Stocks Enter Fed Decision and Big Tech Earnings Week After AI-Spending Selloff

The AI-spending selloff that hit Wall Street last week gets its first real test over the next five days. The Federal Reserve meets Tuesday and Wednesday, Oct. 27 and 28, and three of the biggest companies in the world report within about 48 hours.

The Nasdaq Composite fell more than 650 points, or 2.4%, on Thursday, Oct. 22, its worst session since June. The Nasdaq 100 dropped about 800 points, or 2.7%, and the S&P 500 slid nearly 1%. The Dow lost about 100 points that day.

The Fed goes first

The Fed releases its policy statement at 2:00 p.m. ET on Wednesday, Oct. 28, with a press conference at 2:30 p.m. This meeting has no Summary of Economic Projections and no dot plot, so the statement wording and the press conference carry the weight.

In September the Fed raised the target range for the federal funds rate by 25 basis points to 3.75%-4.00%, its first hike since July 2023. As of Oct. 22, the CME FedWatch Tool put the odds of no change this week at roughly 90.6%.

Third-quarter GDP and the September PCE inflation report also land this week. Investors will use them to size up December policy expectations.

Three companies, one $10.5 trillion test

Alphabet and Microsoft each carry a market value of about $3.9 trillion. Amazon is at about $2.7 trillion. Alphabet and Microsoft report Wednesday, Oct. 28, and Amazon and Intel report Thursday, Oct. 29.

Microsoft and Alphabet are set to report on the same afternoon the Fed decides. Alphabet and Amazon have announced conference call times but not when results will post. Both have posted shortly after 4:00 p.m. ET in recent quarters.

The stocks have a history of big moves. A tally of 8-K filings and daily closes since 2015 shows Microsoft moving an average of 4.2% the session after earnings, and Alphabet 4.3%. Amazon averaged 6.2% and moved 5% or more on 60% of its report days.

The last round was violent. Microsoft jumped 15.5% after its July 30 report, and Amazon gained 15.3% after July 31. Alphabet fell 7.1% after July 23.

Why the AI bill is the question

The selloff came from renewed worry about how much companies are spending on AI and how they are paying for it. Tech firms from Amazon to SpaceX are issuing billions in bonds to fund the buildout. They are also competing for capital with each other and with the federal government.

Nvidia CEO Jensen Huang addressed this in a CNBC interview aired Oct. 22. "What is missing in the middle is the working capital to fuel that growth," Huang said, citing "a scarcity of capital." He added: "The demand of the capital is much greater than the availability of the capital. That's going to get solved."

Huang is not a neutral voice here, since Nvidia sells the hardware the spending buys. He told Fox Business each gigawatt-scale data center costs about $50 billion and could generate tens of billions in annual revenue.

Competing for capital could push borrowing costs up. Russell Thompson, chief investment officer at Hilbert Group, said that same day that money was rotating into Treasuries "to pick up the extra yield available at these levels." The 10-year yield fell about 18 basis points to 4.97% on Oct. 22, below 5% for the first time since Sept. 22. The 30-year dropped to 5.29%, and the 2-year hit a five-week low of 4.64%.

Treasury Secretary Scott Bessent announced a more aggressive buyback program in August. The government often repurchases long-dated debt to put pressure on yields.

What the earnings season has shown so far

The results have not been the problem. As of Friday, Oct. 23, more than 120 S&P 500 companies had reported, and about 83% beat earnings expectations, according to FactSet. IBM, Meta Platforms and SpaceX topped Wall Street's third-quarter estimates earlier in the week.

Alex Cargal, vice president at Bel Air Investment Advisors, said AI has become "an increasingly important driver of corporate investment and earnings growth." Investors want the hyperscalers to keep committing capital, and they want proof the spending pays off.

About 160 S&P 500 companies report this week. Visa reports Tuesday. Mastercard, Eli Lilly and Intel follow Thursday, and Exxon Mobil, Chevron and AbbVie close the week Friday. Boeing reports after the FAA's long-delayed certification of the 737 Max 10 last week. Apple does not report until Monday, Nov. 2.

Analysts' estimates are not results, and the numbers that matter will not exist until Wednesday afternoon. The open question is whether Alphabet, Microsoft and Amazon can show cloud and AI revenue growth that justifies spending at this scale, on the same day the Fed speaks about rates.