Wall Street AI rally faces Big Tech earnings test
SPX500 rides AI euphoria
US equity markets have shown remarkable resilience to lingering macroeconomic uncertainty and stagflation risks from the Middle East conflict. This fortitude is largely fuelled by the AI boom, Wall Street's most potent driver. With earnings season in full swing, the first signals regarding the sustainability of AI proliferation have been unequivocally positive.
TSMC and ASML have confirmed sustained AI demand, while investors cheered Intel's strong report and guidance. The chipmaker impressed with a 7.2% y/y rise in Q1 revenues and an optimistic forecast for the current quarter, benefiting from favourable shifts in AI workloads. Intel's stock surged post-report and the renewed AI euphoria pushed the broader S&P 500 to new all-time highs.
Markets are betting that macroeconomic headwinds won't derail AI proliferation, which appears unstoppable as Agentic AI emerges as the next inflection point and tech giants pour vast capital into infrastructure. While these dynamics could continue to propel the SPX500 higher, the path forward is far from guaranteed.
Technically, the move is stretched, creating scope for a test of the EMA200. Ultimately, the trajectory depends on fundamentals, and this week's Big Tech earnings will determine whether current optimism persists or evaporates.
The earnings test
The AI boom relies heavily on four hyperscalers: Meta Platforms, Alphabet, Microsoft and Amazon.com, and their sprawling capital expenditure. All four report on Wednesday and current optimism sets a solid foundation. However, mounting macroeconomic risks mean these tech giants must now prove a return on their massive investments, and some have largely failed to do so thus far.
The AI story is no longer straightforward. Investors have become increasingly selective, separating true winners from companies struggling to integrate and monetise AI. Should these giants fail to demonstrate a clear return on their multi-billion dollar infrastructure investments, sentiment could sour rapidly and weigh on the SPX500.
AI faces macro risks
The Middle East conflict has complicated an already precarious environment, exacerbated by lingering tariff uncertainty that threatens to derail the AI boom. These pressures could dampen corporate investment and shrink marketing budgets, a key revenue source for these tech giants, fuelling anxiety over AI spending.
Furthermore, disruptions to energy flows and critical materials supply pose real-world hurdles, adding risk and costs to the maintenance and expansion of these vital networks. The narrative surrounding job cuts will also be in the spotlight. While these moves have been supported by markets thus far, they risk renewing fears about AI's impact on employment, potentially weighing on sentiment.
The Fed factor
Markets will also look to the Federal Reserve's decision on Wednesday for insights into the interest rate path. While Big Tech earnings remain the primary driver for the S&P 500, any hawkish signals from the Fed could create additional headwinds. Higher-for-longer rates are a particular concern for tech valuations, which are especially sensitive to the discount rate given their long-duration earnings profiles.
The inflationary impulse from spiking energy prices has forced the central bank into a holding stance, with markets actively pricing out any rate cuts this year. Against the backdrop of the conflict's strain on consumer sentiment and the economy, it remains a difficult mix.
Nikos Tzabouras
Senior Financial Editorial Writer
Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. With extensive experience in market analysis and a strong foundation in international relations, he brings a unique perspective to financial markets. Nikos emphasizes not only technical analysis but also on fundamentals and the growing influence of geopolitics on financial trends.
As a Senior Financial Editorial Writer, he delivers comprehensive and forward-looking insights across a wide range of asset classes, including equities, commodities, and currencies. His work explores how macroeconomic events, political developments, and global policies impact market dynamics, providing readers with a deeper understanding of both short-term movements and long-term trends.
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