Wall Street Week Ahead: Earnings flood, Fed meeting will test rickety AI market rally

Investors are feeling anxious about the state of the artificial intelligence (AI) market, which has been a significant driver of the U.S. equity bull market that recently celebrated its fourth anniversary. The tech-focused Nasdaq Composite index experienced a slight decline on Friday, following its most substantial drop since June the previous day. This downturn was largely attributed to disappointing quarterly earnings reports from major players like Meta and Lam Research. Meta, known for its substantial investments in data centers, and Lam Research, a prominent semiconductor firm that has been a standout in the AI sector, both fell short of investor expectations.

Next week promises to be eventful, with three other major tech companies—Alphabet, Microsoft, and Amazon—set to release their earnings reports. These companies are part of a larger group that will account for about one-third of the S&P 500’s quarterly results. Additionally, the Federal Reserve's upcoming interest rate policy meeting on Wednesday is expected to add further volatility to the markets.

Nick Giorgi, chief equity strategist at Alpine Macro, commented on the current market dynamics, stating, "There are a lot of balls in the air." He emphasized the importance of upcoming tech earnings, noting that the market is currently scrutinizing the substantial investments associated with AI. "The market's just not giving the benefit of the doubt to companies that are spending a ton of money on building this all out, which to us is actually very healthy, but still does augur for some short-term pain," Giorgi added.

Despite facing challenges such as rising Treasury yields and increasing energy costs due to ongoing conflicts in the Middle East, U.S. corporate profit growth has supported stock market gains this year. According to LSEG IBES data, more than 100 companies have reported earnings so far, with S&P 500 profits projected to rise over 32% compared to last year. Next week is anticipated to be the busiest of the earnings reporting season.

King Lip, chief strategist at BakerAvenue Wealth Management, observed that the forthcoming earnings reports would be crucial in determining whether the recent pullback in tech stocks represents a buying opportunity or signals a deeper correction. "What we need is just another round of really strong earnings," Lip stated.

Alphabet and Microsoft are scheduled to announce their earnings on Wednesday, while Amazon will follow on Thursday. Investors will be particularly attentive to the guidance these companies provide regarding their capital spending strategies and whether they are seeing returns on their significant investments.

Hyperscalers, or large cloud service providers, are projected to spend around $800 billion this year, positively impacting a variety of companies involved in AI development. However, rising financing costs have led investors to question the sustainability of such expenditures. Kevin Mahn, president and chief investment officer at Hennion & Walsh Asset Management, remarked, "Earnings are critical to the overall confidence level of the AI trade and how much longer the spend will continue."

In addition to tech companies, next week will also see earnings reports from prominent chipmakers like Intel and Sandisk, which may further influence sentiment around AI investments. Other notable companies reporting include pharmaceutical giant Eli Lilly, oil companies Exxon and Chevron, and industrial equipment leader Caterpillar.

As the Fed prepares for its meeting, the prospect of additional interest rate hikes is also under scrutiny. In September, the Fed raised rates for the first time in 2023 in an effort to combat inflation. However, recent data from LSEG indicates that there is less than a 10% chance of another rate hike being announced on Wednesday. This skepticism may stem from the timing of the announcement, coming just a week before the midterm elections.

Despite the current pause, market expectations are leaning towards a potential rate increase at the Fed’s December meeting, with futures indicating an approximately 80% likelihood of such a move. Walter Todd, chief investment officer at Greenwood Capital, expressed interest in any guidance that Fed Chair Kevin Warsh might provide during the press conference following the rate decision, particularly regarding the outlook for December. "Does he say something to give an idea about December, because right now the expectation is there is going to be a hike?" Todd questioned.