Split Decision

The market's new signals about the AI boom... Meta and Microsoft earnings: two very different reactions... Cash is still king... More on the Fed – and less from it...

Talk about two very different reactions...

Yesterday after markets closed, we got two more earnings reports from the Magnificent Seven – Microsoft (MSFT) and Meta Platforms (META). And the market reaction for each could hardly be more different...

Meta, the social media giant with growing AI investments, reported a mixed second quarter. Quarterly revenue beat consensus Wall Street estimates, but earnings fell short.

Meta also indicated it will spend more this year. It now forecasts capital expenditures ("capex") between $130 billion and $145 billion. That creates a higher midpoint than Meta's earlier prediction of $125 billion to $145 billion in 2026 capex.

That's more spending for, based on Meta's reported earnings, not a big enough payoff...

Recall that Alphabet (GOOGL) reported earnings last week and went free-cash-flow ("FCF") negative for the first time as a public company. Meta's cash flow is also taking a hit over its heavy AI spending.

Watch the bolded sentences I'll include over the next few paragraphs. You can see what companies are earning and what that's doing to their shares.

Meta reported about $780 million in FCF in the second quarter, down from more than $8.5 billion a year ago.

That's a 90% year-over-year drop. That also marked the lowest nominal quarterly FCF for Meta since its metaverse debacle in 2022, which sent the company's shares down more than 75%.

And just like Alphabet shares plunged last week after earnings, Meta shares were down roughly 8% today to a three-month low. The stock has now finished lower for 11 straight days and is down more than 30% from its all-time high set back in August of last year.

Microsoft is going the other way...

In the other Mag Seven report of note after hours yesterday, Microsoft beat Wall Street's expectations for both earnings and revenue. And on the closely watched capex front, Microsoft left its 2026 capital-spending forecast intact.

Microsoft shares soared nearly 16% today. Microsoft is also spending huge amounts of money on AI data centers. But unlike Meta, it's earning enough money to pay for them.

In its 2026 fiscal year (which ended June 30), Microsoft's operating cash flow of $183 billion was more than enough to cover its $116 billion in capex.

And yesterday, Chief Financial Officer Amy Hood said that will continue in the 2027 fiscal year. While capex will grow, Hood said Microsoft will remain FCF positive in the 2027 fiscal year.

This is the way...

The AI boom isn't what it used to be, when the market rewarded all AI-related capex. Now, given all the "circular deals" among various companies with shared interests... and amid questions about how much payoff the hyperscalers will get from their investments... the market welcomed Microsoft's guidance.

Here's the early read on Mag Seven earnings – and today's split decision, so to speak: The market wants companies to shift from "we're spending more to win the AI race" to "we're still generating strong cash flows." These are the stocks that will get rewarded most.

Microsoft has shown the way. Picking up on the market's shifting preferences, the company did a clever accounting trick: It extended the "useful life" of its data centers from 15 years to 25 years.

This lets Microsoft treat some of its data centers as operating expenses rather than capex... reducing its calendar-year 2026 capex to "just" $175 billion, versus a forecast of $190 billion.

It's just moving numbers around. But Microsoft figured out what the market now wants to hear.

Thanks in part to its sleight of hand, Microsoft delivered $20 billion in FCF in the quarter – at a time when Meta and Alphabet are either FCF-negative or very close to it.

The market loved it... Microsoft's shares surged to their highest level since June 1. Since Microsoft's most recent low on June 25, shares have now gained more than 27% in a month.

This is all great news for Retirement Millionaire subscribers...

After today's surge in Microsoft shares, we'd like to tip our caps to the top two recommendations in our list of the top-performing open positions across Stansberry Research.

Dr. David "Doc" Eifrig recommended Microsoft shares to his Retirement Millionaire subscribers way back in November 2010. And it has remained a core part of the portfolio ever since.

He eventually took profits, selling half the position for a 1,185% gain in August 2023 as AI hype was reaching sizzling-hot levels. That earned a spot in the Stansberry Research Hall of Fame. We covered that move in the August 14, 2023 Digest and shared Doc's reasoning...

We don't know what will happen with AI as it pertains to Microsoft. The software giant has a key relationship with OpenAI – the privately held leader in large language models.

We see a lot of hype in the prices of AI-related stocks. And we worry that will deflate.

At the same time, even if some of the AI dreams don't come to fruition, we're fairly certain that the technology – implemented on even a fraction of its apparent potential – will lead to lots of computing power being employed by Microsoft's cloud data centers. That could be a big boon for its business.

The argument holds up. Judging by its new earnings report, Microsoft appears confident it can navigate whatever comes next in the AI boom.

On the half of the position that's still open, Retirement Millionaire subscribers are sitting on a gain of some 1,500% in about 16 years. That's more than triple the S&P 500 Index's return and even beats the 1,200% surge in the Nasdaq 100 Index over the same period.

Same for longtime Stansberry's Investment Advisory subscribers...

Less than two years after Doc's call, Stansberry Research founder Porter Stansberry and the Stansberry's Investment Advisory team recommended Microsoft to their subscribers.

Since that February 2012 recommendation, Microsoft shares have soared about 1,400%. Again, that trounces the S&P 500's 450% return and the Nasdaq's 1,000% return.

As we wrote in the August 14, 2023 Digest, "You don't need to go betting on wild, unprofitable startups" to generate these kinds of gains. Microsoft is a great example of a high-quality business that can deliver 1,000% gains (or more) through various market environments.

All this said, moving ahead, it might be time to look at shares of the hyperscalers that have taken hits lately, like Alphabet and Meta. These are strong companies that are now trading at more appetizing valuations.

As we write today, Meta's forward P/E has dropped to a multiple of 17, below that of the overall S&P 500. And the Mag Seven as a group are now trading near the lowest premium to the broader market ever, at less than 25 times forward earnings.

Finally for today, some more (or less) on the Fed...

As we reported yesterday, the new-look Federal Reserve under Chair Kevin Warsh voted 9-3 to keep its federal-funds rate steady. The central bank's brief post-meeting statement chalked up rising inflation to short-term concerns tied to the war in Iran.

After his second meeting leading the Fed, Warsh also revealed some more about how the central bank will operate under his leadership. Namely, expect limited or no forward guidance.

Here's how Warsh put it...

Market participants are learning to play the ball, not the referee.

In other words... investors should react to what's going on in the economy, not count on the Fed to change conditions for them.

For example, bond yields have risen lately – with the 2-year yield now about 75 basis points above the fed-funds rate.

The latest inflation numbers that came out this morning show the "core" headline personal consumption expenditures index – which has been the Fed's preferred inflation gauge – at 3.3%. Warsh maintained in his opening statement that the bank's target is 2%.

Here's what this would have meant to Warsh's predecessor Jerome Powell, and other past Fed chairs... They'd see a signal that the Fed is "behind" and should raise interest rates. And Powell would have signaled what was going to happen weeks beforehand.

Warsh is doing things differently...

Market prices will continue to respond in the direction and magnitude they see fit. This is, in my view, a change for the better – and we are just getting started. After all, the central bank need not always and everywhere be the center of attention.

During a Q&A session with reporters, Warsh referred to recent bond-market action as "material tightening." To him, it doesn't mean the Fed necessarily needs to do anything with its benchmark rate...

What I've really been trying to do... is getting an unfiltered message from markets. Getting a direct message. Letting buyers and sellers meet at prices for Treasurys, for the foreign exchange value of the dollar, and then trying to judge for ourselves, what does that mean about our remit? How are we doing on inflation? How are we doing on employment?

We're trying not to interfere with that market signal. That's part of the reason why we've been somewhat spare in our words, when we pulled back from forward guidance...

We're trying to stay out of that because, you know, many of you might be interested in our reaction function. We're interested in the reaction of financial markets.

Frankly, this is all a bit confusing... especially after years of listening to Powell. Whether you agreed with his decisions or not, the old chair was straightforward.

We're not the only ones who feel this way. A Financial Times headline read today: "Kevin Warsh is confusing markets."

The skeptic in me thinks this may all just be a convoluted delay tactic for political reasons. Warsh may just want to avoid raising interest rates right out of the gate as Fed chair – given that the White House wants lower interest rates.

But for now, we'll give him the benefit of the doubt.

Here's the most concrete thing Warsh said... He feels the market is telling him that "capex and productivity are strong... labor markets, solid, steady"... and that the Fed's voting members discussed how the war in Iran was influencing inflation numbers and whether raising interest rates would do anything about it.

So, to Warsh, there wasn't really anything for the Fed to do about interest rates – at least not yet. That doesn't mess with our day.

But as for what this new Fed means for your portfolio, our biggest bet is on more volatility in either direction during or after "Fed days" moving ahead.

It sounds like the Fed will let the market flow without worrying about or knowing the bank's "reaction function," as Warsh put it. That's well and good between Fed meetings. But it means that until traders and investors get a better handle on how Warsh is going to operate, markets will react more sharply once investors do figure out what the Fed wants to do – and not do.

We may have seen this yesterday, with all the major U.S. indexes down at least 1%... and the Dow Jones Industrial Average off more than 2% in its worst day in more than a year. Today was better, with all the indexes up at least 1% and the Nasdaq up 3%.

With more uncertainty about each Fed move, expect more of the same.

New 52-week highs (as of 7/29/26): AbbVie (ABBV), Alpha Architect 1-3 Month Box Fund (BOXX), Chemed (CHE), Pacer U.S. Cash Cows 100 Fund (COWZ), Garmin (GRMN), IQVIA (IQV), Coca-Cola (KO), Lamar Advertising (LAMR), Altria (MO), Plains All American Pipeline (PAA), and Visa (V).

In today's mail, a thought about a company mentioned in yesterday's Digest, a guest essay from Luke Lango from our corporate affiliate InvestorPlace... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"How good of you to discuss Roblox, a company accused of doing absolutely nothing to prevent pedophiles from targeting children on their platform, even when presented with strong evidence..." – Subscriber Jeff S.

Corey McLaughlin comment: I hear you. A couple years ago, we had Edwin Dorsey from The Bear Cave on a Stansberry Investor Hour podcast, and he talked at length about the allegations against the online-gaming company.

But yesterday's essay wasn't about Roblox as a business or as a recommended investment. Luke discussed getting early access to a company with wild growth potential, using Roblox's market success as a historical example.

Roblox wouldn't be the first company to prioritize its investors over the public...

All the best,

Corey McLaughlin and Nick Koziol
Baltimore, Maryland
July 30, 2026