Next week brings major risks for the stock market, just as the AI trade keeps faltering
Next week will bring major risks for a stock market that’s trying to find its footing as the AI trade continues to stumble, with several megacap earnings, a Federal Reserve meeting and a key inflation report in store. Wall Street is heading into the thick of earnings season, with 163 S & P 500 companies set to report results next week. Chief among them are financial updates from Alphabet , Amazon and Microsoft , the next hyperscalers to release earnings after Meta Platforms and Tesla found a surprisingly poor reception this past week, dragging down the broader market in thei wake. “The fact that the market has skepticism around potential good news in the technology space, particularly, that’s worth watching,” said Mark Hackett, chief market strategist at the investment management group at Nationwide. “That’s why I’m really curious to see how next week goes.” Meta’s results unnerved investors who worried about the sustainability of the social media giant’s AI spending plans. The stock slumped more than 8% this week, after reporting negative free cash flow for the first time ever going back to its public debut. On Thursday, the spread on Meta’s five-year credit default swaps reached all-time highs, adding further to fears. Tesla eventually ended the week higher, up more than 5%, after initially falling after its results showed enormous investments into emerging technology verticals. Questioning AI sustainability That has added to fear that the hyperscalers reporting next week will also disclose news of heightened capital spending, perhaps by as much as $100 billion, according to Mark Mahaney, who heads Evercore’s Internet research team. Alphabet and Microsoft report next Wednesday, and Amazon posts results Thursday. But the latest slide in stocks could also mean that investors have already priced bad news into those companies, Mahaney said. Alphabet shares are down by more than 5% this week. Amazon and Microsoft are each down by about 1%. “The market fear is now in the stock,” Mahaney said. If the two companies were to announce they did not need to raise capital, or announce just a modest equity or debt deal, the stocks could actually rise, he added. Those results could determine just where the tech trade ends October. As of Friday, the tech-heavy Nasdaq Composite was set to close out the month down by more than 3%, with the S & P 500 also lower. The Dow Jones Industrial Average alone is set to end the month higher, by nearly 3%. There’s also just greater division among the tech stocks. Semiconductors have been crushed, down more than 15% this month. Memory stocks plunged more than 20%. The Magnificent Seven companies are down more than 2%. But software stocks, and cybersecurity names in particular, are set to end the month with gains. Fed credibility, PCE Federal Reserve Chairman Kevin Warsh will have to strike a delicate balance next Wednesday when he takes the podium at the press conference following the Fed’s next policy meeting, according to Gregory Daco, chief economist at EY-Parthenon. If the central bank holds rates steady at their current 3.75% to 4.00%, as is widely expected , Warsh will have to explain the pause to a room full of reporters. The Fed had signaled at the September meeting that it was unanimous in taking inflation seriously.In the weeks since, the economic data has shown that inflation is moving still further away from the Fed’s 2% target, as surging gas and diesel prices pile on pressure. But a weak September jobs report and a succession of Fed officials signaling a patient view of higher interest rates, have curbed expectations of a rate hike at the Oct. 27-28 meeting. Those skeptical officials who have expressed little need for urgency include Fed Vice Chairman Philip Jefferson and New York Fed President John Williams. That heightens the stakes for chairman Warsh, who has expressed a preference for fewer words at a time when investors may prefer clearer communication. “I think there is growing pressure on the Fed to deliver upon its words. It’s not sufficient to be talking a tough game on the inflation front and reiterating your commitment to price stability,” Daco said. “If you don’t deliver upon those commitments, then markets will start to question your credibility.” The Fed meeting on Wednesday will be followed the next day by the release of the central bank’s preferred inflation gauge. The September reading for the personal consumption expenditure price index is projected to have risen 0.5%, slower than the prior month’s reading of 0.9%. But core inflation, excluding food and energy prices, is expected to have risen 3.1% over the past year, up from 3.0% previously. Split between tech and everything else On the surface, the third quarter earnings season is bearing out as expected. Of the S & P 500 companies that have reported thus far, 82% have beaten expectations. When results are over, the broad market index is set to have posted earnings growth of roughly 30% versus the third quarter a year ago. It’s the latest continuation of a historic earnings boom that is virtually unprecedented considering that companies are not coming out of the throes of some economic calamity, but instead building on AI momentum. And, it continues to suggest the market can continue to do well, especially as it heads into the best six months on the calendar, from November through April. The recent increase in bearish sentiment may also suggest equities are due for a near-term pop. Still, the weakness in tech bears watching, as any further cracks in the AI trade could mean a tech-fueled selloff. Nationwide’s Hackett expects that technology will continue to underperform, having already absorbed the bulk of the gains from AI. But he also said the rest of the market remains in “good shape,” and he plans to stick with stocks that may have been overly punished and could start outperforming. “We’re in a coiled spring moment right now, where the outcome is very likely to be positive,” Hackett said. Week ahead calendar All times ET. Monday, October 26 Earnings: Public Storage , Nucor , The Hartford Insurance Group , Verizon Communications Tuesday, October 27 8:30 a.m. Durable Orders preliminary (September) 9:00 a.m. FHFA Home Price Index (August) 10:00 a.m. Consumer Confidence (October) 10:00 a.m. New Home Sales (September) Earnings: FirstEnergy , Visa , PPG Industries , Robinhood Markets , Waste Management , Universal Health Services , Extra Space Storage , Illinois Tool Works , Ecolab , Hubbell , The Boeing Co. , Sherwin-Williams , Coca-Cola , Royal Caribbean Group , CMS Energy , United Parcel Service , Hilton Worldwide , PayPal , HCA Healthcare , Corning , Freeport-McMoRan , CenterPoint Energy Wednesday, October 28 8:30 a.m. Wholesale Inventories preliminary (September) 2:00 p.m FOMC Meeting 2:00 p.m. Fed Funds Target Upper Bound Earnings: O’Reilly Automotive , Raymond James Financial , MGM Resorts International , ServiceNow , Chipotle Mexican Grill , T-Mobile US , Gen Digital , Ford Motor , eBay , Carvana , Align Technology , Tyler Technologies , Microsoft , Mid-America Apartment Communities , KLA , Invitation Homes , Honeywell Aerospace , Alphabet , Fortinet , FedEx , American Water Works , Fortive , Phillips 66 , Old Dominion Freight Line , International Paper , Automatic Data Processing , Labcorp Holdings , NiSource , Boston Scientific , GE Healthcare Technologies , Generac Holdings , Otis Worldwide , GE Vernova , C.H. Robinson Worldwide , Amphenol , Biogen , American Electric Power Thursday, October 29 8:30 a.m. GDP Chain Price first preliminary (Q3) 8:30 a.m. GDP first preliminary (Q3) 8:30 a.m. Initial Claims 8:30 a.m. Core PCE Deflator (September) 8:30 a.m. Personal Consumption Expenditure (September) 8:30 a.m. Personal Income (September) Earnings: GoDaddy , Twilio , Mondelez International , Edison International , Digital Realty Trust , Monolithic Power Systems , Gilead Sciences , Amazon , Weyerhaeuser , Veralto , Sandisk , Starbucks , Resmed , Reddit , Ingersoll Rand , Intel , Illumina , First Solar , FedEx , Freight Holding , DexCom , Coinbase Global , Ameriprise Financial , Intercontinental Exchange , Baxter International , Vulcan Materials , T. Rowe Price Group , Altria Group , Howmet Aerospace , Bristol-Myers Squibb , Quanta Services , Eli Lilly , Hershey , Norwegian Cruise Line Holdings , Merck , D.R. Horton , Cognizant Technology Solutions , Caterpillar , Xcel Energy , West Pharmaceutical Services , Carrier Global , Bunge Global , Mastercard , L3Harris Technologies , Huntington Ingalls Industries , Ares Management , A.O. Smith Friday, October 30 8:30 a.m. ECI Civilian Workers (Q3) 9:45 a.m. Chicago PMI (October) Earnings: Dominion Energy , Cboe Global Markets , General Dynamics , Colgate-Palmolive , Exelon , ExxonMobil , Regeneron Pharmaceuticals , Chevron , AbbVie