ANTHROPIC

Topic of the day, of the month, of the year, of ….

Gleaned here and there FYI:

• Bloomberg writes that “Anthropic has offered up to Wall Street an anti-sell S-1 prospectus, a doomsday document seeking to weed out investors who might not be able to stomach what lies ahead.”
• Indeed, the WSJ Editorial Board found the prospectus difficult to digest:
• Beyond this small existential matter, there are other risks. The largest is whether Anthropic will ever generate the revenue to cover its soaring costs to stay at the AI frontier.
• [the S-1] says a “significant portion of our customer base consists of startups and technology-oriented enterprises that may be more sensitive to adverse macroeconomic conditions.” Beware a major economic slowdown.
• open-weight and open-source AI models “may capture a portion of the market for certain use cases, which could exert pricing pressure on our offerings or lead certain customers to adopt open-source alternatives for those use cases.”
• Large banks and infrastructure providers may be reluctant to use Chinese models because of potential security risks.
• Nvidia and Meta are pushing their own open-weight models, which could be attractive because of lower costs. If open-weight models proliferate, Anthropic could struggle to pay for its computing build-out.
• Then there are regulatory risks. Export controls could recur, could remain in place longer, or could extend to additional models or capabilities,” the company warns.
• Anthropic says “we are subject to complex and evolving laws, regulations, and other legal obligations related to privacy and data protection.” Chinese AI labs face few of these barriers.
• If an Anthropic agent causes damage, the tort and securities bars will pounce.
• why is Anthropic going public now? Our guess is it’s trying to take advantage of the AI boom to let employees with stock options and early investors cash out before its edge erodes—or before more risks bite.
• BB summed up the risks in one paragraph: “rarely have potential investors seen such breadth of risk, everything from access to energy, to intellectual property rights disputes, to political strife with the current (or future) administration, to the barefaced fear that artificial intelligence could be “misused, replicated, weaponized, or allowed to operate with a high degree of autonomy” — killing us all.”
• BB also understands Anthropic’s and OpenAI’s unusual challenges: “Big tech incumbents are offsetting these AI losses with legacy businesses like advertising, cloud computing or space rockets. Anthropic can’t do the same. Instead, it must rely on being the first to market with new frontier capabilities.”
• The FT is more investor-pragmatic:



• The S-1 provided the clearest picture yet of Anthropic’s soaring revenue, which rose from $4.6bn last year to more than $33bn in the nine months to the end of September.
• five customers accounted for 25 per cent of revenue in the first nine months of the year, while only 250 spent more than $10mn on an annual basis.
• Denis here: note that more than 11,900 customers are spending $100,000+ annually. That’s up from roughly 950 a year earlier.
• To support its spending in the near term, the start-up has a cash pile of $112bn on hand.
• Anthropic is pushing to become profitable, focusing on using its scarce computing power more efficiently, including by using its AI model Claude to train newer models. Anthropic spent just over $2.50 on computing power and infrastructure for every $1 of revenue in the first quarter of 2025. During the second quarter of 2026, that was down to less than 50 cents. There are signs the efficiency drive is working. Anthropic’s operating margin was 8 per cent and operating income was $1bn for the three months ended June 30, compared to a loss of $1.2bn for the same period a year earlier.
• Anthropic identified computing power as “the critical input” for its business. Its hunt for chips and data centres has driven a wave of deals, with the AI lab signing up to commitments worth more than $800bn and stretching as far as 2045.

• Anthropic admits its “novel” corporate governance structure “differs significantly” from most other public companies. It gives ordinary shareholders virtually no control over the company’s decisions.
• For good measure, the FT’s piece ends with a summary of the 94 pages of risk factors:
• Anthropic also described how it may lose control of its own products. Models might one day exhibit “unexpected . . . self-preserving behaviours, including attempts to resist shutdown, conceal or manipulate information” or could generate “coercive, deceptive” outputs that resemble “blackmail”.
• Anthropic warned that it may be impossible for any single insurer or even the insurance industry as a whole to underwrite these risks.
• The filing also acknowledges that the US administration could increase costs, restrict Anthropic’s operations or enact new regulations that influence demand for its models.
• “Many of the risks we face are interconnected and may compound or trigger cascading adverse effects,” Anthropic concludes.

BTW:

Since the IPO will be in November, Q4 earnings will again benefit from huge non-operating profits. For example, Amazon would own about a fifth of ANT if its convertible notes were fully converted (worth ~$400B at a $2T valuation).  Google has a roughly 7% stake which could rise if GOOG invests up to $20B more under deals struck earlier this year. GOOG could commit $10B at the listing price.

  Capital is capital:

Broadcom CEO Intervened to Seal $63 Billion Anthropic Debt Deal The deal, announced on Monday, is the biggest ever to raise money for AI infrastructure

(…) Thanks to its sterling credit rating, [Broadcom] had already agreed to provide some financial guarantees to make banks more comfortable with the sizable risk of lending over $40 billion. But over the past few weeks, some of the banks grew increasingly anxious about participating in the deal, known as “Project North Star,” people familiar with the matter said.

Given the rise in interest rates and growing difficulties in the markets for artificial intelligence ventures, some banks felt they weren’t being compensated enough to take the risk and considered pulling out altogether, the people said.

In the end, Broadcom’s CEO held 11th-hour talks with bank executives over the weekend to get them to finalize their commitment to the deal and also agreed to higher interest rates on the loans, the people familiar with the matter said.

Banks also got more comfort around the guarantees from Broadcom that will protect them from losses in case Anthropic defaults on the loans, the people said. The deal, led by Bank of America, Citigroup, and Morgan Stanley, was announced late Monday after Anthropic released its IPO filing. Another chunk of debt, partially financed by Blackstone, brought the total commitments to $63 billion. (…)

The $63 billion deal is historic in several respects beyond size. Banks and private-credit firms like Blackstone, which regularly compete with each other, came together on the biggest ever financing of artificial intelligence infrastructure. The banks also plan to distribute half of their debt, around $22 billion, to the investment-grade bond market, the deepest pool of capital in the world.

(…) North Star involves another $18 billion in riskier debt that won’t carry a Broadcom guarantee, half of which will be financed by Blackstone. Private-credit firms, insurers and hedge funds have bought similar deals over the past year but intensifying volatility in financial markets related to AI may curb their willingness to take on the risk tied solely to Anthropic.

North Star is the sequel to another Anthropic and Broadcom chip-financing deal called “Big Sky.” Apollo financed some of the riskier parts of that deal and still hasn’t been able to complete some deals with investors to unload debt, people familiar with the situation said. (…)

One reason it has been hard for arrangers of the deal to persuade other banks to pitch in: Debt markets are getting indigestion from hundreds of billions of dollars of AI-related bonds and loans. Many banks are still trying to unload loans they already committed to, limiting capacity to make new ones, debt fund managers say.

The flood of supply—combined with investors’ mounting fears that some AI bets will go bad—have made the loans a tougher sell. Some banks have traded the loans to clients at a loss to free up capital, while others are holding on, limiting their ability to do new deals. The logjam is leaving some banks stuck with loans made to riskier players in the AI ecosystem. (…)

• BlackRock’s Rieder Spent Weekend Doing Deals in AI Debt Rush

(…) “This is one of the most exciting investment periods I’ve ever seen,” he added. “I spent the entire weekend looking at some of these transactions, participating in a pretty significant way in some of these transactions.” (…)

Just this week, Broadcom Inc. has arranged a $63 billion deal to finance the purchase of chips for AI model developer Anthropic, while SpaceX signed a roughly $40 billion equipment-finance lease with Apollo Global Management Inc. Meta Platforms Inc. is seeking to raise as much as $95 billion from selling stock in one of the largest equity offerings in history. Anthropic also filed for its long-awaited IPO, a landmark moment, and warned it may seek financing sooner than expected. (…)

As the so-called hyperscalers like Amazon.com Inc. and Alphabet Inc. issue record debt, soaking up hundreds of billions of dollars that might otherwise flow into Treasuries, investors question whether the market can absorb it all.

The 10-year Treasury has “taken a backseat” to other opportunities in fixed income, Rieder added. Even with its yield above 5%, Rieder views the benchmark increasingly less as a core investment and more as a market barometer, often for equities. (…)

• J.P. Morgan estimates that only 20% of AI capital expenditures will be funded by free cash flow in 2027, with the remaining 80% requiring external financing. (Daily Shot)

AI-related?

Microsoft Will Offer Buyouts to 60,000 Employees

(…) “The Voluntary Exit Offer reflects an important part of how we’re evolving our approach to change: creating greater flexibility and, where possible, more ways for employees to shape their next chapter,” Amy Coleman, Microsoft’s chief people officer, said in a message sent to employees. (…)

Microsoft in April announced a voluntary retirement program, which offered around 8,600 employees buyouts, the person familiar with the matter said, and more than 30% accepted the offer. The company expects a far lower percentage to accept the latest buyouts, the person said. Microsoft employed 223,000 employees as of the end of June. (…)

60000/220000 = 27%! Even if only 20k take the offer, this is a big deal (i.e. statement).

AI CORNER

• Anthropic token price hits record low, rapidly catching down to openAI (@zerohedge)

• “The costs of tokens coming down are nowhere near the demand going up”. (Cisco)

• OpenRouter shows Anthropic token volume up 3.6x since Opus 5.5. (AI Daily Brief)

• Amazon Web Services capacity is mostly booked up through at least next year, Amazon CEO Andy Jassy said on an Andreessen Horowitz podcast released on Friday. “‘26 is obviously at this point sold out. [2027] is largely sold out. A good chunk of ‘28 is sold out,” Jassy said. (The Information)

• Citing OpenRouter data, Cisco’s President and Chief Product Officer Jeetu Patel said agent token consumption surpassed human consumption in February and is now five times higher. He also said that an agent consumes 450% more network bandwidth than a human performing the same task and that 60% of global compute this year will be used for inference rather than training. Patel said fewer than 2% of people use agents as power users today and predicted that number could reach 30% to 40% within 12 to 15 months.
• Another day, another round of on-demand GPU rental indices surging across the board and reaching ATHs. Even the A100 index, which recently saw some softness, seems to be inflecting a little. (@silicondata)

• China’s MiniMax completes export registration for open-source, overseas AI model licensing

The registration comes a week after ​Beijing proposed export controls on 23 AI technologies, including ⁠models, agents and computing clusters, as ​it seeks to limit transfers of tools it ​views as vital to national security. A social media account affiliated with state broadcaster CCTV said on ​Thursday that MiniMax and DeepSeek had won ​state approval for global use of their AI models. The Chinese ​commerce ministry had earlier said most ​AI ⁠technologies would stay freely exportable, with simplified licensing for open-source exports and for Chinese ⁠firms ​running their own computing ​centres overseas.

EARNINGS WATCH

Whirlpool Heading for Full-Year Loss as Costs Mount and Sales Fall Appliance maker says higher raw material and fuel costs are compounding its problems

A miserable housing market is keeping appliance-shoppers on the sidelines, and Whirlpool is paying the price.

The struggling appliance maker on Monday announced that it expects a full-year loss of $1.30 per share. The company has steadily decreased its full-year guidance since January, when it forecast adjusted earnings of $7 per share. (…)

Whirlpool has attempted to protect its profits with higher prices and cost-cutting, including trimming jobs at its Iowa refrigerator factory as a prelude to modernization, phasing out a plant in Mexico and reducing its distribution centers.

The efforts, however, have been blunted by higher costs for raw materials, fuel and logistics. In the third quarter, the company’s ongoing EBIT margin was 2.6%, down from 4.5% the prior year. (…)

As for prices, Whirlpool is increasing them by 7% for the fourth quarter. It claims the rest of the industry has done the same. (…)

• America Needs Canada’s Aluminum. Trump’s Tariff Exposed Just How Badly. Smelters in Quebec run on cheap hydropower; 50% tariff pushes up prices for American industry

(…) “They’ve treated the United States very unfairly,” Trump said last month about Canada. “They have been one of the worst countries in the entire world.” He has said the U.S. has no need for Canada’s natural resources.

Aluminum has emerged as one of the trade war’s biggest conundrums. The steep tariff—imposed in the name of national defense—is intended to stimulate U.S. production. Yet the enormous power requirements for making aluminum have meant that Canada, where abundant hydropower has kept electricity prices from rising as sharply as in the U.S., has supplied about 70% of U.S. aluminum imports in recent years.

The tariff has pushed aluminum prices in the U.S. to a record premium over global benchmarks, punishing home buyers, data-center developers, automakers and grocery shoppers. (…)

Rio, one of the largest aluminum producers outside China, is starting up in Saguenay the West’s first new smelters in more than a decade. The company also is working in Quebec to commercialize a new carbon-free smelting process in a joint venture with Alcoa and the provincial government, with support from the Canadian government and Apple.

Much of the Canadian aluminum entering the U.S. comes from Rio’s Saguenay operation, which ships about 70% of its output across the border.

“We always call aluminum ‘solid electricity,’” said Jérôme Pécresse, who runs Rio’s aluminum, lithium and Canadian businesses. “We cannot find a source of power in the U.S. which is anywhere close to what we have in Canada in terms of competitiveness.” (…)

Emirates Global Aluminium, the Mideast’s largest producer, and Chicago-based Century Aluminum have said they would spend more than $4 billion to build what would be the largest U.S. smelter, capable of more than doubling domestic production of primary aluminum. The Biden administration awarded $500 million for the project, and Trump has thrown his support behind it with additional incentives.

But opposition to the project has swelled in Inola, the Oklahoma prairie town chosen as the site. Local critics have expressed concerns about pollution and foreign ownership of land and objected to taxpayer-funded incentives to the developers. (…)

On a public call to rally support for Mazzei, Trump vouched for Emirates Global—“very fine people with unlimited money”—and said the smelter would bring jobs, tax revenue and the envy of other states.

“This country desperately needs aluminum,” he said. “We get it all from Canada, for the most part, and we need it badly.” (…)

Tariff proponents, including Century, contend that Canada’s inexpensive hydropower constitutes an unfair subsidy. (…)

Through August of this year, Canadian aluminum shipments to Europe are up 77% from the year-earlier period, and EU carbon taxes may steer even more Canadian metal across the Atlantic to meet demand for lower-carbon metal, said Karen Norton, associate director at S&P Global Energy. “The U.S. may have less access to Canadian metal than it does now,” she said.

Competition for Canadian metal could add to the price pressure on U.S. aluminum users. Ford Motor has forecast as much as $2 billion of higher commodity costs this year. Semiconductor-equipment manufacturer Applied Materials, auto-parts maker Allison Transmission and can producer Ball have told investors that they are passing on higher aluminum costs to customers. (…)

Yesterday I noted that excluding the war-related boost in commodity prices, the 6 “normal-economy” sectors are expected to grown their earnings 4.8% on average in Q3 on revenues rising 6.5% on average. Declining margins.

US FLASH PMI

Business activity growth holds close to five-year high, but selling
prices rise at sharpest rate since August 2022

The headline flash S&P Global US PMI Composite Output Index slipped from 58.4 in September to 57.6 in October but remained firmly in strong growth territory. Despite the fall, the index still signalled the second-sharpest increase in activity since March 2022.

Growth dipped lower in both manufacturing and services, but in both cases the rates of expansion were among the highest seen over the past five years.

New orders growth meanwhile ticked higher from September’s elevated reading and was the highest in over four-and-a-half years. However, a weakened rate of increase in manufacturing new orders contrasted with an improved rate of growth of services new business to the strongest since March 2022.

While the upturn in orders was again principally a reflection of rising domestic demand, boosted partly by precautionary stock building, October saw export sales gain traction, registering the strongest gain since May 2022. Export orders for goods rose for the first time since June of last year, accompanied by the largest rise in services exports since July 2023.

Companies’ backlogs of uncompleted orders, a key indicator of capacity utilization and future business growth, rose sharply again, the latest increase being the largest since May 2022. Backlogs accumulated at stronger rates in both manufacturing and services.

The rise in backlogs of work again encouraged firms to take on more staff. Employment rose in October at the fastest rate since June 2022, barring only the jump in payrolls reported in September. Both service sector and manufacturing payrolls increased, the latter notably at the fastest rate since March 2012, while the service sector jobs gain was below that seen in September but still the third largest for over four years.

Business output expectations for the 12 months ahead cooled compared to September but were still the second highest seen this year. A paring-back of optimism in the services economy was countered, however, by a marked improvement in sentiment in the manufacturing sector.

Business expansion plans reflected reports of confidence being buoyed by signs of ongoing demand growth and economic resilience. Manufacturers remained more upbeat than service providers, and factory confidence has more or less returned to its long-run average. In contrast, service providers’ sentiment remained well below its trend level amid worries over the cost-­of-living, higher borrowing costs and political uncertainty.

Selling price inflation picked up further momentum in October. The overall rise in prices across goods and services was the largest since August 2022. The upturn in price pressures was also broad-based: while services inflation edged up to the steepest since August 2022, manufacturers’ selling prices rose at a pace not seen since July 2022, with the rate of inflation accelerating markedly.

Higher prices reflected a further sharp increase in companies’ costs. Average input costs measured across both goods and services rose at the fastest pace since November 2022, excluding only the rise seen in September. The surge in cost pressures was most prominent in manufacturing, though service sector costs also rose sharply again.

Respondents commonly cited oil-based inputs, energy, fuel and freight rates as having pushed costs higher, but various other raw materials including steel, aluminum and copper were also up in price, often due to tariffs or shortages.

Supplier delivery times lengthened to the greatest extent since 2022 amid material shortages, low stock levels, overloaded suppliers, labour shortages, rising back orders and shipping or import delays. Service providers also widely noted higher wage rates and increased utility and insurance costs.

The S&P Global US Manufacturing PMI rose from 55.9 in September to 56.0 in October, according to the flash reading, registering the strongest improvement in operating conditions since May 2022. Although production and new orders growth rates slowed, both remained elevated to register sustained strong expansions. Jobs growth meanwhile accelerated further to reach the highest since March 2012, and input inventories rose at the fastest rate for four months. Suppliers’ delivery times meanwhile lengthened to the greatest degree since July 2022.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence:

“October’s flash PMI data indicate that the US economy continues to boom at the start of the fourth quarter. The output readings from the survey are consistent with GDP growing at a 5% annualized rate after a 4% expansion was signalled for the third quarter. Especially healthy corporate earnings and profits are also indicated, and hiring has surged as companies seek to boost capacity to fulfil stronger customer demand.

“If the reopening of the economy after COVID is excluded,recent months have seen the best growth spell for US businesses since early 2015.

“However, cost pressures remain a key concern, notably as the renewed surge in oil prices reverberates through to impact a wide variety of goods and services. Supply chain bottlenecks have meanwhile intensified, and order book backlogs are growing, making it easier for companies to pass higher costs on to customers. The result is the sharpest increase in selling prices for over four years toa pace that indicates consumer price inflation is likely to rise further above the Fed’s target in the coming months.”

 

As Goldman Sachs illustrates, manufacturing output price inflation is particularly strong in the US …

… allowing US manufacturers to pass their increasing costs along thanks to strong demand.

The October Flash PMI confirms September’s:

• US economic growth is broadening and accelerating to “booming conditions”.
• Employment growth is also accelerating, “at the fastest rate since June 2022”.
• Corporate costs are also surging due to “material shortages, low stock levels, overloaded suppliers, labour shortages, rising back orders and shipping or import delays”.
• Strong demand allows businesses to broadly boost selling prices.

The strengthening labor demand is particularly interesting since wage inflation is the only missing ingredient in current subdued inflation scenarios. But unemployment claims declined 18% since July to their lowest level since 1969. Continued claims are down 12.5% since July while job postings on Indeed rose 4% (inversed below).

The Atlanta Fed composition-adjusted wage tracker pinned the low point in overall wage growth at 3.5% last April. It was 3.9% in August. Wage growth for job switchers also troughed in April at 3.7%. It jumped to 4.7% in August.

“Optimism that the war and the interruption to supply that it causes will soon be over has drained away”: (John Authers)

If you look closely at this next chart, you should see the delayed impact that oil prices have on services inflation. Service providers’ costs are mainly wages and energy. Higher for longer oil prices will incite businesses to start passing along their rising costs given strong demand.

The Truflation CPI has surged from 2.5% to 3.3% in just 3 weeks:

Truflation CPI

Treasury yields opened at 4.94% on September 23, jumped to 5.1%  after the scary Flash PMI out that morning, to 5.2% on September 24 and peaked at 5.32% on October 6. The subsequent “AI scare” drove yields back to 4.96% last Thursday but they rose back to 5.0% on Friday after the October Flash PMI.

This AI scare is really a “CoreWeave financing scare”, limited to the smaller AI players. SemiAnalysis’ comprehensive data confirm that data center construction will be very strong through 2027: net capacity addition will rise from 15.6GW in 2025 to 25GW in 2026 and to 51.2GW in 2027, 77% of which is already financed and under construction per SA’s research.

The Q3 CFO Survey by Duke University’s Fuqua School of Business and the Federal Reserve Banks of Richmond and Atlanta was conducted from Aug. 17 to Sept. 4.

“Overall, CFOs remain optimistic about the U.S. economy and their own company’s prospects,” said Sonya Ravindranath Waddell, vice president and economist with the Federal Reserve Bank of Richmond. “Where there are challenges, they are most pronounced for small or financially constrained firms. Rising optimism among large firms is accompanied by strong expectations for revenue and employment growth in 2026 and 2027. Not only did optimism decline among small firms, but 20 percent reported financial constraints that prevented them from covering costs or pursuing new business opportunities, compared to about 10 percent of large firms.” (…)

About 90 percent of companies expect demand over the next year to be about the same or stronger than last year. Likewise, most firms continue to hire replacements and fill new positions — only 12 percent report not filling open positions or laying off workers.

These are tough times to be small.

Interestingly, in the third quarter, “labor costs and profitability/pricing power made new appearances on the list” of concerns.

Because nothing above is hard data, favored by Kevin Warsh, the FOMC this week may well dismiss it as soft data, however hard it may be. Many members have already said there’s no urgency to raise rates again.

Last June, Warsh told reporters at a press conference that he didn’t want the central bank to give too much forward guidance because he wants the market to form its own conclusions from economic data and that he plans to “listen to the signal from markets more”.

Here’s one signal on the eve of the meeting:

EARNINGS WATCH

The Earnings Boom Is Heavily Reliant on Just a Handful of Stocks Ten companies—including Nvidia, Micron and other AI giants—account for roughly two-thirds of corporate profit growth

Analysts expect companies in the S&P 500 to report a 30% jump in third-quarter earnings from a year ago, according to FactSet, boosting investor confidence that the good times can keep rolling so long as businesses keep printing money. But just two companies—Nvidia and Micron—account for 34% of that growth, according to a Dow Jones Market Data analysis.

And only 10 companies—including Broadcom and Meta Platforms—account for roughly two-thirds of the profit growth. Others include oil-and-gas giants that benefited from higher energy prices caused by the conflict in Iran. (…)

Even without the top 10 stocks juicing growth, the rest of the S&P 500 is expected to deliver a 10% jump in profit from a year ago—a respectable showing, especially for a bull market that has now stretched into its fourth year, said Chris Grisanti, chief market strategist at MAI Capital Management. (…)

I have been beating that drum for a while. And even that “respectable 10% jump in profit” should be qualified. Excluding the war-related boost in commodity prices, the 6 “normal-economy” sectors are expected to grow their earnings 4.8% on average in Q3 on revenues rising 6.5% on average. Declining margins.

So far, with 24% of S&P companies in:

121 companies in the S&P 500 Index have reported earnings for Q3 2026. Of these companies, 82.6% reported earnings above analyst expectations and 14.9% reported earnings below analyst expectations. In a typical quarter (since 1994), 67% of companies beat estimates and 20% miss estimates. Over the past four quarters, 82% of companies beat the estimates and 15% missed estimates.

In aggregate, companies are reporting earnings that are 6.6% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.4% and the average surprise factor over the prior four quarters of 7.7%.

Of these companies, 63.6% reported revenue above analyst expectations and 36.4% reported revenue below analyst expectations. In a typical quarter (since 2002), 63% of companies beat estimates and 37% miss estimates. Over the past four quarters, 77% of companies beat the estimates and 23% missed estimates.

In aggregate, companies are reporting revenues that are 1.7% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 2.5%.

The estimated earnings growth rate for the S&P 500 for 26Q3 is 31%. If the energy sector is excluded, the growth rate declines to 26.3%.

The estimated revenue growth rate for the S&P 500 for 26Q3 is 12.5%. If the energy sector is excluded, the growth rate declines to 11.7%.

The estimated earnings growth rate for the S&P 500 for 26Q4 is 30.1%. If the energy sector is excluded, the growth rate declines to 25.5%. (LSEG IBES)

Forward EPS are now $405.63, up 6.3% in just 3 weeks!

If you don’t mind investing on forward earnings, the current 18.8x P/E is back into its historical channel. It is 18.1x 2027 estimates of $424.

The S&P 500 median stock is at 16.6x forward EPS (charts from Ed Yardeni):

The S&P 500 is only down 2.8% from its October 6 high but AI-related stocks are down 24% from their June high.

@negligible_cap

The chart above plots Goldman Sachs’ broad AI basket, a proprietary custom thematic basket designed to track the comprehensive AI ecosystem. Rather than focusing solely on mega-cap tech stocks, Goldman Sachs structures its broad basket around a multi-phase framework that spans hardware, infrastructure, data management, and the eventual business productivity beneficiaries.

Among the worst performers from their respective 2026 highs (with their current NTM P/Es):

MRVL: –30% (40.4x), ORCL: –49% (14.8x), VRT: –49% (24.5x), CRWV: –62% (NA), CEG: –29% (20.5x), VST: –23% (13.8x).

Ed Yardeni charts his own AI-11 stocks’ October performances …

… and their YtD.

The S&P IT stocks are now selling at par with the S&P 500 P/E. NVDA, the dominant full stack AI company, sells at 17.4x NTM EPS. Last time: 2016 when its EBITDA margins were 19.6% vs 66.4% currently per Koyfin data.

Japan’s Top Union Group Calls For 6% Wage Increases in 2027

Japan’s largest labor union federation will push for wage increases of around 6% in next year’s pay negotiations, seeking to build on recent gains as the government targets sustained pay rises to help drive consumer spending and boost economic growth.

Rengo plans to urge affiliated unions to demand total pay increases of at least 5% and ideally 6%, in annual wage negotiations culminating next spring, according to targets outlined in its draft policy framework Thursday. That includes base-pay increases of at least 3% and ideally 4%.

Workers affiliated with Rengo secured an average wage increase of 5.01% in negotiations earlier this year, with the gains feeding into the government’s monthly wage data through the summer. Along with easing inflationary pressures, the pay increases helped lift Japanese workers’ real wages for an eighth straight month in August, the longest streak of gains in almost a decade. (…)

Sustained wage growth is crucial to policymakers’ efforts to achieve their respective economic goals. The Bank of Japan is hoping to spur a mutually reinforcing cycle of wage and price growth as it gradually proceeds with interest rate increases toward levels not seen in decades.

Prime Minister Sanae Takaichi also emphasized wage growth in her policy speech earlier this month, saying Japan was at a crossroads in establishing a virtuous cycle of corporate investment, higher wages and stronger consumption. She stressed the need for sustained pay gains that outpace inflation. (…)

• Japan government, BOJ gap on inflation laid bare ahead of key policy meeting

Japan has yet ‌to meet the conditions for officially declaring victory over deflation, Economy Minister Minoru Kiuchi said on Friday, exposing a divide with the Bank of Japan as it sees the economy on the cusp of durably achieving its 2% inflation goal.

Kiuchi’s remarks, from a close ally of dovish ​Prime Minister Sanae Takaichi, underscore a disconnect between the government and the BOJ on price moves.

They also come ​ahead of the BOJ’s policy meeting next week, when it is seen signalling that underlying inflation has ⁠hit its 2% target as the Iran war-induced energy shock and rising import costs from a weak yen push up ​prices.

The government, however, has stopped short of declaring victory over deflation, saying it needs clearer evidence that the economy will ​not slide back into a period of persistent price declines.

While fuel subsidies have helped temper price pressures, core consumer inflation has hovered near the BOJ’s 2% target for four years, challenging the government’s view that Japan has yet to fully escape deflation.

The core consumer price index (CPI), which excludes volatile fresh food but includes fuel costs, rose 2.1% in September from a year earlier, data showed on Friday.

Some analysts say the government’s reluctance ​to declare an end to ​deflation reflects concern that doing ⁠so would narrow its room to pursue accommodative fiscal and monetary policy.

Declaring an official end to deflation could also draw calls to tweak a joint government-BOJ statement, signed in 2013, pledging ​coordinated efforts by the two sides to end deflation including by “pursuing monetary easing to achieve ​the BOJ’s inflation ⁠target at the earliest date possible.” The government and BOJ reaffirmed the joint statement in 2025.

“I hope the BOJ conducts monetary policy appropriately to stably and sustainably achieve its 2% inflation target, taking into account the principles of the joint BOJ-government statement,” Kiuchi ⁠said.

Considered an ​advocate of loose monetary policy, Kiuchi has repeatedly signaled his reservation over ​the BOJ’s rate-hike plans.

Kiuchi said on Tuesday he hoped to attend the central bank’s policy meeting next week, when it is seen keeping interest rates steady, but revising up its ​inflation forecast and signalling its resolve to keep hiking borrowing costs.

FYI:

Japanese investors have now sold foreign bonds for five consecutive weeks, the longest selling streak in four years, and the consequences for global bond markets could be significant. 

As you all know, for decades, Japan has been one of the world’s largest exporters of capital. With interest rates close to zero, Japanese banks, insurers, and pension funds had every incentive to invest abroad but that dynamic is changing.

The yield on 10-year Japanese government bonds has risen by more than 80 basis points since the beginning of the year reaching unseen levels in decades. Some will argue that US bonds still offer higher yields but it ignores the cost of currency hedging. A US bond yields 5% but if currency hedging costs 2.5%, the hedged return falls to 2.5%. Compared with a Japanese bond yielding nearly 2.9%, without currency risk, the decision becomes far less obvious.

Japanese life insurers manage around $2.5 trillion in assets. Several are already planning to maintain or increase their purchases of domestic bonds so we could be looking at a gradual reallocation of capital over several years.

For the United States, which must finance enormous fiscal deficits, this is quite an issue. If Japanese investors reduce their purchases of Treasuries, other buyers will have to step in. Attracting those buyers could require the US Treasury to offer higher yields. (@C_Barraud)

China medtech exports surge, challenging global incumbents

Chinese medical equipment makers are increasingly challenging US, European, and Japanese competitors in hospitals around the world, extending Beijing’s technological prowess to yet another industry.

While treatment centers long relied on machines from GE, Siemens, and Philips, some are now embracing machines like Shanghai-based United Imaging Healthcare’s CT scanners, which can perform full-body scans in five minutes versus the 20 it takes conventional equipment. (…)

Shrinkflation

After decades of increasing in size, newly built homes are shrinking. (Daily Shot)