Hyperscaler Earnings and a Warsh Fed Meeting Set Up the AI Trade's Next Stress Test

The AI trade heads into the week of October 26 under real pressure, and the calendar gives it no room to hide. Alphabet and Microsoft report Wednesday, October 28, with Amazon following Thursday, October 29, according to a CNBC week-ahead preview published Friday, October 23. Those three hyperscalers are the next to face investors after Meta Platforms and Tesla drew a surprisingly poor reception the prior week, dragging the broader market with them. In total, 163 S&P 500 companies are scheduled to report during the week, so the AI narrative will be tested inside a dense earnings tape rather than in isolation.

The Meta precedent is what has investors nervous. The stock slumped more than 9% in the week ended October 23 after reporting negative free cash flow for the first time since its public debut, and the spread on its five-year credit default swaps reached all-time highs on Thursday, October 22, per the CNBC report. That combination, falling equity plus widening credit protection costs, is the market asking whether AI capital spending is sustainable at current scale. Evercore internet analyst Mark Mahaney told CNBC the fear is that the hyperscalers reporting next will disclose heightened capital spending, perhaps by as much as $100 billion.

The counterargument is that some bad news is already in the price. Alphabet shares fell more than 5% in the week ended October 23, while Amazon and Microsoft each slipped about 1%, and Mahaney told CNBC that the market fear is now in the stock. His framing cuts both ways: if the companies announce no need to raise capital, or only a modest equity or debt deal, the shares could actually rise. That makes the capex line items and any financing announcements on Wednesday and Thursday as important as revenue and profit figures.

The internal split in tech is worth watching alongside the headline indexes. As of Friday, October 23, the Nasdaq Composite was set to close October down more than 3%, with the S&P 500 also lower, while the Dow was set to finish the month up nearly 3%, according to CNBC. Within tech, semiconductors were down more than 15% for the month and memory stocks had plunged more than 20%, while the Magnificent Seven were down more than 2%. Software, and cybersecurity names in particular, were on track to end October with gains, a rotation that suggests investors are distinguishing between AI infrastructure spending and software businesses that may benefit without carrying the capex burden.

The Fed is the second stress test, and it lands the same day Alphabet and Microsoft report. The Federal Open Market Committee meets October 27 and 28, with a decision and a press conference from Chair Kevin Warsh on Wednesday afternoon. Rates currently sit at 3.75% to 4.00%, and CNBC reported that holding steady is widely expected, though a weak September jobs report and patient commentary from officials including Vice Chair Philip Jefferson and New York Fed President John Williams have only curbed, not eliminated, hike expectations. Inflation has been moving further from the Fed's 2% target as surging gas and diesel prices add pressure, which is exactly why the press conference matters.

Warsh has already shown how much his words move pricing. Speaking in Bangkok on October 24, he called AI investment a big boon for the US economy without commenting on monetary policy, and the probability of an October rate hike fell to 15% from more than 25% the prior day, according to a GMT Eight report dated October 24. Nasdaq 100 futures rose as much as 0.2% after the remarks, having earlier fallen 0.5%, and the MSCI Asia Pacific index gained 1.5% with South Korea's Kospi up 3.6%. EY-Parthenon chief economist Gregory Daco told CNBC that growing pressure on the Fed to deliver on its inflation commitments means markets will start questioning credibility if words are not matched by action.

The inflation data arrives Thursday, October 30, one day after the decision. September personal consumption expenditure prices are projected to have risen 0.5% month over month, slower than the prior month's 0.9%, but core PCE is expected to show a 3.1% year-over-year increase, up from 3.0%, per the CNBC preview. A core print at or above 3.1% would sharpen the credibility question Daco raised, especially if the Fed holds. For the AI trade specifically, the interaction matters: higher-for-longer rates pressure the long-duration cash flows that justify heavy AI capex, so a hawkish hold plus weak hyperscaler guidance would compound rather than offset.

The broader earnings backdrop is still strong, which complicates the bearish read. Of S&P 500 companies that had reported, 82% beat expectations, and the index was set to post roughly 30% earnings growth versus the third quarter of 2024, according to CNBC. Nationwide chief market strategist Mark Hackett called the setup a coiled spring moment with a very likely positive outcome, while expecting technology to continue underperforming after absorbing the bulk of AI gains. The week of October 26 will show whether that rotation holds, or whether cracks in hyperscaler capex plans and Fed credibility turn a tech stumble into something broader.