The AI trade got its report card last night and the grades came back split. Microsoft beat on almost every line and its shares jumped about 5 per cent after hours. Alphabet grew revenue by a quarter and more than doubled its cloud business, yet still came up a fraction short of forecasts while telling investors it will spend close to $200 billion on infrastructure. Its shares fell between 7 and 9 per cent. The market is no longer paying for AI ambition on trust. It wants to see the spending turn into cash, and this morning Nasdaq futures are down more than 1 per cent as it sorts the winners from the bill-payers.
The 60-Second Market View
Wall Street closed Wednesday modestly higher after the Federal Reserve left rates on hold. The S&P 500 rose 0.28 per cent to 7,743.98, the Nasdaq Composite added 0.27 per cent to 26,549.85 and the Dow gained 0.19 per cent to 52,475.10. The VIX fear gauge slipped to 16.91. In London the FTSE 100 ended barely changed at 10,694.50 as the Budget passed without drama in the gilt market.
The picture changed after the bell. Nasdaq 100 futures are down about 1.2 per cent and S&P 500 futures about 0.35 per cent, while Dow futures are up 0.4 per cent because the old-economy index has far less exposure to Alphabet. Brent crude has eased about 1 per cent to just under $114, gold is a touch softer near $4,040, the dollar index is steady around 102.2, sterling is near $1.33 and the US 10-year yield has dipped back just under 5 per cent. Bitcoin has slipped below $80,500.
What Happened Overnight?
The Fed did what it was expected to do and held its target range at 3.75 to 4.00 per cent, but the vote told its own story. Ten members backed the hold and two, Lisa Cook and Beth Hammack, wanted another quarter-point rise. Chair Kevin Warsh struck a wait-and-see tone, describing the economy as strong while flagging inflation as still too high. A Fed with two members pushing to tighten further is not one that is about to rescue an expensive stock market.
Asia took the hint from US futures. After its 6 per cent surge on Wednesday, South Korea’s KOSPI gave back about 1.5 per cent, and Taiwan fell 1.7 per cent as investors banked gains in the chip names that have carried the region. Shanghai lost almost 1 per cent. Japan bucked the trend, with the Nikkei up 0.6 per cent to a fresh high above 64,000, and Australia and India also edged higher.
In the Gulf, reports that Washington has warned allies to prepare for possible strikes on Iran after next week’s US midterm elections kept a risk premium in oil, even as prices eased. Saudi air defences intercepted a Houthi missile aimed at the Eastern Province early on Thursday, with no damage reported.
The Big Story: One Report Card, Two Very Different Grades
Microsoft reported revenue of about $92.3 billion for its first financial quarter, up 19 per cent and ahead of expectations. The standout was Azure, its cloud platform, which grew 48 per cent. Investors could see the AI investment coming back as paying customers, and the shares rose about 5 per cent in late trading.
Alphabet’s numbers were, on most measures, spectacular. Revenue rose 25 per cent to about $127.6 billion and Google Cloud more than doubled. But revenue was a whisker below forecasts, search advertising came in light, and the company pointed to capital spending in a range of roughly $195 billion to $205 billion. With that spending running ahead of cash coming in, free cash flow turned negative, at minus $9.1 billion according to reports of the results. That is the part that spooked the market.
Why does it matter beyond two share prices? Because these companies are the customers for the whole AI supply chain. On Wednesday, SK Hynix and Micron were celebrated for selling the shovels. Last night investors asked whether the people buying the shovels can keep paying for them. Microsoft said yes. Alphabet said yes, but it will cost more and take longer, and the market has become far less patient with that answer at a time when the US 10-year yield is sitting around 5 per cent and borrowing for data centres is getting more expensive.
The reaction is a reminder that index levels can hide a lot. The S&P 500 is still close to its record, yet a growing list of large technology names, including Meta and Alphabet, are now well over 20 per cent below their peaks. When a market’s leadership narrows, it becomes more fragile, because a few disappointments can do outsized damage.
What to watch now is whether the selling stays contained in Alphabet and its suppliers or spreads into the broader Nasdaq at the open. Amazon and Apple report after the US close tonight, so the AI spending question gets asked twice more before the weekend.
FX
Currency markets are calm by comparison. The dollar index is steady near 102.2 after the Fed hold, with EUR/USD around 1.114 and USD/JPY close to 157.8. Sterling is trading near $1.332, having come through the Budget with little damage. The Chancellor’s package of energy support, a higher bank levy and more money for defence and Ukraine contained no surprise large enough to rattle the pound. EUR/GBP is near 0.836. The bigger test for the euro comes at lunchtime, when the European Central Bank announces its decision and US inflation and growth figures land within the same hour.
Equities
The FTSE 100 should be relatively sheltered this morning, as London has little direct exposure to US mega-cap technology. Shell and Lloyds both report results before the open, so energy and banks, two of the index’s heaviest sectors, have their own news to trade on. A higher bank levy announced in the Budget gives Lloyds’ results an extra layer of interest. In the US, the gap between Microsoft and Alphabet will dominate the open, and the reaction in chip makers and cloud suppliers will show whether investors treat Alphabet as a one-off or a warning. Fortinet’s sharp after-hours fall on a slowdown in services revenue adds to a nervous mood in technology.
Bonds
US Treasury yields eased after the Fed, with the 10-year just under 5 per cent and the two-year near 4.69 per cent. The 10-year gilt yield is about 5.35 per cent, little changed after the Budget, which is the best outcome the Treasury could have hoped for. German 10-year yields are near 3.36 per cent and Japan’s near 2.83 per cent. The US 5 per cent mark matters because it sets the price of money for everyone else, including the companies borrowing to build AI capacity.
Commodities
Brent crude has eased about 1 per cent to just under $114 a barrel and US crude is near $101.40. Prices are still high because the Strait of Hormuz remains disrupted and talk of possible strikes after the midterms keeps traders wary of a sudden spike. Gold is a little softer around $4,040 and silver is near $53.30. Copper is slightly lower near $6.65 a pound.
Crypto
Bitcoin has slipped about 1.6 per cent to around $80,150 and Ether is down about 2 per cent near $2,320, following the softer tone in technology shares. The $80,000 area is the level crypto traders are watching closely after a brief break below it on Wednesday.
Today’s Economic Calendar
Morning, UK time — Shell and Lloyds results — Two FTSE heavyweights set the tone for energy and banks, with the new bank levy in focus for Lloyds.
10:00 — Eurozone economic sentiment — An early read on confidence ahead of the ECB decision.
12:30 — US third-quarter GDP, September PCE inflation and weekly jobless claims — Growth is expected around 3.2 per cent annualised and core PCE, the Fed’s preferred inflation gauge, around 3.1 per cent. A hot inflation figure would back the two Fed members who wanted a hike.
13:15 — ECB rate decision — Expected to leave rates unchanged. Any hint about future moves would move the euro.
13:45 — ECB press conference with Christine Lagarde — Her tone on inflation and growth matters more than the decision itself.
After the US close, from about 20:00 — Amazon and Apple results — Two more big tests of whether AI and cloud spending is paying off.
Levels Traders Are Watching
These are reference points, not predictions. On the S&P 500, Wednesday’s close near 7,744 and the round 7,700 level below are the areas to watch for whether the after-hours selling sticks. For Nasdaq 100 futures, a recovery back towards 30,000 would suggest the market is treating Alphabet as a stock story rather than a sector one. On Brent, $110 and $115 frame the recent range. Gold’s $4,000 is the obvious line in the sand. For GBP/USD, $1.33 is the pivot, and on the US 10-year yield, 5 per cent remains the level that matters most for valuations.
Where This Leaves Traders
The fair read this morning is that the AI boom is real, but the market has stopped giving every company the benefit of the doubt. Microsoft showed spending turning into revenue and was rewarded. Alphabet showed spending racing ahead of cash and was punished, despite growth most companies would envy. With the Fed in no hurry to cut and two of its members wanting to hike, investors have less patience for long payback periods.
What would change the view is reasonably clear. Hot US inflation at 12:30 would push yields back above 5 per cent and add pressure on technology. Strong results from Amazon and Apple tonight would help the market treat Alphabet as a single disappointment. A sharp move in oil on Gulf headlines would hit everything at once. The markets worth keeping on screen are Nasdaq 100 futures into the US open, the US 10-year yield around 12:30, EUR/USD through the ECB, Brent throughout the day and the FTSE 100 banks after Lloyds.
For beginners, the lesson is that a company can grow fast and still see its shares fall, because prices move on what was expected, not just on what happened. Knowing how you would react to a day like this before it arrives is half the job. If you want to test how you would handle sessions like this one, the free Samuel & Co Trading Trader Assessment is a sensible place to start.
