Hot Core CPI Sorts the Stocks: ASML Delivers, J&J Stumbles

Dear readers,

Wednesday’s inflation report was uncomfortable without being a shock. Headline inflation rose to 3.7 percent in September, exactly as expected. Core inflation, which strips out energy and food, rose 0.3 percent from the prior month against a forecast of 0.2 percent. The ten-year Treasury yield jumped above 5.3 percent, and markets now put the odds of a Fed rate hike in October at roughly 22 percent.

Yesterday’s open question was which stocks can defend their valuations with real pricing power. In this rate climate, that now decides which earnings beats get rewarded.

ASML: Profit Far Above Consensus, but the Stock Slips

Operationally, ASML won over investors. Third-quarter net profit was €4.96 billion, against analyst expectations of a little over €4.1 billion. Revenue rose 55 percent to €11.66 billion, a hair short of consensus. The company now targets full-year revenue of €44 billion to €45 billion, up from €43 billion to €45 billion.

The message behind the numbers matters more. Planned supply for 2027 and 2028 doesn’t cover demand, and customers are already asking for slots in 2029 and 2030. ASML plans price increases from 2027 and is weighing a capacity expansion beyond the 30 percent already planned.

The stock rose in Amsterdam in the morning but traded at about €1,500 in the afternoon, roughly 2 percent below Tuesday’s close. That is a good 14 percent under its June record of €1,748, though the shares are still up about 63 percent this year.

At roughly 28 times 2027 earnings, ASML is not cheap, and with yields climbing, a beat alone no longer carries the stock. The investment case rests on pricing power: a company that rations scarce capacity can lift its margins.

Johnson & Johnson: Why a Beat Wasn’t Enough

J&J fell 5.7 percent on Tuesday to $248.61, even though it raised its full-year outlook. Third-quarter revenue grew 5.9 percent to $25.4 billion. Adjusted earnings came in at $2.59 per share, against a consensus of $2.53. Reported (GAAP) earnings collapsed to $0.09 per share, weighed down by about $5.8 billion for a settlement in the talc litigation.

The MedTech division was the problem. It grew just 2.5 percent to about $8.6 billion and missed expectations, while pharmaceuticals grew 7.7 percent. Within pharma, Tremfya grew 68 percent. Management plans to spin off the orthopedics unit DePuy Synthes by mid-2027.

The shares now sit about 11 percent below their September high of $281.07. The raised guidance, to adjusted earnings of $11.05 to $11.15 per share, supports the pharma side of the story. Whether a spin-off actually lifts the weaker MedTech business out of its valuation discount remains open.

Should investors sell immediately? Or is it worth buying ASML Holding?

BASF and Evonik: A Sweetened Offer?

According to people familiar with the matter, BASF is considering raising its offer for Evonik. The first proposal reportedly stood at €22.15 per share, which would imply an enterprise value of more than €14 billion. Evonik rejected it as too low. A figure around €25 is being discussed, but BASF wants a look at Evonik’s books first.

For Evonik shareholders, the signal is clear: talks are open, and the gap between offer and demand is the number to watch. For BASF investors, a higher price means a heavier financing burden. For now this is speculation from negotiating circles, and no formal offer has been made.

Cloud Beats On-Premises Servers, but Not Every Cloud Survives

On Tuesday, Barclays downgraded HPE, Dell and NetApp to Equal-Weight (Neutral). The reasoning has two parts. Rising memory prices squeeze hardware makers’ margins. And enterprise customers are running AI projects mostly through cloud providers instead of buying their own infrastructure. All three stocks fell.

A Gartner study takes some of the shine off the other side of the trade. By 2030, it says, more than $3.5 trillion of AI infrastructure spending could be written off, and over 80 percent of specialized neocloud providers would have to end standalone operations.

Established platforms look better placed than latecomers. Mizuho appears to share that view on Oracle: the bank reiterated Outperform with a $320 price target, while the stock trades at $143.20. Anyone betting on AI infrastructure should separate providers with strong balance sheets from the stragglers.

Bumble: A Big Premium, but Far Below the IPO

Ithaca Holdings is buying the dating app Bumble for about $1.3 billion in cash. The offer of $6.05 per Class A share is 138 percent above the October 9 close. The Blackstone fund and founder Whitney Wolfe Herd have consented in writing, so no shareholder vote is needed. The stock trades at about $5.95, just under the offer price.

The price shows how far the value has fallen. Bumble was valued at $14 billion at its 2021 IPO. In the second quarter, revenue fell 15.2 percent to $211 million, and paying users dropped 16.4 percent to about 3.2 million. Existing shareholders get an exit at a premium, but far below earlier highs. Anyone buying now is betting on a sweetened bid, which looks unlikely with the major holders already on board.

The Takeaway

The Fed meets on October 27 and 28, and the next inflation data arrives on November 10. Until then, the market will keep rewarding companies that can show pricing power in their numbers, as ASML did, and punishing the ones where a weak division overshadows a beat, as J&J’s drop showed. For BASF and Evonik, the next detail on the offer is what to watch.

Best regards,
The StocksToday.com Editorial