This Week's Market Notes: Fed Decision, AI Spending Giants' Earnings, US Q2 GDP

US stock markets have been volatile recently, and this week's direction will be shaped by the Federal Reserve (Fed) meeting and a wave of corporate earnings reports. The Fed's meeting is expected to provide further clues on future interest rate policy, while earnings will be led by major technology and artificial intelligence (AI) companies.

This Week's Market Notes (0727-0731)

Major US indices closed lower last week, dragged down by sharp post-earnings declines in Alphabet (GOOGL-US) and Tesla (TSLA-US) shares.

Alphabet's stock was sold off partly due to the company's announcement of further increasing its already massive AI spending plans, casting a shadow over other major cloud service providers set to report earnings this week, including Microsoft (MSFT-US), Amazon (AMZN-US), and Meta (META-US).

AI-related stocks have been central to this year's market rally, driving the bull market into its fourth year. Despite recent setbacks, the S&P 500 is still up over 8% year-to-date.

Kristina Hooper, market strategist at Man Group, said the market "feels very bubble-like. In a way, investors are now walking on thin ice, and they're more likely to react negatively at the first sign of imperfection."

Will the Fed hold rates steady?

As the Fed meets, rising tensions in the Middle East have pushed oil prices sharply higher, with Brent crude briefly touching $100 per barrel last week. This has heightened concerns that inflation, already well above the Fed's 2% annual target, may force policymakers to adopt more aggressive rate hikes to control prices.

The market widely expects the Fed to hold rates steady when it releases its monetary policy statement on Wednesday. However, according to LSEG, federal funds futures as of Friday evening still priced in a 38% chance of a 25-basis-point rate hike.

Nonetheless, uncertainty remains on Wall Street, especially as Fed Chair Kevin Warsh is reforming monetary policy communication. The market cannot rule out the possibility of an unexpected move by the central bank.

This will be Warsh's second meeting since taking office. He has so far avoided providing forward guidance while pledging to bring inflation back to target.

In addition to the US central bank, the Bank of Japan (BoJ) and the Bank of England (BoE) will also announce their rate decisions this week.

Investors seek clues on future rate hikes

Even if the Fed holds rates steady on Wednesday, investors will closely scrutinize the policy statement and Chair Warsh's subsequent press conference for any hints about the future rate path.

Federal funds futures currently reflect expectations of two rate hikes by the January 2027 meeting.

Scott Wren, market strategist at Wells Fargo Investment Institute, said, "If you sense more committee members leaning toward multiple rate hikes for the remainder of the year, I think that will be problematic for the market."

Rate hikes could also push up US Treasury yields, which have already been rising in recent weeks, further competing with stocks for investment capital. The 10-year Treasury yield surpassed 4.7% last Thursday, the highest since early 2025.

Investors will also receive a series of US economic data this week, including second-quarter GDP, monthly inflation figures, and consumer confidence reports.

Earnings from AI spending heavyweights

This week, about one-third of S&P 500 companies are scheduled to report earnings, making it the busiest week of the Q2 earnings season. This includes Apple (AAPL-US), Visa (V-US), Chevron (CVX-US), and Coca-Cola (KO-US).

As of last Wednesday, over 80 companies had already reported. According to LSEG IBES data, S&P 500 earnings for Q2 are currently expected to rise 26.5% year-on-year. This strong earnings growth was anticipated by Wall Street, and the market has already priced in much of this expectation ahead of earnings reports.

AI spending has been a core driver of 2026 stock performance, boosting not only semiconductor firms but also companies involved in data centers and other infrastructure development.

However, investors are increasingly concerned whether these tech giants, pouring in massive funds, will ultimately recoup their huge AI investments. Alphabet's earnings highlighted this concern, which may influence how investors interpret Microsoft, Amazon, and Meta's latest results this week.

Market strategist Hooper said even if these companies easily meet earnings expectations and provide strong outlooks for the next quarter, they could still be sold off due to shifting investor sentiment on AI spending. "They used to see opportunity; now they're more likely to see risk."