Reaction Functions
Markets are trying to understand the Fed Chair's reaction function
Summary: The two big stories of last week were an FOMC meeting and earnings from large tech companies. Kevin Warsh’s press conference gave some additional insight into the way the new Fed chair thinks about managing monetary policy. Tech companies continued to balance huge demand for AI services and huge expenditures to keep up with that demand.
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Macro
The Fed held rates constant
“Today, as you know, our committee decided to vote by a nine-to-three vote to maintain the target range for the federal-funds rate at 3 ½ to 3 ¾ percent.” - Federal Reserve Chairman Kevin Warsh
Warsh held a press conference
“So, apparently it was news that I had a press conference. Let me just see if I can offer some clarity on that. Between now and year-end, my predecessors and the Federal Reserve committed to press conferences this year, I’m committing to press conferences this year.” - Federal Reserve Chairman Kevin Warsh
Markets are trying to understand his reaction function
“Any central banker, when he or she sees underlying inflation moving higher, he or she is more inclined to tighten policy. Again, when you’ve achieved the other side of your mandate, and you see underlying inflation falling, he’s more inclined to loosen policy. That’s my reaction function” - Federal Reserve Chairman Kevin Warsh
He reiterated that his Fed will have an unwavering commitment to 2 percent inflation
“For some households, businesses, and market professionals, five years of high inflation have left a mistaken impression that is hard to shake: that the Fed’s implicit inflation target was somehow above 2 percent. Let me reiterate: There is no soft inflation target, there is no soft implicit target —not on this Committee’s watch. There is only a target, and it is 2 percent. ..This Fed will not waver. Our credibility rests on performing our duties, and delivering on our responsibilities.” - Federal Reserve Chairman Kevin Warsh
He wants to follow markets’ lead on interest rates
“In the inter-meeting period, market attention centered on real data and real economic developments. Prices reacted in real time to incoming information, and the reduction in forward guidance may have been a factor. Market participants are learning to play the ball, not the referee—and 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...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 Treasuries, 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.” - Federal Reserve Chairman Kevin Warsh
He doesn’t want his Fed to breathlessly watch official data
“...we’ll be watching inflation data over the period ahead, but I also don’t want you to leave the misimpression that we’re sort of breathlessly waiting for that.” - Federal Reserve Chairman Kevin Warsh
He’s not trying to surprise markets. He’s trying not to distort the signal they provide
“Surprise is not the objective function. Surprise is not what we’re solving for. We have a clear North Star...By not spoon-feeding markets...what we’re getting is the views from a very accomplished economist. That’s the internals of financial markets. Instead of just repeating or echoing what we’re saying back to us, they’re giving us somewhat, not perfect, their own judgment. So, surprises are not the objective.” - Federal Reserve Chairman Kevin Warsh
Economic shocks are creating a challenging environment for policymakers
“A lot of our focus was on trying to understand and identify underlying inflation dynamics amid shocks. We take these shocks seriously. There have been a series of them that have been hitting this economy, we’re not looking through them and saying, oh, they don’t matter. But we’re trying to understand is to what extent are these shocks broadening in their effect...I’ll be the first to admit the shocks make this job and this policy conjuncture a little tougher.” - Federal Reserve Chairman Kevin Warsh
Jackson Hole could give some additional insight on the big picture
“I look at it like a blank piece of paper right now...historically, at least for my first tour of duty at the Fed, the more recent periods, it would be sort of a setting up speech more often than not, of what was going to be happening in the fall...in the high mountain air in Jackson, Wyoming, I’d like to also frame the big questions. There is a tendency, especially with the proliferation of meetings and press conferences, to get caught up in the myopic” - Federal Reserve Chairman Kevin Warsh
International
Chinese luxury demand has stabilised but not recovered
“A year ago, six months ago, I already said that I see a situation that has stabilized in China, I do not see an improvement. I don’t see a great improvement. You know my position, which is to say that today, what drives purchases today is the real estate market in a country and the stock market more than the growth of GDP.” - Hermès International (HESAY) CEO Axel Dumas
Consumer confidence in China is improving, led by tech hype
“But I would say that Chinese consumer confidence and especially Chinese with savings and money has -- is improving. The stock markets have been better. There’s a big tech growth and hype in China, and I feel that at least consumers are a bit more eager to spend their money on premium products.” - L’Oréal (LOR:CA) CEO Nicolas Hieronimus
Real Estate markets remain a drag
“In China, we have seen that they are digesting a drop in the real estate market, which represents a large part of their savings. In fact, we see that the Chinese have increased their savings, which is therefore a question of expenditure, which is made, there’s more a question of revenue than savings.” - Hermès International (HESAY) CEO Axel Dumas
Markets with strong wealth creation are driving luxury demand
“...wherever there is wealth creation, which we have seen in the U.S., which we have seen in Korea, there is a strong appetite for luxury and a strong appetite for our goods all across clientage.” - LVMH (LV:CA) CFO Cecile Cabanis
European LNG storage volumes are low
“European storage volumes are very limited and actually much below where we would have expected, closer to the 50 percent. We’re actually seeing that requirement very strongly here. That redirection is happening, but it does make for a tightness coming in the next quarter or so” - Shell (SHEL 0.00%↑) CFO Sinead Gorman
Financials
IPO markets have already generated more volume than all of last year, driven by SpaceX
“It was a huge market event, catalyzing the overall IPO market in the U.S. A total of $146 billion of common stock was offered in U.S. IPO in the first 6 months of this year, dwarfing the $26.46 billion offered in the first half of 2025 and the $42.09 billion offered all of last year, according to S&P Global Market Intelligence data. Of the first half total this year, $86 billion was raised by the SpaceX IPO, accounting for more than half of the overall total.” - S&P Global (SPGI 0.00%↑) Research Analyst Sarah James
Hyperscalers are expected to issue $250-$300B in debt this year
“In the first half, we saw approximately $169 billion in billed issuance from the hyperscalers while our initial outlook for the year assumed approximately $200 billion for the full year...We are now assuming $250 billion to $300 billion in hyperscaler issuance for the full year and double-digit growth in M&A-related issuance.” - S&P Global (SPGI 0.00%↑) CEO Martina Cheung
It’s crypto winter
“That said, crypto market conditions were challenging. Total market crypto spot trading volumes were down more than 20%. Total crypto market cap fell double digits, and volatility compressed to multi-year lows.” - Coinbase (COIN 0.00%↑) CEO Brian Armstrong
Consumer
Consumer spending growth has been robust
“U.S. payment volume grew 10% year-over-year, up about 2 points from Q2, a growth rate not seen since fiscal 2019, excluding the post-COVID recovery...U.S. payments volume growth was the result of several factors, including higher tax refunds, the cost of fuel, retail, including the timing of promotional shopping events, strong Visa Direct growth and FIFA-related spend.” - Visa (V 0.00%↑) CFO Christopher Suh
“The macro environment remains supportive. Consumers and businesses are healthy and continue to spend, supported by positive job growth, low unemployment and real purchasing power in many major economies...Net revenues were above our expectations, up 12%” - Mastercard (MA 0.00%↑) CEO Michael Miebach
The U.S. labor market remains healthy
“The U.S. labor market remains healthy with the number of job openings still ahead of the number of people looking for work. Our daily revenue indications have historically been a terrific indicator of economic activity” - Arthur J. Gallagher (AJG 0.00%↑) CEO J. Gallagher
Travel and entertainment are top categories
“Travel remains the #1 leisure category where consumers intend to spend more, and they are increasingly seeking vacations as a way to relax, unwind and escape.” - Royal Caribbean Cruises (RCL 0.00%↑) CEO Jason Liberty
“In a world of endless screens & AI-generated everything, the one thing that can’t be copied is being there. More artists are on the road than ever & fans keep choosing to be...with them, driving the strongest concert ticket sales we’ve ever seen..We’ve seen no consumer issues to date in terms of purchasing. Numbers are up across the board, whether it’s international, America, clubs, amphitheaters, stadiums, all genres. All venues and all geographies right now, up over 10% in terms of fan count” - Live Nation (LYV 0.00%↑) CEO Michael Rapino
Lower-income households remain pressured
“...would tell you just the consumer studies that we do, low-income households certainly are feeling more pressure.” - The Hershey Company (HSY 0.00%↑) CEO Kirk Tanner
Wages are lagging inflation
“...people’s wages this year have not kept up with inflation, which means it has an amplified impact on discretionary income” - The Boston Beer Company (SAM 0.00%↑) CEO C. Koch
Housing markets are weak
“Although existing home sales improved modestly during the spring selling season, the recovery has yet to gain meaningful traction with June activity remaining near historically low levels of approximately 4 million annualized units.” - Floor & Decor (FND 0.00%↑) CFO Bryan Langley
Technology
Hyperscalers are seeing huge revenue growth
“In Azure and other cloud services, revenue grew 43% against a prior year that included accelerating growth. Customer demand continues to exceed available capacity.” - Microsoft ( MSFT 0.00%↑) CFO Amy Hood
“We’re reporting $200.6 billion in revenue, up 20% year-over-year. Operating income was $27.5 billion, up 43% year-over-year. Q2 was another very strong quarter for Amazon.” - Amazon () CEO Andy Jassy
Growth is expected to continue for years
“In Azure, we expect revenue growth of approximately 45% in constant currency, and we remain focused on delivering efficiencies that help us bridge the gaps we see as customer demand continues to exceed supply.” - Microsoft (MSFT 0.00%↑) CFO Amy Hood
“...we have so much demand right now. Apart from what we’ve talked about in ‘26, a lion’s share of capacity in ‘27, we’re adding a lot of capacity, as I mentioned just a few minutes ago, is largely reserved. And we have quite a bit of capacity that’s already been reserved for ‘28.” - Amazon (AMZN 0.00%↑) CEO Andy Jassy
AWS could become a $1 trillion revenue business
“In fact, the demand we already have for 2028 is striking. And remember, enterprises are still very early in using inference at scale in their current production applications. We long believed AWS could become a few hundred-billion-dollar revenue business and now believe it will be at least double that, and very possibly be $1 trillion annual revenue business for us in time with very appealing accompanying free cash flow and return on invested capital.” - Amazon (AMZN 0.00%↑) CEO Andy Jassy
Demand continues to exceed supply
“First, there are still constraints in the system. I think we’ve continued to say, I think, now for a number of quarters that demand continues to exceed available supply. And that certainly remains true. You can even see it, I think, in some of the pricing that’s occurring in the spot market for assets.” - Microsoft (MSFT 0.00%↑) CFO Amy Hood
“The industry has underbuilt historically for the wave of AI adoption, making existing capacity, including our own, extremely valuable...we are today and expect to be in the sort of foreseeable future supply constrained. And that really includes our core business, too, where there are -- we still have numerous ROI-positive places that we would put compute toward if we had it.” - Meta Platforms (META 0.00%↑) CFO Susan Li
Capex will continue to grow
“We now believe we will spend approximately $220 billion in cash CapEx in 2026. The higher cost of memory is pushing this number up from a prior estimate of about $200 billion. But even at that amount, we will still not have enough capacity to meet all the demand we have in 2026. And I believe this dynamic will also be true in 2027 too.” - Amazon (AMZN 0.00%↑) CEO Andy Jassy
Microsoft and Amazon will double their datacenter capacity from 2025-27
“We added 31 new data centers across 5 continents this quarter, bringing the total to 88 this year as we expand our footprint in response to accelerating demand. We are also bringing capacity online faster than ever...All up, we added another gigawatt of capacity this quarter and remain on track to roughly double our overall capacity in just 2 years.” - Microsoft (MSFT 0.00%↑) CEO Satya Nadella
“So yes, we’re adding a lot of capacity, but there are a lot of other reasons why it’s growing. I expect that we will -- we’re on pace with the capacity build that we talked about a few quarters ago where we said we expect to have double the capacity -- power capacity by the end of ‘27 that we had in ‘25, and we continue to be on that track.” - Amazon (AMZN 0.00%↑) CEO Andy Jassy
Data center capacity could 6x over time
“Total U.S. data center backlog has grown to 307 gigawatts or 15 years of backlog at 2025 build rates, up from 12 years in our last update. Only roughly 20% of this backlog converts near term. The majority will translate to 2028 and beyond deliveries, a very nice tailwind for Eaton for years to come...Just think about this 300 gigawatts of announcements versus the 50 gigawatts that was built over decades that’s going to be online by the end of this year, 6x what this industry built ever is going to be built in the next years to come.” - Eaton (ETN 0.00%↑) CEO Paulo Sternadt
The spending is creating inflation in subcomponents
“I think it’s no secret right now to any company in the world that there are inflated prices right now on some of the components like memory and hard drives and SSDs.” - Amazon (AMZN 0.00%↑) CEO Andy Jassy
“On the supply side, however, it appears difficult for the supply-demand balance to improve meaningfully in the near term. This is due to the increasing complexity of advanced processes applied to HBM and AI server memory, as well as lead times required for constructing new production facilities. With tight supply-demand conditions expected to persist for a considerable period, discussions regarding multi-year contracts to secure mid to long-term supply stability with customers are ongoing.” - SK Hynix (SKHY 0.00%↑) President Hyun-Jong Song
The semiconductor industry is under-supplied
“It is a very, very, very tight market across everything, whether it’s memory, whether it’s test equipment, whether it’s substrates, whether it’s TSMC wafers, it’s a very, very, very tight world” - Arm (ARM 0.00%↑) CEO Rene Haas
“...the industry is still meaningfully undersupplied, right? You’ve got clean room coming online over the next, I don’t know, 12 months and beyond, frankly, and all that will lead to incremental opportunities as we get into ‘27.” - Lam Research (LRCX 0.00%↑) CFO Douglas Bettinger
Inflation is impacting adjacent industries
“On the pricing front, we reluctantly raised prices, I would say, and we did it because we’re in what I would characterize as a 100-year flood on the memory pricing with exponential increases in memory prices. And so that was the rationale for it.” - Apple (AAPL 0.00%↑) CEO Tim Cook
Investors are worried about the impact of capex on free cash flow
“Capital expenditures, including principal payments on finance leases, were $31.1 billion, driven by investments in servers, data centers and network infrastructure. Free cash flow was $784 million.” - Meta Platforms (META 0.00%↑) CFO Susan Li
“This means in the short term, when demand is necessitating so many data centers being built simultaneously in advance of when we can start monetizing them, we’ll spend a lot of CapEx and encounter free cash flow headwinds until these data centers come online, can be monetized, and we get a few years into these servers being utilized. But as we get a few years out, the revenue growth outpaces the incremental CapEx growth, which will happen at some point. The resulting revenue, free cash flow and return on invested capital is very compelling.” - Amazon (AMZN 0.00%↑) CEO Andy Jassy
Accounting tricks can help spread out the impact on earnings
“Now before I move to outlook, effective at the start of FY ‘27, we are extending the estimated useful life of our data centers and office buildings from 15 to 25 years, reflecting our operating history and expected use of these assets. The impact of this update is reflected in today’s guidance.” - Microsoft (MSFT 0.00%↑) CFO Amy Hood
Meta will have to prove it can monetize its compute
“We’re getting a lot of offers for compute at a significant premium over what we paid for it...The question in thinking about this is we believe that there will continue to be a significantly higher margin on selling intelligence rather than selling compute directly. But we think that there is a big opportunity, obviously, to sell compute as well. So we’re thinking through -- I think you asked what one area would likely scale the most. But I mean I’m actually quite optimistic that we’re going to see meaningful growth in all of these areas. And I think we will have more to share soon on a number of them.” - Meta Platforms (META 0.00%↑) CEO Mark Zuckerberg
Maybe glasses will boost Meta
“Glasses are the ideal form factor since they can be with you throughout the day, and they can assist you without pulling you away from the moment. Our Glasses remain one of the fastest-growing consumer electronics of all time, and we continue adding to the lineup. We just released our own line of Meta Glasses in collaboration with EssilorLuxottica, including a style that we designed with Kylie Jenner. They’re the first glasses to ship with Muse Spark out of the box so that they can understand what you’re seeing and give even more helpful answers. Early sales have been strong, exceeding our expectations” - Meta Platforms (META 0.00%↑) CEO Mark Zuckerberg
Companies are using AI to do more, not cut costs
“I expect it to become a lot easier to ship new apps, so we are planning to build out more ideas and use our recommendation systems to scale them to the people who will find them interesting, as we’ve done with Threads.” - Meta Platforms (META 0.00%↑) CEO Mark Zuckerberg
“From a technology perspective, what we’re seeing is anywhere from a 30% to 40% decrease in cycle time from a coding perspective. Now, that’s really not a savings because what that does is allows us to do more, and so that’s what we’re doing.” - American Express (AXP 0.00%↑) CEO Stephen Squeri
“We are accelerating innovation, targeting complete agent delivery in under 3 weeks. By applying tools like low-code, we are also increasing overall developer productivity by up to 30%.” - SAP (SAP 0.00%↑) CEO Christian Klein
“...we just had our entire senior team vibe coding this week, which has been a fascinating experiment and something that we’re pushing quickly. Let me start with that. We’ve obviously spent a considerable amount of time and effort over the last three years training and developing our organization around AI...Clearly asking people to use large language models across their work to drive enhanced productivity, and we’re seeing it pretty consistently across the board.” - Colgate-Palmolive (CL 0.00%↑) CEO Noel Wallace
Maybe AI won’t lead to a jobs apocalypse
“Now also you have the air coming out of the balloon in terms of AI job destruction. You’ve seen the CEOs of the two major players walk back their comments. AI is not going to be a job apocalypse at this point in time. Now it’s AI is going to drive efficiencies for the individuals. It’s all these pieces are coming together, which really gives us a lot of excitement of where we are at this point in time based upon the landscape, based upon the competencies that we’ve built out, and based upon how our teams are executing.” - Kforce (KFRC 0.00%↑) CEO Joseph Liberatore
Arm-based accelerated servers have surpassed x86 spending
“Arm-based CPUs are becoming central to next-generation AI infrastructure. IDC reported that spending on Arm-based accelerated server platforms has nearly doubled in the past 2 quarters and has now surpassed x86 platforms. We’re witnessing both the rapid expansion of AI infrastructure and Arm’s growing role within it. Our opportunity extends well beyond the data center.” - Arm (ARM 0.00%↑) CEO Rene Haas
Industrials and Transport
Industrial recovery is broadening
“Now when you break it down between retail and industrial, retail continues to be a positive territory. On the industrial side, what changed from last quarter is that we are seeing manufacturing starting to build momentum, and we haven’t seen that in more than 3 years, which is fantastic to see.” - XPO (XPO 0.00%↑) CEO Mario Harik
Companies are getting refunded for tariff payments
“We are participating in the tariff refund process. And as I mentioned earlier, we received approximately $600 million in Q2. The amount is limited for a couple of reasons. First, our teams did a lot of work forward buying and prepositioning inventory to avoid tariff costs. Second, we are not the importer of record for the large majority of items sold in our store” - Amazon (AMZN 0.00%↑) CFO Brian Olsavsky
“In terms of applying for a refund of tariffs paid, we’re following the established processes, and we plan to reinvest any amount we receive back into U.S. innovation and advanced manufacturing. These would be new investments and would be in addition to our prior commitments in the U.S. “ - Apple (AAPL 0.00%↑) CFO Kevan Parekh
Aircraft demand remains structurally strong
“Across the commercial market, we continue to see exceptional demand and market conditions as evidenced by our record backlog of more than 6,200 airplanes and a market outlook of nearly 44,000 new aircraft over the next 20 years.” - Boeing (BA 0.00%↑) CEO Robert Ortberg
Materials & Energy
Electricity demand is accelerating faster than new supply
“Global electricity demand is accelerating, and there is simply not enough new capacity coming online to keep up. This supply/demand imbalance is compounded by grid infrastructure that has not kept pace with the growing need for electricity and is not being developed quickly enough to accommodate new demand.” - Brookfield Renewable Corporation (BEPC 0.00%↑) CEO Connor Teskey
Data center power demand will continue to materially exceed available supply for a while
“Demand far exceeds supply. The grid cannot keep up with the demand from hyperscalers and others, and we see that persisting for years.” - Chevron (CVX 0.00%↑) President of Chevron New Energies Jeff Gustavson
Oil companies had strong quarters
“Our strong Q2 performance is a result of disciplined investment and strong execution that drove record U.S. upstream production, record crude throughput in our U.S. refineries, and exceptional reliability across key assets” - Chevron (CVX 0.00%↑) CEO Mike Wirth
“We delivered strong earnings and cash flow, continued investing in advantaged opportunities, returned cash to shareholders, and strengthened the balance sheet.” - ExxonMobil (XOM 0.00%↑) CEO Darren Woods
“Shell’s operational performance enabled very strong results during another quarter of severe disruption in global energy markets...Today, we commence another $3B of share buybacks, in line with our 40-50% of CFFO through the cycle distribution policy.” - Shell (SHEL 0.00%↑) CEO Wael Sawan
Nuggets of Wisdom
Keep learning and keep going
“Learning is the single greatest superpower, and if you go into it with the attitude, how hard can it be? If anybody can do it, I can do it, and just realize that it will be hard and you just have to have the resilience to overcome it every single day. You don’t have to overcome life in one day. You just have to overcome that morning.” - NVIDIA (NVDA 0.00%↑) CEO Jensen Huang
The luxury industry evolves slowly
“Luxury is one of the few sectors that thinks in generations rather than quarters. A cognac sleeps between 10 and 50 years before it is sold. A vineyard is handed down across eighty years. The craft of a trunk-maker or a glassmaker takes twenty years to form and three to lose. You don’t run that like a digital platform: you tend it, you prepare it, you pass it on. It is a long-haul profession, and a responsibility all the more serious for not being mine. It belongs to the craftsmanship of the group’s 220,000 employees, to the 40,000 who work in France, to the families who live from it, to the Maisons of which we are merely the custodians.” - LVMH (LVMH) CEO Bernard Arnault