October proved to be another volatile month for the stock market, with the technology sector feeling the most pressure. It was a combination of factors that weighed on growth stocks, but the two primary forces working against the sector are higher interest rates and mixed earnings. Interest Rates & Impacts on the Market
Although members of the Federal Reserve voted to keep interest rates unchanged in October’s FOMC, September’s rate hike still took a big toll on markets. Companies that rely on debt and borrowed capital especially fall victim to higher rates as even a quarter point hike can debase earnings outlook. So, when last week’s large cap tech earnings showed massive capital expenditures and spending, the market reaction was extremely negative. Take Google, Amazon, and Microsoft as some examples. The three companies reported approximately $172.5 billion in combined quarterly capital expenditures. Just a few months ago, the market would’ve fully supported and rewarded higher AI spending, but it’s a very different case now that enough time has passed and investors are demanding returns on that spending.
Apart from the massive amount of spending, large cap tech earnings were actually pretty solid:
Google reported $127.6 billion in revenue, representing 25% YoY growth. More importantly, Google Cloud revenue surged 103% to $30.7 billion, reflecting strong demand for its AI infrastructure and cloud services.
Amazon reported $201.9 billion in revenue, up 12%, while its AWS division grew 39.3%, its fastest growth in nearly five years. Operating income reached $28.1 billion, with its operating margin reaching a company record.
Microsoft reported 48% growth in Azure revenue, also reinforcing that enterprise demand for AI and cloud infrastructure remains extremely strong.
The growth is clearly there, but investors are beginning to question whether that growth is translating into enough free cash flow to justify the spending.
Politics, Midterms, and the Stock Market
Politics and stocks go hand in hand. Since Trump was elected and Republicans maintained controlled of Congress. Large cap technology companies have had an easy pass to buildout their data center dreams. Prediction markets recently assigned Democrats more than a 90% probability of winning control of the House of Representatives, introducing the possibility of divided government. Democratic controlled House could increase congressional scrutiny of data center development, environmental impacts, energy consumption, and the financing arrangements behind AI infrastructure projects.
There may also be opportunities for other sectors. One example is solar and clean energy companies could benefit from shifting expectations around future energy policies.
Midterms voting has already started, but this week is especially important because November 3rd marks. We'll be watching which party wins control of the House and Senate, and how markets begin pricing the implications for technology, energy, defense, and other politically sensitive industries.
The Latest on the Iran-U.S. Conflict, Monetary Policy, and Inflation
Oil spiked to its highest level in six months last week, which was part of the reason the market sell-off intensified to end the week. adding another concern for investors already dealing with higher interest rates and elevated technology valuations.
Why does that matter for the stock market? It's all about inflation. September's Consumer Price Index came in at 3.7% year over year, significantly above the Federal Reserve's 2% inflation target.
Dallas Fed President Logan even stated that two additional 25 BPS hikes may be necessary to get inflation under control. In reality, however, inflation is not likely to fall back to 2% until oil prices significantly cool. If Feds keep hiking rates, it may slowdown spending, yes, but it won’t solve the core issue of high oil prices.
Earnings Focus this Week
Given that it’s largest company by market cap, Apple is arguably the most important earnings reports this week. But they’re not the only focus. Several semiconductor and AI infrastructure companies including AMD, Qualcomm, Arm Holdings, Astera Labs, Super Micro Computer, and OnSemi, are also scheduled to report earnings. These results will help determine whether the technology sector can stabilize after last week's selling pressure or whether investors have more reason to reduce exposure. Notable Economic Data this Week
- ISM Manufacturing
- Labor Market Data
- Productivity Data
- Unemployment Rate (Friday) 🚨
The labor market is especially important because the Federal Reserve is trying to balance its inflation mandate without unnecessarily slowing economic growth. Strong employment data could reinforce the argument for keeping interest rates elevated, while surprisingly weak data could raise concerns that tighter monetary policy is beginning to hurt the economy.
November Outlook
The S&P 500 enters November facing several potential market moving catalysts, with monetary policy, technology earnings, election results, and oil prices all capable of driving volatility. The most important thing to watch from a technical standpoint is whether buyers begin stepping back into large cap technology stocks after the recent pullback. For SPY, we're monitoring the reaction around nearby support and resistance, along with volume and whether the index can establish a higher low.