US stock market enters crucial week as Fed decision, big tech AI spending take center stage

The other big event arrives mid-week, when US Fed officials sit for a two-day FOMC meeting to decide on interest rates. Markets expect the US Fed to keep rates unchanged in the July FOMC, but they place a higher probability on a rate hike at the September meeting.

Kevin Warsh’s press conference

Kevin Warsh’s press conference may attract more interest than the outcome of the FOMC meeting itself. The capex on AI buildout is a growing concern for Warsh and his team, who have noted that AI spending in the US is contributing to higher inflation, even as they continue to prioritize controlling those inflationary pressures.

Warsh is likely to announce no change in rates on Wednesday, July 29, keeping the federal funds rate at 3.5%-3.75%. On Thursday, the Fed’s preferred measure of inflation will be published, alongside gross domestic product data.

Volatility in oil prices will be a key factor in determining the direction of rates ahead. After dropping below pre-Iran war levels, prices moved up again as strikes escalated between the US and Iran.

But after the US and Iran halted strikes against each other over the weekend, amid efforts to revive diplomacy, Brent declined toward $90 per barrel on Monday, giving back gains made last week.

The July US CPI data, arriving mid-August, will also become a crucial piece of data for US Fed officials as they decide their next course of action ahead of the September FOMC meeting.

Overall, be ready for surprises. As seen in his first press conference last month, Warsh is opposed to giving markets any clear direction. His top goal is to reduce inflation, and any resolution in the Middle East could prevent rate hikes altogether, if not lead to a rate cut.

However, some Fed officials are advocating for a rate hike, as inflation remains well above the Fed’s target range. In that scenario, a marginal front-end hike is not ruled out before 2026 ends.

Big Tech earnings

Amazon, Apple, Microsoft, and Meta Platforms’ insights on their AI spending are likely to matter more than the reported profit figures this week. Alphabet exceeded expectations last week, yet its stock declined following an increase in projected spending on AI infrastructure. Even Tesla’s stock declined after reporting earnings.

“Technology stocks led the decline, with major companies such as Alphabet and Tesla coming under pressure after reporting earnings. Investors questioned whether the significant capital being invested in AI will generate returns quickly enough, prompting a broader sell-off across the technology sector,” says Bas Kooijman, CEO and Asset Manager of DHF Capital S.A.

The time has come for investors to ask about the monetization plans of these big tech companies. Meta is reportedly planning to launch a cloud computing business that could sell its excess computing capacity or AI model access. Meanwhile, Amazon is increasing rental prices for the hardware necessary to train and operate AI models, with its earnings report scheduled for Thursday.

Takeaways

The US economy is showing resilience, with robust growth in the services sector leading to the fastest increase in business activity in eight months. Manufacturing growth remained positive, albeit slightly slower, and employment rose, marking the first hiring surge in three months. New unemployment claims fell to their lowest level since 1969, indicating a strong labor market, although the housing market presented mixed signals.

“Overall, investors remain encouraged by the strength of the US economy but cautious about persistent inflation, geopolitical uncertainty, and the long-term profitability of AI investments,” says Kooijman.

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