Market Snapshot

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📉 Banana Bits

• U.S. inflation climbs to 3.6% as economic growth accelerates to 3.4% in the third quarter.

• ECB President Christine Lagarde announces plans to step down in February 2027, months ahead of schedule.

• Alphabet suffers its worst-ever trading day, wiping out nearly $500 billion in market value.

• Amazon and Intel tumble after hours as AI spending concerns and disappointing forecasts weigh on shares.

• Bank of Japan holds interest rates at 1.25% while signaling more hikes could be coming.

• Gold prices slide toward $4,000 as stubborn inflation fuels expectations of further Fed rate hikes.

Market News

Wall Street's AI Reality Check

Wall Street saw a sharp rotation out of technology stocks as renewed concerns over AI spending and profitability weighed on major tech companies. The Nasdaq Composite fell 1.38%, led by a historic 12.6% selloff in Alphabet after the Google parent missed revenue expectations and reported massive AI spending that pushed free cash flow into negative territory. Amazon shares also declined in after-hours trading as heavy infrastructure spending and disappointing revenue guidance raised concerns about returns, while Intel's weaker-than-expected outlook sent its stock plunging after the bell.

Despite the tech weakness, most S&P 500 stocks advanced, highlighting broad gains outside the market's biggest technology names. The Dow also came under pressure as Caterpillar dropped 9.3% despite beating profit expectations. Meanwhile, Treasury yields declined, while Microsoft's $25 billion corporate bond offering attracted roughly $115 billion in orders at its peak.

Economic data complicated the outlook for interest rates as the US economy grew at a 3.4% annualized pace in the third quarter, accelerating from 2.2% in Q2, supported by stronger investment and consumer spending. The Fed's preferred inflation gauge also rose 0.5% in September, while annual PCE inflation climbed to 3.6% from 3.4% in August, moving further above the Fed's 2% target. The combination of resilient growth and persistent inflation reinforced expectations that the Fed could raise interest rates again, just a day after holding its benchmark rate steady at 3.75%–4.00%.

Across the Atlantic, the European Central Bank also held interest rates steady, keeping its deposit rate at 2.5% while warning that elevated energy prices could push inflation higher. ECB President Christine Lagarde announced plans to step down in February 2027, months ahead of schedule.

On the corporate front, Anthropic reportedly accounted for more than a third of SpaceX's third-quarter revenue, highlighting the growing interconnectedness of major AI players. Starbucks exceeded US comparable-sales expectations, Coinbase returned to profitability thanks largely to gains on its crypto investments despite weaker trading revenue, Reddit announced plans to restrict access for logged-out users, and Roblox reported weaker-than-expected user numbers and fourth-quarter bookings guidance.

Peel Take: Wall Street's AI trade is facing a reality check as investors increasingly question whether massive infrastructure spending can translate into sustainable revenue and profits. The broad gains outside major tech stocks suggest investors aren't abandoning equities altogether but are becoming more selective about valuations. With inflation remaining stubborn and economic growth resilient, the Fed could face pressure to raise rates again, putting additional pressure on highly valued technology companies to deliver stronger earnings.

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What's Ripe

Carvana Co. (CVNA) 15.68% 

• Carvana surged nearly 16%, making it one of the S&P 500's top performers after the online used-car retailer reported record third-quarter revenue of $8.04 billion, up 42% year over year, and more than 217,000 vehicles sold.

• Retail vehicle sales climbed 39% from a year earlier, while adjusted EBITDA reached a record $800 million. The strong results highlighted robust demand for its digital car-buying platform, reinforcing investor confidence in the company's ability to expand sales and capture a larger share of the used-car market.

• Peel Take: Carvana's impressive quarter shows that its online-first business model is gaining traction in the competitive used-car market. Record revenue and strong vehicle sales suggest its expansion strategy is delivering results. However, maintaining profitability while scaling operations and managing vehicle acquisition costs will be crucial to sustaining growth, particularly as affordability concerns and elevated financing costs continue to influence consumer demand.

Eli Lilly & Co. (LLY) 6.63% 

• Eli Lilly surged 6.6% after the pharmaceutical giant reported third-quarter earnings that exceeded Wall Street expectations, fueled by booming demand for its blockbuster diabetes and obesity treatments, Mounjaro and Zepbound.

• Revenue jumped 39% to $24.4 billion, while adjusted earnings reached $7.48 per share, beating analysts' estimates. Strong sales across its weight-loss drug portfolio prompted the company to raise its full-year revenue forecast to $91–92 billion, reinforcing investor confidence in its ability to capitalize on the expanding GLP-1 market.

• Peel Take: Eli Lilly continues to demonstrate that the weight-loss drug boom is translating into substantial earnings growth. With demand for Mounjaro and Zepbound remaining strong, the company is well-positioned to benefit from the expanding obesity treatment market. However, competition, pricing pressures, and manufacturing capacity will be critical factors in determining whether Lilly can sustain its momentum and justify its premium valuation.

What's Rotten

Marvell Technology Inc. (MRVL) 13.24%

• Marvell plunged 13.2% following reports that the semiconductor company is in advanced talks to acquire optical-networking specialist Lumentum (LITE), which has a market capitalization of roughly $83 billion. The potential deal could strengthen Marvell's position in AI infrastructure by expanding its exposure to high-speed optical connectivity, a critical component of modern data centers.

• However, investors appeared concerned about the potential acquisition's hefty price tag, financing requirements, and integration risks. No final agreement has been announced, while Lumentum shares edged up 0.6% on Thursday as takeover speculation continued.

• Peel Take: Marvell's sharp decline suggests investors are questioning whether an AI-driven acquisition would justify its potentially hefty price tag. Acquiring Lumentum could help Marvell capitalize on growing demand for optical networking as AI data centers require faster and more efficient data transmission. However, the deal's valuation, financing structure, and integration risks could outweigh its strategic appeal in the near term, especially as Wall Street becomes increasingly selective about AI-related investments.

Alphabet Inc. (GOOGL) 12.64%

• Alphabet plunged nearly 13% after the Google parent reported third-quarter earnings and revenue that fell short of Wall Street expectations, triggering a record single-day loss of approximately $500 billion in market value.

• Despite Google Cloud revenue surging 103% to $30.7 billion, weaker-than-expected Search and YouTube advertising revenue overshadowed the company's AI growth momentum. Meanwhile, capital expenditures reached $51.4 billion, contributing to negative free cash flow of $9.1 billion and raising concerns about the returns on its massive AI investments.

• Peel Take: Alphabet's historic selloff highlights how Wall Street's patience with the AI spending boom is wearing thin. While Google Cloud continues to benefit from growing AI demand, strength in one division may not be enough to offset disappointing performance elsewhere. With investors increasingly scrutinizing the returns on massive AI investments, Alphabet faces mounting pressure to prove that its AI strategy can strengthen its core businesses and deliver sustainable profitability.

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🦈 Deal Dispatch

M&A, IPOs, And Other Notable Transactions

• FuriosaAI Takes Aim at Nvidia With a $2.9 Billion Valuation

• Marvell Eyes Lumentum Takeover to Supercharge AI Ambitions

• DoorDash Strikes $17 Billion Deal to Acquire Instacart.

• Thrive Holdings Agrees to Take ADT Private in a $15.3 Billion Deal.

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Banana Brain Teaser

Previous

A private equity firm acquires a company for 12× EBITDA, financing the transaction with debt equal to 5× EBITDA and the remainder with equity. Five years later, it exits at 10× EBITDA, having repaid half the original debt. Assuming no dividends or additional equity investments, by what percentage must EBITDA have grown for the firm to double its invested equity?

Answer: 65% EBITDA growth

Today

A market maker quotes a stock at $99 bid and $101 ask. The stock's true value is equally likely to be $90 or $110. Of incoming trades, 30% come from informed traders who know the true value and trade accordingly, while the remaining 70% come from uninformed traders who buy or sell randomly. What is the market maker's expected profit or loss per trade?

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Happy Investing,
Elie, Mitchell, Fernanda, Nick, & Patrick

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