportive.
If earnings deliver a negative surprise and $525 breaks, $500 becomes the next important level where I would expect some mechanical support.
On the upside, $575 remains the main level to watch.
High-conviction options flow is also bullish, adding support to the constructive positioning picture.
Alphabet: More Neutral Positioning, but Bullish Flow
Alphabet presents a somewhat different setup.
Positioning is more neutral, with $300 acting as the main support and $360 as resistance.
The volatility trigger sits at $315, making it an important level for the initial reaction.
A significant earnings disappointment could change the positioning picture quickly, particularly below the $280–290 area, where dealer exposure falls sharply.
Despite the more neutral positioning, high-conviction options flow remains bullish here as well.
Prediction markets, however, remain rather divided on the outcomes of the major earnings reports.
Investors Are Being Unusually Forgiving of Earnings Misses
Something else worth noting this earnings season is how the market has been reacting to disappointing results.
According to Bank of America, companies missing EPS estimates have actually outperformed the S&P 500 by 0.7 percentage points the following day, compared with an average underperformance of roughly 2 percentage points since 2000.
FactSet’s data paints a similar picture.
Companies missing estimates have declined by just 0.4% around their earnings reports, compared with a five-year average decline of 3.1%.
Meanwhile, earnings beats are receiving roughly normal rewards, and the average next-day stock move has fallen to 3.7%, compared with 5.3% in the second quarter.
Basically, investors have been much less aggressive in punishing disappointments than usual.
That’s constructive, but I wouldn’t assume it will continue indefinitely, particularly with so much index exposure concentrated in the companies reporting this week.
The Most Important Earnings Number Is CapEx
For the broader AI trade, the numbers I’ll be watching most closely are the hyperscalers’ capital expenditure plans.
The important question is not simply whether Microsoft, Alphabet, and Amazon beat earnings expectations.
It’s whether their spending plans support the longer-term AI infrastructure outlook discussed earlier.
With SK hynix pointing to strong memory demand and an extended infrastructure cycle, the hyperscalers’ guidance will help determine whether the spending outlook remains consistent across the AI supply chain.
Any meaningful reduction in planned investment would challenge that narrative. Conversely, continued spending growth would reinforce the argument that the AI infrastructure cycle still has years left to run.
The Fed: Could Markets Be Too Hawkish?
Before we get through those earnings reports, however, we have the Federal Reserve decision.
Markets are pricing less than a 10% probability of a rate hike at today’s meeting, but the probability of a December increase is around 80%.
Prediction markets are even more confident that the Fed will hold rates today, assigning only around a 5% probability to a hike.
At the same time, the FedSpeak model has reached its most hawkish level since April 2023.
So while expectations for an immediate hike have declined, the broader policy tone remains restrictive.
There is, however, an interesting argument that the market may be approaching this meeting with expectations that are too hawkish.
Some time ago, Kevin Warsh mentioned that he was watching the second derivative of AI capital expenditure as an input into monetary policy.
The distinction is important.
The first derivative tells us how quickly AI spending is growing. The second derivative tells us whether that growth is accelerating or decelerating.
AI CapEx can continue growing rapidly even after the peak in its acceleration has passed.
And that second derivative may already have peaked this year.
If the strongest acceleration in AI infrastructure investment is behind us, the additional economic stimulus coming from AI CapEx could gradually weaken, even while overall spending remains elevated.
That could mean less incremental pressure on economic growth, resources, and inflation than markets currently anticipate.
It doesn’t necessarily mean the Fed will turn dovish today, but it does raise the possibility that markets are overestimating how much additional tightening will ultimately be needed.
SPY, QQQ and SOXX: Key Market-Maker Positioning Levels
Turning to market positioning, yesterday’s levels played out largely as expected.
SPY tested 770, QQQ reclaimed 720, and SOXX broke above 500, with momentum accelerating after the breakout.