Wall Street investors are turning their focus to earnings as the AI rally shows signs of wobbling. "It certainly feels like the narrative in the market is a little bit jittery," said Garrett Melson. Companies expect a 30% profit jump, but many now want proof that AI spending brings returns.
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"It certainly feels like the narrative in the market is a little bit jittery," said Garrett Melson, portfolio strategist with Natixis Investment Managers Solutions. "Clearly there's a lot of uncertainty around where AI stands right now."
In other recent signs of caution, strategists at Deutsche Bank and RBC Capital Markets separately pulled back on their recommendations of the tech sector. On October 9, Deutsche Bank strategists said the rotation into tech had "run far and the risk-reward no longer looks favorable in the near term."
"This is very much an on-off switch type of market," Melson said. "When AI is working, it sucks all the oxygen out of the room for the rest of the sectors."
META KICKS OFF HYPERSCALER RESULTS
US reporting season heats up next week, with investors counting on robust performance. S&P 500 companies are expected to have increased earnings by more than 30% in the third quarter, according to LSEG IBES.
Massive outlays on AI data centers and infrastructure underpin the profit jump. Meta is one of five AI hyperscalers that combined are expected to increase their capital spending to about $1.2 trillion next year, according to Goldman Sachs. Investors are eager for signs the companies can show returns on the investments, which would build confidence that the spending is sustainable.
"One of the most important takeaways of earnings season is whether or not the profitability of the hyperscalers can grow faster than the pace of their capex," said Kevin Shea, senior equity analyst at BNY Wealth.
Meta, whose market capitalization was about $1.9 trillion, has seen its shares climb in recent weeks as it launched its Muse AI assistant.
"With the cost of capital going up, this capex blowout is going to become more expensive, which raises the bar for returns," said Chuck Carlson, chief executive officer at Horizon Investment Services. "Meta is going to be the first up to try to provide some color around that question."
SEMIS, TESLA, NETFLIX ALSO ON TAP
Investors will look to Wednesday's reports from Lam Research and Texas Instruments for broader indications of demand in the semiconductor industry. Both companies' share prices are up some 60% in 2026.
The rise in Treasury yields and prospects for further rate hikes from the Federal Reserve also remain front-burner issues for stock investors. Hot inflation data this week boosted bets on another rate increase at the Fed's meeting at the end of October. Futures pricing suggested most investors still expect the US central bank to wait until its meeting in December to raise rates for a second time this year.
"Another strong earnings season should help equities withstand moderately higher rates," analysts at UBS Global Wealth Management said in a note on Thursday.