Week 44 Recap
US Equities: Hawkish Hold, Then the Cash-Burn Reckoning
The AI capital-spending debate reached its breaking point in the trading week ending October 30th. The S&P 500 slipped 0.6% to 7,580.07 (its third consecutive weekly loss), the Nasdaq Composite fell 2.0% to 25,437.00, and the Dow Jones dropped 0.9% to 51,770.31, snapping a three-week win streak. Friday alone took the S&P down 1.8% and the Nasdaq down 2.8%, with the tech sector off nearly 5%. Meanwhile, the rotation we flagged in our last recap only intensified: the Russell 2000 gained 1.3% on the week while high-multiple growth bled out. The week began constructively (the Nasdaq added 1.2% on Tuesday), the Federal Reserve delivered a hawkish hold on Wednesday, and then Alphabet's report detonated the AI trade.
Megacap Earnings: Alphabet's Worst Day Ever
Wednesday's FOMC decision and the evening's Alphabet and Microsoft prints set up a two-day reckoning:
- The Fed (Wednesday, 2:00 p.m. ET): Held the funds rate at 3.75%–4.00% in a 10–2 vote, with Cook and Hammack dissenting in favor of a hike. There are no new projections until December 9th, but with two dissents and inflation still accelerating, a December hike remains the base case.
- Alphabet (GOOGL): EPS of $2.12 badly missed consensus of $3.02 (including a $0.55 hit from an $8.7 billion paper loss on its equity stakes) on revenue of $127.6 billion (+25% year-over-year), a hair below estimates. Google Cloud was spectacular, up 103% to $30.7 billion, but $51.4 billion of quarterly capex, a maintained $195–205 billion full-year spending plan, and negative $9.1 billion of free cash flow were the real story. On Thursday, the stock fell 12%, its worst day since its 2004 IPO, erasing nearly $500 billion of market value, the second-largest one-day market-value loss ever for a US-listed stock.
- Microsoft (MSFT): The counterexample. Revenue of $92.3 billion (+19%), Azure up 48% to $33.17 billion (a beat, and guided to 49–50% growth next quarter), Microsoft Cloud at $63.9 billion (+30%), GAAP EPS of $4.92 (+32%), and a $678 billion commercial backlog (+73%), all delivered without raising capex plans. The market's verdict: Microsoft's longest winning streak of 2026.
- Amazon (AMZN): Adjusted EPS of $1.89 missed by seven cents on revenue of $201.9 billion. AWS accelerated to 39% ($46.0 billion) but fell short of whisper numbers near 42%. Meanwhile, trailing-twelve-month free cash flow hit a record outflow above $42 billion as AI spending more than doubled, and fourth-quarter guidance was soft. Shares fell as much as 7.5% before closing down 4.3% on Friday.
- Intel (INTC): A Q3 beat (revenue of $16.5 billion, +21%; its best data-center growth in 15 years) was obliterated by Q4 guidance of $15–16 billion in revenue and just $0.25 of non-GAAP EPS, plus a warning that the company will burn cash as the PC market falters. The stock plunged roughly 25%, marking its worst session in half a century.
- ServiceNow (NOW): Fell 27% on Thursday, its worst day ever, after its outlook revived fears that AI will disrupt enterprise software. The scare has officially migrated from “AI capex is too big” to “AI eats the software stack.”
Macro: Strong Growth, Sticky Prices
Thursday's doubleheader delivered a 3.4% annualized Q3 GDP advance (better than expected) and a September reading of the Fed's preferred inflation gauge accelerating to 3.6% year-over-year from 3.4%, in line with estimates, but drifting ever further from target. The 10-year Treasury settled Friday at 4.93%, down 6 basis points on the day, as the equity rout produced a modest flight-to-quality bid. Brent crude held above $116 (its highest sustained level since 2022) as the Iran conflict kept its risk premium intact, and European gas crossed €100/MWh for the first time since the 2022 energy crisis. In metals, the liquidation continued: gold slid roughly 3% to about $3,875, and silver was crushed roughly 9% to around $49.
Europe: ECB Holds at 2.50% as Lagarde Calls It Quits
The STOXX 600 bounced 0.8% on Monday to 638 after the prior week's France-driven drubbing, then faded into Friday's global risk-off session (DAX −1.1%, FTSE roughly flat). The ECB held its deposit rate at 2.50% on Thursday with inflation running near double its target, and President Christine Lagarde announced she will step down on February 7th, months before her mandate ends, formally opening a succession race that will be shaped by France's fiscal crisis and bond-market turmoil. The ECB stressed it has the tools to calm markets if French spreads destabilize. Meanwhile, the macro backdrop is getting expensive: the EU's oil bill is running roughly €10 billion per month higher than in 2025.
China/HK: Bear-Market Blues, a Friday Bounce, and Soft PMIs
Hong Kong swung with the global AI narrative. The Hang Seng slipped 0.6% on Thursday (Tencent −2.8%, SMIC −6.2%) as Alphabet's shock spilled into Asian tech, then rebounded 1.5% on Friday to 23,294 on strength in energy and financials (Sinopec's Q3 profit jumped 57% and PetroChina rose 2.5%), with Tencent's latest AI model launch and the international rollout of its office AI agent lending support. The index still finished October down 4.5%. Mainland investors sold a net HK$24 billion of Hong Kong shares in October, the largest monthly outflow since 2021, even as A-shares trade at a roughly 33% premium to their Hong Kong counterparts. Mainland blue chips remain in a technical bear market, 20% below June's peak, with suspected state-support ETF buying providing the only floor. Finally, Saturday's October PMIs confirmed the soft patch: manufacturing fell to 49.3 (from 50.1; 50.0 expected) and services printed at 49.7, putting every headline gauge back below 50.
Week 45 Outlook
Key Events
- Monday, November 2nd: ISM Manufacturing (watch the prices-paid index). After the close, Apple reports fiscal Q4 results, the first earnings call under CEO John Ternus, days after the company unveiled its first touchscreen Macs. Consensus sits at EPS of $1.99 on revenue of $113.4 billion (+10.7%), with iPhone revenue up 15%; the December-quarter guide is the swing factor, and options are pricing a roughly 4% move. Palantir also reports after the close.
- Tuesday, November 3rd: The US midterm elections: all 435 House seats and a third of the Senate are on the ballot, with control of both chambers genuinely in play. DigitalOcean reports before the open (our new position, see below), and AMD reports after the close. The RBA decides on rates overnight.
- Wednesday, November 4th: ISM Services: the prices and employment sub-indices will serve as early reads on October CPI and Friday's payrolls.
- Thursday, November 5th: Bank of England rate decision (a hold is expected).
- Friday, November 6th: The October employment report: consensus sits around +60,000, with the unemployment rate expected to hold steady after a weak September. This is the last major labor print before the December 9th FOMC meeting, which comes with fresh dot plots. Uber, McDonald's, and a long tail of S&P 500 names also report throughout the week.
- Looking Ahead: Our core Chinese holdings, Alibaba and Tencent, report in mid-November, with Nvidia following on November 16th.
Positioning Into Week 45: We Hold, and We Get Paid to Buy DigitalOcean
Let's be candid: this is a difficult market, and our book was marked down alongside everything else last week. But our horizon is long, and nothing about the selloff changed a single thesis. Accordingly, there is no new rotation this week: we are holding everything we repositioned into last week: the December 2026 short puts on IBM, GLD, SLVP, and EWZ, and our doubled-down China tech book of Alibaba, Tencent, and UBTECH. The metals washout is testing our GLD and SLVP put sales (gold below $3,900 and silver near $49 is not where we wanted them), but that is precisely what a December expiry is for, and mid-November's Chinese earnings season is the next catalyst for our Hong Kong names.
The one new addition is a position we are genuinely excited about:
DigitalOcean (DOCN): Selling Heavily Leveraged January 2027 $90 Puts
A few weeks ago, this stock traded in the low $140s (intraday peak of $143.35). It closed Friday at $89.65, down more than 10% on the day, a 37% haircut delivered with zero company-specific bad news. This was pure multiple compression: rate-hike fears after the hot PCE print, the megacap cash-burn panic, and the ServiceNow-led “AI eats SaaS” scare hitting every high-growth name in the complex. At $89.65, DigitalOcean carries a $10.5 billion market cap and trades at roughly 41x trailing earnings, down from roughly 66x at the peak.
The business itself is doing nothing but accelerating: Q2 revenue grew 28.6% to $281 million (a beat), adjusted EPS of $0.45 was roughly double consensus, adjusted EBITDA margin ran at 40%, free cash flow margin hit 21.5%, ARR stands at $1.13 billion, billings grew 46%, and management raised full-year guidance to roughly $1.18 billion in revenue and $1.38 in adjusted EPS. This is a fast-growing, solidly profitable operator of essential cloud infrastructure for developers and small businesses, and it is exceptionally well positioned as that demand compounds.
In our view, there is no way this franchise is not worth materially more than a $90 share price over our horizon. So instead of buying the stock outright, we are selling heavily leveraged January 2027 $90 puts (DOCN270115P00090000, the January 15th, 2027 monthly), sized aggressively and well beyond cash-secured. The quote we are taking is roughly $14 of premium: over $1,400 per contract, or 15.6% of the $90 strike, for eleven weeks of risk, an annualized yield near 74% on notional. With the stock at $89.65, the strike sits a hair in the money, so all but roughly $0.35 of that premium is pure time value, with implied volatility pinned in the high 80s ahead of Tuesday morning's pre-open earnings report. Break-even lands at $76, an effective entry, if assigned, roughly 15% below Friday's close and 47% below the recent peak.
Yes, this is leveraged, and yes, we are selling into a binary print, deliberately. The January expiry carries us through both major event risks standing between now and mid-January (Tuesday's earnings report and the December 9th FOMC), so neither can force our hand at the worst possible moment. If DOCN keeps executing, there are still ten weeks of runway after the print for time decay to do its work. Our reasoning is simple: DOCN has beaten and raised all year while the stock fell anyway, which tells you expectations are already washed out. If the print is fine, we keep a fat premium; if the tape breaks the stock further, we roll down and out, or we take assignment and own a great business at a bargain $76 effective basis. Difficult markets are exactly when the options market pays you the most to be the calm hand.
In a market that is paying people to panic, we will happily take the other side of that trade, and collect the premium for doing it.