By Lewis Krauskopf
NEW YORK, Oct 23 (Reuters) - US stock investors face a pivotal week, with corporate earnings reports led by major AI players and a Federal Reserve meeting both posing critical tests for a suddenly shaky market rally.
Weakness in technology shares left investors on edge about the state of the AI trade that has driven the US equity bull market that just marked its fourth anniversary.
The AI pullback deepened on Thursday, with the Nasdaq Composite posting its biggest one-day drop since
June. Investors were disappointed by quarterly reports from Meta and Lam Research. Meta is one of the hyperscalers spending massively to build out data centers, while Lam is a high-flying semiconductor company, one of a group that has been among the biggest AI stock winners.
Three other hyperscalers -- Alphabet, Microsoft and Amazon -- headline a packed week of quarterly results, including about one-third of S&P 500 companies. The Fed's interest rate policy meeting on Wednesday also could rattle markets.
"There are a lot of balls in the air," said Nick Giorgi, chief equity strategist at Alpine Macro.
"Next week, you have a lot more tech earnings, and right now the market is taking a discerning eye as it relates to all the spending that goes along with artificial intelligence," Giorgi said. "The market's just not giving the benefit of the doubt to companies that are spending a ton of money on building this all out, which to us is actually very healthy, but still does augur for some short-term pain."
Investors also have their focus trained on the US midterm elections on November 3, with growing bets that the Democrats will wrest control of the US Congress away from President Donald Trump's Republican party. The series of market catalysts could ratchet up volatility over the next couple of weeks and challenge optimism that has helped lift the benchmark S&P 500 index up about 12% in 2026.
HYPERSCALERS ON THE HOT SEAT
Robust US profit growth has underpinned the stock market's gains this year in the face of headwinds including spiking Treasury yields and rising energy costs stemming from the Middle East conflict.
With more than 100 companies having posted results so far, third-quarter S&P 500 earnings are on pace to have climbed more than 32% from a year ago, according to LSEG IBES data. Next week is the busiest of the reporting season.
"I think earnings will determine whether this ... tech pullback is a buying opportunity, or is there a deeper correction ahead," said King Lip, chief strategist at BakerAvenue Wealth Management. "What we need is just another round of really strong earnings."
Alphabet and Microsoft report on Wednesday. Amazon's results are due Thursday. Focus will be on the guidance the companies give on capital spending plans and whether they are seeing returns on the massive outlays.
Capital spending from hyperscalers, expected to be around $800 billion this year, is boosting the bottom lines for a wide swath of companies involved in the AI buildout. But investors are wary of the sustainability of such spending amid mounting financing costs.
"Earnings are critical to the overall confidence level of the AI trade and how much longer the spend will continue," said Kevin Mahn, president and chief investment officer at Hennion & Walsh Asset Management.
FED EXPECTED TO PAUSE ON RATES, FOR NOW
Quarterly reports next week from chip companies Intel and Sandisk also could influence the AI trade.
Elsewhere, other high-profile companies set to report next week include drugmaker Eli Lilly, oil majors Exxon and Chevron and industrial equipment giant Caterpillar.
The prospect for more interest rate hikes also comes into focus with the Fed meeting. The Fed raised rates in September for the first time since 2023, in an effort to control above-target inflation, but Fed fund futures late on Thursday suggested only a 5% chance the Fed will hike again when it gives its policy statement on Wednesday, according to LSEG data.
One factor: Investors are dubious that the Fed will want to increase rates just a week before the midterm elections.
However, markets are leaning toward a hike at the next meeting in December, with futures suggesting an 80% probability of such a move then.
Walter Todd, chief investment officer at Greenwood Capital, said he will be watching for any hints about the rate path at Fed Chair Kevin Warsh's press conference following the decision.
"Does he say something to give an idea about December, because right now the expectation is there is going to be a hike?" Todd said.
(Reporting by Lewis Krauskopf, editing by Colin Barr and David Gregorio)
