America’s AI buildout will be in the spotlight this week, with some of the world’s biggest tech companies due to hand in their latest results and Federal Reserve officials expected to take up the topic when they meet. A number of Fed officials have suggested that spending on AI infrastructure could be a more persistent cause of inflation than energy shocks stemming from the war with Iran. The Federal Open Markets Committee, which sets monetary policy, is likely to discuss AI and other factors influencing inflation when it meets Tuesday and Wednesday. The central bank is unlikely to adjust interest rates this week, but rate hikes may be coming later in the year, some Fed watchers say. An update on the Fed’s preferred measure of inflation is set to come Thursday, along with gross domestic product data.
What Amazon, Apple, Microsoft, and Meta Platforms have to say about their AI spending may be of more interest than the numbers they hand in this week. Last week, Alphabet handily beat expectations, but its stock sank after the parent company of Google and YouTube raised its projected expenditures on AI infrastructure. Tech companies are selling stock and using debt to finance the construction and operation of AI data centers, leaving investors concerned about whether these investments will pay off. Investors will listen closely for updates on the Magnificent 7 members’ efforts to monetize AI. Meta, which reports on Wednesday, is reportedly looking to launch a cloud computing business that may sell the social media giant’s excess compute capacity or access to AI models. Amazon, which is scheduled to report on Thursday, is charging customers more to rent hardware needed to train and run AI models. The tech giants’ capital expenditures also have implications for chip, memory, and data storage stocks, which have recently lost momentum but have been some of the best performers in the stock market this year. A number of companies that supply AI hardware are slated to report too, including Seagate Technology, Qualcomm, and Arm Holdings.
What analysts are saying about U.S. stocks
JPMorgan: “While there are some fundamental concerns on the tech story, we see the recent weakness as mostly technical and positioning-driven, and we advise buying the dip. Mag-7 now trades around 1 standard deviation cheap on relative P/E, the lowest in 10 years. Having said that, we continue with the call of rotation and broadening into 2H, with AI unlikely to be “the only story in town.” Cyclicals are ahead of defensives by 6% YTD in Europe and 9% in the U.S.; we think this can continue, helped by healthy earnings delivery and a supportive macro backdrop.”
Evercore ISI: “EVR ISI Strategy continues to view the structural bull market as intact—no recession, a Warsh Fed reluctant to hike, a U.S. 10-year yield still contained (4.75% could weigh on equities, 5% a headwind), and largely absent ‘wild-eyed’ AI FOMO.”
Morgan Stanley: “The broadening-out story is shifting to a quality rotation as we exit the early cycle phase of the rolling recovery. Our factor analysis supports this view led by the sharp reversal in capex/sales we’ve highlighted. Semis still underperform hyperscalers, but AI adopters are likely to outperform both.
Goldman Sachs: “Equity investor focus is likely to turn increasingly to the midterm elections in coming weeks. U.S. midterm elections take place on November 3rd, three months from now. In past cycles, economic policy uncertainty has usually risen in the August ahead of midterm elections and remained elevated in the subsequent few months. Midterms add to the near-term argument for owning index volatility. While the AI trade and upcoming earnings reports will likely continue to weigh on correlations, increased focus on macro issues including elections, geopolitics, and interest rate volatility should put upward pressure on equity index volatility.”
RBC Capital Markets: “Even with some conservatism still baked into our P/E assumption, we have seen earnings tailwinds offsetting P/E pressures from a trickier rates and inflation environment in the year ahead. Note that since the time of our late-June target update, the real GDP and inflation outlook have both improved, but the situation around the Iran war has deteriorated, which calls into question whether those shifts will stick. Cross-currents remain complex, but we still see a path higher for US equities in the year ahead, admittedly with some twists and turns likely.”