Prof G Markets - Microsoft Soars, Meta Sinks: Has The AI Narrative Flipped?

Episode Date: July 30, 2026

Ed Elson is joined by Gil Luria to break down earnings from Microsoft and Meta, and what the disparate results reveal about what’s next for the AI trade. Then, Mike Gapen returns to discuss the Federal Reserve’s interest rate decision and why he thinks rates might stay stagnant for the rest of the year. Finally, Ed gives his take on FIFA’s decision to sell its profits.  Gil Luria is the Head of Technology Research at D.A. Davidson. Mike Gapen is the managing director and Chief U.S. Economist at Morgan Stanley. Subscribe to the Prof G Markets Youtube Channel  Check out our latest Prof G Markets newsletter Follow Prof G Markets on Instagram Follow Ed on Instagram, X and Substack Follow Scott on Instagram Send us your questions or comments by emailing [e-mail] Learn more about your ad choices. Visit podcastchoices.com/adchoices

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I'm Ed Elson. It is July 30th. Let's check in on yesterday's Market Vitals. The major indices fell. sharply. As President Trump vowed to resume strikes on Iran, he told Fox News, quote, we're going to beat the f*** out of them. Brent crude rose back above $90 per barrel. Meanwhile, the Federal Reserve held interest rates steady, sending stocks even lower. More on that later. And finally, Treasury yields surged. Okay, what else is happening? Two of the largest companies in tech

reported earnings yesterday, but investors only were rewarded. ordered one of them. Meta grew revenue 28%, slightly beating expectations, but its profits fell 13%, because costs jumped 55%. It's operating margin dropped from 43 to 31%, and company's sales forecast came in under analyst expectations. The stock fell as much as 11% in after hours trading. Microsoft, on the other hand, had great news. Revenue was up 18% Eurovier. Profits grew 32%. Azure, its cloud business accelerated to 43% growth, which was faster than last quarter and faster than analysts expected. The stock popped as much as 10% after the bell. What the two have in common is spending. Both are building AI infrastructure at record scale and neither show any signs of

slowing down. But investors seem to be more frightened than excited. Microsoft stock is down nearly 20% this year. Metis is down 10%. This raises. This raises a an important question. How much longer will investors fund this buildup? Here at Alba's answer. We're speaking with Gil Luria, head of technology research at DA Davidson. Gil, good to see you.

We'll start with meta, and then we'll get to Microsoft. Investors are not happy with these meta results, at least in after hours. We'll see how it moves throughout the day. What did you make of that earnings report? It was barely possible. So they beat by just a little bit, and they guided below expectations for next quarter.

As you pointed out, they're growing expenses faster than revenue. They're growing COPEX faster than revenue. They increased their COPCs guidance by just a little bit, which was a little relief. But overall, it's not an impressive result. And more importantly, Mr. Zuckerberg had a whole hour to explain how he's going to monetize the massive AI investments. and he didn't really give us a firm answer. He basically said, we'll figure it out as we go. And that's just not good enough right now,

not with how nervous investors are about this investment, and he just left investors wanting more. That's why you're seeing this disappointment. That was going to be my main question, is has he laid out a plan for how he will actually generate a return on these incredible AI infrastructure investments, which continue to rise? I mean, as you say, he raised the CAPEX by a little bit, but he still raised the CAPEX.

Is there anything? I mean, do we have any understanding? There was the rumor, for example, that META would start a cloud business. That was the reporting we heard. Do we not know at all? We know what the pieces are, and he confirmed that that is one of the pieces they have on the board. So, one is, hey, we sell a lot more ads for a lot more money. They've been doing that recently.

Let's not forget. Let's be kind to meta for a second. They just grew 28%. That's almost twice as fast as Google. There's massive share gainers in the advertising market. That's the part investors would love to own. It's all the other stuff that they're less comfortable with. But what he said is, okay, we do that, right?

Then we do have this opportunity to sell compute to others. We have opportunity to sell enterprise products now. But really what we want to do is be selling compute to consumers. We think we have the biggest opportunity in selling personal assistance to consumers. We think we're going to be better at that than anybody. How those pieces rank, there were a lot of questions on the call, and he wasn't clear about priorities or timing on any of that. But those are the pieces, and they intend to monetize in any of those pieces while continuing

to invest. He was asked the question directly, why are you still investing while you turn around and sell capacity, and he said, well, we're selling it for more than we bought it at. So we're going to keep doing that. And it's going to help us fund the build-out, which is somewhat satisfactory at best. Help me understand what's going through his mind and his team's mind, because this is the multi-trillion dollar question. He knew this was coming. This is the only question shareholders have. This is the question everyone has. And he comes out and, and, and, seems to filibuster. I mean, I can only glean from that. Maybe he actually doesn't know what

they're doing with that data center capacity. Like, what do you think is actually going through his head? Well, we have to remember that Mr. Zuckerberg has controlling interest in meta. He's the owner-founder, and he treats meta as such. And when you're invested in meta, you're on, you're along for the ride. This is like much like Elon Musk companies, especially SpaceX, right? You no longer controls Tesla. He still controls SpaceX. You're on for the ride. And if Mark Zuckerberg wants to invest because he wants to win the AI race and compete with Anthropic and Open AI, he gets to decide to do that. He doesn't have the type of governance than many of the other companies that we talk about. We'll talk about a good one, Microsoft soon. And so he can just decide to do that. This has been

much to the frustration of investors over this. This is why Meta-Trades at such a low multiple of earnings. is because it's Mr. Zuckerberg's show, and he gets to decide how to run it. Let's pivot to Microsoft, a very different story. Investors are very excited. What did you make of Microsoft's earnings? This is a narrative-breaking result.

So Microsoft, for most of this year, has been cast aside as losing an AI because AI is so good that it's going to ruin the software business, and then AI is so bad that they're wasting money investing in data centers. And they got the raw end of both of those narratives. And what they just reported will break both of those narratives.

Their software business is doing very well. On the office side, on the commercial side, on the infrastructure software side, Azure accelerated after growing four quarters at around 39% and accelerating to 43, Amy Hunt just got into 45 next quarter. This is a business that's more than 100 billion. dollars that's growing that fast. And so both the software side's doing well, the infrastructure side's doing well. So they're accelerating growth at the same margins, which is to say a lot of incremental

profit that should be paying for those investments. But the most important thing she just did on the earnings call is let us know that capital expenditures are going to be up year over year from this year. Right? So I want to emphasize why that wording is so important. If she said down year every year, all hell would break loose in the market, right, as a reaction, right? All semi-stocks would get cut in half. If she said what the CFO of Google said last week, that Cappex is going to grow significantly and put mustard behind that significantly, then Microsoft would be in a lot of trouble, just like Google was. But she went right down the fairway and said capital expenditure is going to be up. That's very good news, because if they can grow Azure at 45%, and go capital expenditures

is a lower rate, that means cash flow is bottom and is increasing from here. And by the way, Google's cash flow negative met a basically break-even. Microsoft had $20 billion of positive free cash flow in the quarter, and they just guided that they will also have positive free cash flow next year. So they delivered a great result that should really change the narrative on Microsoft going forward. Now that you bring up Google's negative cash flow, and while we have you, I'd love to get your reactions to that. I mean, it seems like everyone is worried about childish-like spending when it comes to AI, irresponsible spending. It seems like Microsoft has demonstrated with this report that they are something of an adult in the room.

It's hard to make the case for Google at this point. I was quite struck by that negative free cash flow that they reported. How did you feel about it? Absolutely. It was shocking. This is one of the best businesses ever created, and they went to cash flow negative and showed intent to stay there. It was jarring.

It wasn't jarring. The market reacted appropriately to that news and really took a step back. That's why I was looking forward to this Microsoft. result because you said exactly right. They're the adult in the room. In the past, they've shown that, and they continue to show that. If the returns are there, they'll invest, but they're not doing it in a big game theory, game of chicken competition with the other companies. They're doing it because it's good business, not because they feel a need to beat somebody at something or get the artificial general intelligence first or anything like that.

And that's why I expect there to be a big sigh of relief across the AI trade. Because if Microsoft is setting the tone, as opposed to less responsible actors like Mr. Zuckerberg, or to some extent, Google, then maybe we're in better hands than we thought we are. Just looking at the stocks of some of these names, I mean, we'll see, after hours trading might change things. But as of close, year-to-date, Microsoft is down 18%.

Meta is down 10%. Google's up 9%. Just what is your view of the valuations at this point? You mentioned how low metas multiple is. Where do you stand on the prices at this point? I think the important payer here is Microsoft and Google. A year ago, when everybody thought Google was done, Microsoft was trading it 30 times,

and Google was 18 times. As of a week ago, it had completely flipped. Google was the big winner, Microsoft was the big loser, Google was trading it 30 times, Microsoft was trading it 18 times. We were expecting a reversion to the mean, and between the Google result and this Microsoft result, we're going to get it.

Why should these revert to the mean? Because they're very similar companies with very similar positioning in AI. They both have very good assets to bear in the growth of AI. They're growing revenue and earnings at a similar rate. So they're very comparable. They should trade in a similar multiple,

but that pendulum swung way too far a year ago. It swung in Google's favor this year. We expect there to be a reversion to the mean. Final question before we let you go, Gail. It seems like the AI trade has had something of a shaky few weeks. I mean, the chip stocks have been getting crushed. The credit default swaps and a lot of, these names like NVIDIA, those have been rising. There is increased fear that a lot of these

companies, these big tech companies, which are now issuing billions of dollars of debt, might default, that they might not actually make those payments combined with this news or this reporting that we saw from NICA basically telling us that there is almost $2 trillion worth of debt that is off-balance sheet for a lot of these tech companies that is being issued in these SPVs, that are largely funded by private credit firms. In some, a lot of weirdness and concern. You cover this sector. What do you make of those concerns?

Do you think that they are warranted? Yes. And we should be concerned, and we have to be ballots. You're going to hear me say that I believe that we are, that the investment in AI infrastructure is a wise one, that we're going to get good returns. We're already starting to do that. But I don't like circular financing.

I don't like that we're building on the market. leverage. We have enough cash flow. We have enough cash on our balance sheets to do this build-out. I don't like the special purpose vehicles. You know where that term came from. I don't want to go back to Enron. So we have to be balanced here. We do need to be worried about excessive behavior while at the same time we can believe that these AI tools and the technology are going to pay off both for consumers as well as businesses and be worth the investment. We need to do both. And we need to encourage these companies to invest wisely because the good ones will and they'll emerge as winners, the bad ones will put the whole system at risk. But specifically on CDS is on Nvidia and the other

mega caps, the credit rating and credit worthiness of Nvidia, Microsoft, Amazon, and Google is better than any country but the United States of America. So I'm not too worried about their ability to pay their debt. Their technology is so good and their winner-teachery. all markets, that they're literally charging a global tax on technology, that means they can pay down their obligation. So I wouldn't go as far as worrying about the creditworthiness of these big companies. All right. Gil Lurie, head of technology research at DA Davidson. Gil, always appreciate it. Thank you so much. Thank you. After the break, the Fed holds rates again. And if you're enjoying the show so far,

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dissenting in favor of a quarter point hike. The Fed's policy statement hardly changed from June, with officials pledging to, quote, deliver price stability, but the Fed offered little insight into what comes next, leaving investors to weigh the possibility of a rate hike at the September meeting. Yields on longer-term U.S. government bonds surged after the decision. The 30-year treasury yield jumped to 5.21 percent, the highest level since mid-2007, and the Dow dropped 1,100 points its worst day since April 2025.

joining us to discuss this federal interest rate decision. We are joined by Mike Gapen, managing director and chief U.S. economist at Morgan Stanley. Mike, thank you for joining us. I have heard this interest rate decision described as a hawkish hold. Do you agree with that characterization? What do you make of the decision? Not necessarily. I do think markets went into the meeting thinking the risk here is that,

we would get a Fed share who wanted to demonstrate inflation fighting bona fides and would raise rates despite what was generally favorable incoming data over the intermediate period. And you're right, it was nine to three, and there were three dissents in favor of a hike. But what you didn't hear was, say, a Fed share that said, oh, the decision was close. We debated it. Some wanted to hike, some didn't. Here was the rationale behind that. He didn't really offer much of a, in any way, of an explanation of why the Fed decided to stay on hold

or why the three dissenters in favor of a hike felt that way. So yes, on the vote alone, it was 9 to 3. It felt like maybe there was debate for a hike, but I'm not convinced it was a hawkish hold in the sense that he didn't say necessarily express a willingness to tighten policy. in the near term. So I think markets came away from this a little confused. I think it's fair to say the Fed chair that wants to hike just for credibility reasons, that path has diminished in terms of its probability.

It's unclear what came behind it. If the market reaction is any vote, it was a little more of a dubbish hold because what the markets did was take down the probability of rate hikes later this sheet. and it raised what we would call break-even rates of inflation. So there's a gap between yields on nominal treasury securities and yields on real treasury securities, and that gap includes the market's view of inflation expectations. So what we call break-even rates of inflation.

So those went up today. So I think the market's a little confused, and it wonders if maybe the bar for rate hikes is higher, than they thought. And what that would mean is potentially inflation that runs hotter. So I think it was a bit of a confusing message for markets. Yeah, I've been trying to gauge what the markets are actually saying because, I mean, the bond market did not seem happy. If we look at the 30-year yield hitting 5.2 higher since 2007, stock market did not seem very happy either. Basically, all of the major indices were down. And I can't quite tell if this is to do with the Fed decision or if it's to do

with maybe Iran or maybe tech earnings. I mean, if you had to sort of characterize what the market seems to care about right now and the extent to which it relates to the interest rate decision. And also at the same time, like, if my assumption is that investors are not looking for a rate hike right now, or at least equity investors. And so if the takeaway is maybe it's more dovish than expected, but I guess to your point, that doesn't seem to be consensus on that, then you think that maybe investors would be happy about that. I'm waffling a little bit because it's clear that we don't really understand. So what do you think the markets are actually telling us? Let me answer this, or start an answer anyway. Yeah. By taking a step back and

seeing what markets did going into the meeting, right? So Warsh did. He was nominated. He came in. He gave press conference in June. We had some initial remarks from him that the markets interpreted as fairly hawkish, a Fed share who might be committed to achieving 2% inflation outcomes, right? Chastising the Fed for not having delivered on that for five years. So then we got some positive inflation data, and the market thought, well, that must matter. And it reduced it. its likelihood for rate hikes. But then we got more conflict in the Middle East, and oil prices went up. Somewhere in there, before the oil conflict came around and oil prices went up, Chair Warsh had said at the ECB's meeting in Cintra in Portugal, he said, well, you know, inflation risks have come down.

Right. So we got favorable inflation. Oil prices came down. He said things were moving in the right direction. and all of a sudden oil went the other direction, and what did markets do? Markets responded to that by increasing the probability of hikes in the short term, and it raised 10-year yields almost down a one-to-one basis with movements in oil, and moving 10-year yields higher, real rates rose, but market expectations of inflation stayed stable.

My interpretation of that is they viewed Chairman Warsh as bringing a hawkish reaction function. And if oil prices mattered on the way down, they must matter on the way up. Therefore, the Fed's going to respond to this by raising rates. So it went into the meeting with the yield curve flattening, moving higher but flattening because they priced in hikes in the front end and moved a 10-year yield higher. And real rates went higher and the dollar appreciated. What happened after today's meeting? All of that reversed. But front-end yields came way down. nominal 10-year yields actually went up. As you noted, the 30-year rate went up a lot, and the dollar depreciated.

So the market took down probability of cuts and priced in inflation running higher than it had expected. Now, one would interpret that as saying the Fed has a more dovish reaction function than we thought. I think as you're saying, and I would agree, I'm not sure that's the right takeaway. What we know is that maybe that inflation fighting Fed didn't appear today. Will it appear tomorrow? Maybe, maybe not. But the market came out of today thinking there's a higher bar to raise rates. And if so, the market is probably testing the Fed now.

It's saying, oh, you want to restore price stability, but you're not really saying that tighter monetary policy or higher short-term interest rates are part of that. that solution. So that's about the best I can do given development. That helps on on the inflation front itself. We had the personal consumption expenditures for May which hit 4.1%. That is the Fed's preferred measure. So you'd think maybe that's what they're going off of. But also we had the the CPI, which came in a little bit lower in June 3.5. Directionally speaking, though, still not great. The target is to the Iran conflict.

There's a new update every day. We had another one today that Iran's going to take a beating. That was per the president. I mean, if you had to put your money on this thing resolving itself soon, I think you'd have to bet no. And then the outcome of that would probably be higher prices. But who knows? Where do you stand from your seat on?

the inflation picture right now, do you think that we will get it under control anytime soon? Well, we do think inflation will come down into year-end. So that 4% figure you mentioned, we think, is probably the peak, and inflation will be coming down. I think the question is ultimately, in our minds, how far does it come down? And I think this is an argument that the rest of the committee was probably debating today. So Chairman Warsh has a view. You can call it unconventional. That's fine.

The rest of the committee, I would say, has a fairly conventional view. And I think what they're debating is, feels like inflation will be coming down. The question is how much and how long do we let this play out? And so you may still get rate hikes later this year if you talk to the rest of the committee, and that's what I think the dissents were today. Our view is that inflation comes down to around 3.3 or so by the end of a year and could diminish further in 2027. And if that's right, then we think the Fed can stay on hold for the rest of the year. If not, and that's too optimistic, you're right. Maybe oil prices have

greater second round effects on other transportation costs, so it's not just a gasoline story. It's things like airfares and food prices. So maybe conflict in the Middle East can keep oil prices and other core inflation prices elevated. The Fed has no choice but to receive. respond to that. Or cooler heads prevail over time and exit ramps are taken and payback from tariff inflation and shelter prices and so forth, pull inflation down. We'll see that's still highly uncertain. Our view is that inflation will moderate enough to keep the Fed where it is, but obviously the risk is that doesn't happen later this year. The Fed still has to come back in raise rates.

That is encouraging to hear. Just before we wrap here, just confirmation on your interest rate expectations, sounds like you think that we'll stay where we are until the end of the year. That's our expectation, is that we feel like disinflation is coming. We feel like we've gotten a strong enough signal for that. If so, we think the Fed will roll into each meeting and just decide to stay where they are. Obviously, the risk to our view is that that's not true. inflation stays firm, and we get rate hikes later this year.

All right. Mike Gapen, managing director and chief U.S. economist at Morgan Stanley. Mike, always appreciate your time. Thank you. Thank you. FIFA, football's 122-year-old nonprofit organization, has just made a controversial decision. It will be selling its profits. The FIFA Forward Enterprise is FIFA's new investment vehicle, which plans to sell a 20% stake in the entity at a valuation of roughly $20 billion. What actually is the FIFA Forward Enterprise? It's essentially the new legal home of all of FIFA's media and commercial rights, basically all the ways that FIFA makes money.

Now, why is this so controversial? Well, because FIFA is and always has been a non-profit. The mission of FIFA is to, quote, promote and improve the game of football, it is expressly not to generate financial returns, and that is literally written into its charter. According to FIFA's financial statute, the association is, quote, a non-profit organization and is obliged to spend its funds for this purpose. The statute goes on to clarify that as an association, quote, no dividends are paid. In the event of the dissolution of FIFA, its funds shall not be distributed,

but transferred to the Supreme Court of the country in which the headquarters are situated. In other words, FIFA is legally bound to not profit from its operations. And by the way, that was by design because the founders clearly knew that by selling access to football to the beautiful game,

well, the beautiful game would cease to be beautiful. So how is it even legal for Gianni Infantino, FIFA's president, to be selling a stake in FIFA? Well, here is the catch. He's not selling a stake in FIFA. He's selling a stake in the FIFA forward enterprise, the for-profit entity that he made up specifically in order to circumvent the laws that were put in place by this nonprofit organization all of those years ago. This is financial hijacking of the highest order. Infantino, who presented Trump with the very first

FIFA Peace Prize, has now taken a page out of Trump's financial. playbook. He is now using financial engineering to steal value from one of the most storied institutions in the world and then redistribute those funds to his financial backers and ultimately to himself. If that sounds almost exactly the same as what Trump has done with the White House, it is. And it's not a coincidence that the two of them have become very good friends. This is the beginning of the end of football, as we know it. And I say that as a lifelong football fan. But don't take it from me. Take it from UEFA, the European Football Association, which recently said that this quote crosses a line that football's governing associations should never

cross. The sole and governance of football are not assets to trade, especially with zero transparency as to who gains financially. That was UEFA's statement, which I endorse. However, I would add one small edit, and that is that we do know who gains financially. It's JP Morgan. the bank that'll advise and execute this deal. It's Josh Kushner, the Open AI investor and the brother of Jared Kushner, who is expected to lead the deal. It is basically anyone involved in this transaction. We are reaching historic lows as a society.

And if ever you thought the beautiful game was exempt from this corruption or from greed or fraud or any form of scammery, well, think again. This is just beginning. Okay, that's it for today. This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our video editor is Brad Williams. Our research team is Dan Chalon, Kristen O'Donoghue, and Mia Silverio,

and our social producer is Jake McPherson. Thank you for listening to Prof G Markets from Profg Media. If you liked what you heard, give us a follow. I'm Ed Elson. Tune in tomorrow for a conversation with legendary short-seller Jim Chanos.