Wall Street Looks to Earnings as AI Rally Loses Ground

Wall Street investors are turning to the coming week's corporate earnings, including Meta Platforms, after a retreat in AI-linked shares pushed the S&P 500 to its largest weekly decline since June, Economic Times Markets reported on October 17. The benchmark nevertheless remained roughly 2% below the record high it reached earlier this month.

Semiconductor stocks and technology hardware companies, including Dell Technologies, were among the casualties. The pullback has sharpened scrutiny of the financing behind the AI infrastructure expansion—and whether the companies committing vast sums to it can generate sufficient profits.

The weakness was not uniform across the market. Healthcare and consumer staples gained during the week, offering a contrast to the technology-heavy trade that has helped drive a bull market now four years old.

Meta faces the spending-and-returns test

Meta's results will provide an early indication of how the largest AI infrastructure investors are balancing expansion with profitability. Goldman Sachs estimates cited in the report put combined capital spending by five AI hyperscalers, including Meta, at about $1.2 trillion next year.

Kevin Shea, senior equity analyst at BNY Wealth, identified the central earnings-season question as whether hyperscalers can increase profitability faster than capital expenditure. Chuck Carlson, chief executive of Horizon Investment Services, separately warned that a higher cost of capital makes the investment programme more expensive and raises the returns investors will demand.

Expectations for the broader reporting season are already high. S&P 500 companies are projected to deliver third-quarter earnings growth of more than 30%, according to LSEG IBES figures cited in the report. AI-related infrastructure spending is described as a major contributor to that increase.

Financing concerns have also drawn attention to AI cloud company CoreWeave, which the report puts at about $50 billion in debt. Its shares fell sharply during the week. Separately, Deutsche Bank and RBC Capital Markets strategists reduced their enthusiasm for technology-sector exposure; Deutsche Bank's October 9 assessment said the move into technology had left the near-term balance of risk and reward less attractive.

Chip results will offer a demand check

Wednesday's scheduled results from Lam Research and Texas Instruments could help investors assess demand across the semiconductor industry. Both companies have enjoyed substantial share-price gains this year: 54% for Lam Research and 59% for Texas Instruments, according to the report.

The broader chip sector's recent reversal has been steep. The Philadelphia semiconductor index has fallen about 12% this month, although it remained 57% higher for the year. That compares with a roughly 12% year-to-date gain for the S&P 500.

The reported earnings calendar also includes Tesla and SpaceX, which the outlet describes as newly public and operating an AI business. Netflix, Procter & Gamble and GE Aerospace are among the other major companies due to report, extending the week's focus beyond AI infrastructure.

Interest rates add another hurdle

Rising Treasury yields and the prospect of additional Federal Reserve rate increases are another pressure point for equities. The report said the week's hot inflation readings increased bets on a rate rise at the end-October meeting, although futures pricing still suggested most investors expected the Fed to wait until December for its second increase of the year.

In a Thursday note cited in the report, UBS Global Wealth Management analysts argued that another strong earnings season could help shares absorb moderately higher rates. The coming results will therefore be watched both for evidence of durable AI demand and for companies' ability to sustain earnings as financing becomes more costly.