Daily market update: Lloyds, Shell, Alphabet, Microsoft

Buoyed by strong corporate results, European markets chalked up strong gains on Thursday, bucking the negative trend seen in Asia overnight.

While the Federal Reserve decision held few surprises, US futures pointed to a weak start thanks to a poor reception for Google-owner Alphabet’s earnings, announced after the market bell on Wall Street yesterday.

The numbers have only further magnified concerns about the sustainability of the huge sums currently being spent on AI.

Several domestic-facing stocks also made gains in London on relief that the Budget hadn’t caused more of a stir, with gilt yields and sterling remaining stable in the wake of Chancellor John Healey’s announcement.

The next key test of market sentiment will come with the decision from the European Central Bank on rates later today.

Lloyds

Lloyds’ ability to absorb the pain inflicted by Chancellor John Healey yesterday was in evidence in its third-quarter update as profit doubled, even if a large chunk of this increase reflected the absence of new provisions related to motor finance mis-selling.

There had already been a relief rally in the sector as the temporary increase in the surcharge was not as severe as feared. It was the equivalent of expecting a kick in the teeth and getting a slap on the wrist instead.

While results were largely in line with expectations there was some disappointment as underlying revenue came in modestly below forecasts and Lloyds failed to lift guidance, with warnings of a more competitive market for customer deposits.

There were indications of further progress in CEO Charlie Nunn’s strategy of reducing the company’s reliance on fluctuating interest rates by expanding its wealth management and insurance footprint.

For now, higher for longer interest rates are buoying the company and there is little sign of any increase in bad debts to cause the market significant disquiet.

Alphabet

Vast spending on AI seems to be tolerated by investors if companies’ earnings are unblemished. This is where Google-owner Alphabet has fallen down.

While overall revenue was solid in the quarter, the company saw weakness in its core search advertising business as it burns through cash at rates which would make the main character in Brewster’s Millions blush.

There are clear signs that Google’s chatbot-style ‘AI mode’ is hurting traditional search and while there was always likely to be a transition here, the deceleration in growth is still causing real disquiet.

Profit is hurt by the impact of movements in the valuation of some of its big investments, including SpaceX, and regulatory fines aren’t helping on the cash flow front either.

More positively there was strong growth in the cloud business as the company sees strong demand for its AI services and as it sells computing capacity to rivals, helping to explain why the business is so committed to the AI arms race.

Only time will tell if Alphabet’s expensive all-encompassing strategy of developing its own chips, data centres and large language models is the right one. The reaction to this latest update suggests that more than a few doubts persist in the market.

Microsoft

Microsoft is getting credit for the relatively parsimonious approach to AI spending revealed by its latest quarterly earnings update.

The lower-than-expected capex number may have been driven by delays in construction of new data centres but, more significantly, the company still managed to generate meaningful free cash flow at a time when rivals are seeing cash go out the door.

This financial discipline is underlined by plans for job cuts, with news emerging this week that Microsoft is offering buyout packages to tens of thousands of staff.

Crucially, Microsoft also demonstrated the growth which investors are demanding in return for supporting its grand AI-driven ambitions. Growth in its Azure cloud computing unit was a key driver behind better-than-expected revenue and profit.

There was compelling evidence of Microsoft seeing increased adoption of its AI-powered assistant Copilot – also helping to justify its AI push.

Shell

You might have expected Shell’s results to drive a much bigger market response but, given the recent strength in oil prices, there was little to surprise investors in the company’s bumper third-quarter showing.

The last time profits were at these levels was in 2022 when Russia’s invasion of Ukraine created its own energy shock to rival that seen as a result of the Iran conflict.

A big reduction in refining capacity globally is driving record margins for this part of Shell’s business.

The current extremely favourable market conditions may not last forever, but Shell looked to share the benefits with shareholders as it announced an increase in share buybacks.

Typically, this is a more flexible option for companies than increasing the ordinary dividend, where there is greater expectation from investors of payments being maintained or increased.