US stocks face crucial test as AI earnings, Fed meeting loom

ETMarkets.com

Technology stocks came under pressure last week, putting investors on alert about the sustainability of the AI-driven rally that has powered the US equity bull market into its fourth year. The Nasdaq Composite ended marginally lower on Friday, a day after recording its steepest single-day decline since June, as quarterly results from Meta Platforms and semiconductor equipment maker Lam Research disappointed investors.

The focus now shifts to Alphabet, Microsoft and Amazon, three major cloud computing and technology companies scheduled to report quarterly results this week. Their earnings, alongside those of roughly one-third of S&P 500 companies, could provide critical clues about corporate profitability and the returns from massive investments in AI infrastructure.

The Federal Reserve’s policy meeting on Wednesday is another major event that could influence market sentiment. Investors will assess the central bank’s decision and its guidance on the future interest rate trajectory amid persistent inflation concerns and rising Treasury yields.

According to Reuters, Nick Giorgi, chief equity strategist at Alpine Macro, said investors face several competing market catalysts, with technology earnings likely to determine whether companies can justify their substantial AI-related spending. The market has become more selective about businesses committing large sums to AI infrastructure, raising the possibility of further near-term volatility.

The uncertainty comes as the S&P 500 has gained about 11% in 2026, supported by robust corporate earnings despite headwinds from higher bond yields and rising energy costs linked to the conflict in the Middle East.

AI spending under investor scrutiny

Corporate earnings have been a key pillar of the US stock market’s performance this year. According to LSEG IBES data cited by Reuters, third-quarter earnings for S&P 500 companies were on track to increase by more than 32% from a year earlier, based on results reported so far.

However, investors are increasingly scrutinising whether the returns from AI investments will justify the enormous capital commitments made by technology giants.

Alphabet and Microsoft are scheduled to announce their results on Wednesday, followed by Amazon on Thursday. Investors will focus on their capital expenditure plans, demand for cloud computing services and evidence that investments in AI infrastructure are translating into sustainable revenue and profits.

Capital expenditure by major cloud computing companies is expected to reach around $800 billion this year, supporting businesses across the AI supply chain, including semiconductor manufacturers, data centre operators and equipment suppliers. However, higher financing costs and uncertainty over the pace of returns have raised questions about the sustainability of this spending.

Reuters quoted Kevin Mahn, president and chief investment officer at Hennion & Walsh Asset Management, as highlighting the importance of earnings in determining investor confidence in the AI trade and the duration of the current investment cycle.

King Lip, chief strategist at BakerAvenue Wealth Management, said the latest earnings round would help determine whether the technology sector’s pullback represents a buying opportunity or signals the beginning of a deeper market correction.

Results from chipmakers Intel and Sandisk will also be closely watched for indications of demand across the semiconductor industry and the broader AI ecosystem.

Beyond technology, investors will monitor earnings from pharmaceutical company Eli Lilly, oil majors Exxon Mobil and Chevron, and industrial equipment manufacturer Caterpillar for insights into consumer demand, energy markets and industrial activity.

Fed decision and rate outlook in focus

The Federal Reserve’s policy decision on Wednesday will be another key driver of market direction, particularly as investors assess the outlook for borrowing costs amid inflationary pressures.

The central bank raised interest rates in September for the first time since 2023 in an effort to bring inflation closer to its target. However, interest rate futures indicated less than a 10% probability of another rate increase at the October meeting, according to LSEG data cited by Reuters.

The timing of the meeting, just a week before the November 3 US midterm elections, could also influence expectations surrounding the Fed’s decision.

Market expectations point to a greater likelihood of a rate increase in December, with futures indicating an approximately 80% probability of such a move as of Friday.

Investors will therefore pay close attention to Fed Chair Kevin Warsh’s press conference following the policy announcement, particularly any signals about the central bank’s next move and the possibility of further tightening before the end of the year.

According to Reuters, Walter Todd, chief investment officer at Greenwood Capital, said guidance from Warsh on the December policy decision would be particularly important, given market expectations of another rate increase.

Midterm elections add to market uncertainty

Investors are also positioning for the US midterm elections on November 3, with expectations growing that Democrats could gain control of Congress from President Donald Trump’s Republican Party.

The combination of major technology earnings, the Federal Reserve’s policy decision and political uncertainty could increase market volatility over the coming weeks.

For investors, the immediate direction of US equities will depend heavily on whether the technology giants can demonstrate that their AI investments are generating sufficient returns, while the Fed’s guidance will shape expectations for borrowing costs.

With earnings growth supporting the market rally so far in 2026, any signs of weaker profitability, slowing AI demand, or a more restrictive monetary policy outlook could challenge investor confidence. Conversely, stronger-than-expected results and reassuring guidance on capital expenditure could help stabilise technology shares and revive risk appetite.