FOMC to keep rates higher after hawkish January pause

General market commentary

U.S. equity markets closed lower on Wednesday, with major indices reflecting a cautious mood following the Federal Reserve's decision to pause its rate-cutting cycle. The Fed acknowledged that inflation remains "somewhat elevated," but indicated that the labour market remains solid, leaving investors uncertain about future policy moves. The Dow fell 0.31%, the S&P 500 dropped 0.47%, and the Nasdaq lost 0.51%. Meanwhile, Nvidia saw a significant 4.1% decline, weighed down by concerns over potential competition from a more efficient AI model in China. Bond yields edged higher, with the 10-year U.S. Treasury yield rising to 4.54%, while the U.S. dollar strengthened against major currencies.

In after-hours trading, investors digested mixed earnings reports from major tech companies. Tesla saw a 4% rise despite posting weaker-than-expected quarterly results, buoyed by investor optimism about the company's long-term prospects. Meta Platforms, on the other hand, climbed 2% after exceeding both earnings and revenue estimates, indicating strong performance in its core business. However, Microsoft experienced a 5% drop following a slight miss in its Azure cloud services forecast, reflecting growing concerns over the slowdown in demand for cloud computing services. As a result, all eyes are now on Apple's earnings report due today after the market close, which could provide further insights into the health of the tech sector.

Latest market and economic update

Asian markets mostly traded within a tight range on Thursday, with Australian shares hitting a record high on expectations of a rate cut by the Reserve Bank of Australia, while technology equities remained under pressure following mixed signals from the U.S. and concerns over China's advancing AI capabilities. Caution around U.S. President Trump's potential trade tariffs and muted trading volumes due to Lunar New Year holidays further contributed to the subdued market sentiment across the region.

U.S. equity futures pointed to a positive open on Thursday, with investors reacting to mixed earnings reports from major tech companies, including gains for Tesla and Meta Platforms. However, caution remains as markets digest the Fed's pause on rate cuts and ongoing concerns over competition in the AI sector, particularly with Nvidia.

European shares hit a record high, led by a 5.6% jump in ASML after strong earnings, while the technology sector rose 2.5%. The German DAX also reached a record, driven by a 4.5% gain in Deutsche Telekom, but luxury equities like LVMH and Kering fell. Spain's IBEX rose 1% on strong economic growth data.

The US dollar index stabilised around 107.8 on Thursday after a volatile session, following the Federal Reserve's decision to keep rates unchanged while signalling potential future rate cuts. EUR/USD traded at 1.0420, with market focus shifting to the upcoming PCE price index report and the European Central Bank's policy decision, adding to the uncertainty surrounding dollar movements.

Oil prices steadied in Asian trade this morning as traders processed hawkish signals from the Federal Reserve and U.S. President Trump’s push for increased domestic energy production. Market sentiment was weighed down by concerns over Trump’s proposed tariffs and the potential impact on global oil demand, particularly from China, the world’s largest oil importer.

The Federal Reserve held the fed funds rate steady at 4.25%-4.5% during its January meeting, pausing its rate-cutting cycle to assess further progress on inflation. While noting solid economic growth and a stable labour market, the Fed acknowledged that inflation remains elevated and emphasised the uncertain economic outlook. In the meantime, President Donald Trump criticised the Fed's handling of inflation and proposed boosting energy production, cutting regulations, and adjusting trade balances to restore financial strength in the U.S.

Equities on the move

The following companies experienced moves in their share price driven by analyst ratings, quarterly earnings, or other news:

An American Airlines regional jet collided with a military helicopter near Washington, D.C., on Wednesday evening, causing both aircraft to crash into the Potomac River, with fatalities reported. Emergency response teams were dispatched to the site, while Ronald Reagan Washington National Airport temporarily suspended all flights for rescue operations.

Microsoft's shares fell 4.5% after it forecast disappointing growth in its Azure cloud business and faced concerns over competition from cheaper Chinese AI models. Despite strong overall revenue and efforts to reduce costs, investors remain cautious about the company's AI monetisation strategy and the increasing pressure from rivals.

Meta Platforms surpassed Wall Street's fourth-quarter revenue expectations but forecast first-quarter sales below analysts' predictions, raising concerns about its AI investments. While CEO Mark Zuckerberg remains optimistic about AI and open-source models, the company's heavy spending on AI infrastructure and metaverse technologies continues to draw investor scrutiny.

Tesla's market value surged as it announced plans to roll out new, cheaper electric vehicle models in 2025 and begin testing a paid autonomous car service in June, despite posting weaker-than-expected quarterly results. Investors were encouraged by the company's reduced costs and progress on full self-driving technology, though concerns over rising tariffs and competition from rivals such as BYD and BMW remained.

IBM exceeded fourth-quarter profit expectations, driven by strong demand in its software unit as businesses increased IT spending on cloud and AI technologies. The company forecast revenue growth of at least 5% for fiscal 2025, signalling confidence in its AI and cloud strategies despite a decline in consulting revenue.

ServiceNow's shares dropped 8% in after-hours trading despite surpassing Wall Street estimates for Q4, with adjusted earnings of $3.67 per share and revenues of $2.96 billion, driven by a 21% rise in subscription revenue. The company guided Q1 subscription revenues between $2.995 billion and $3.00 billion, while its remaining performance obligations grew by 19% year-on-year.

T-Mobile expects its wireless subscriber growth to more than double Wall Street estimates this year, driven by strong demand for its premium 5G plans, sending shares up over 5%. The company reported strong fourth-quarter results, including 903,000 postpaid phone net additions and better-than-expected revenue, boosted by successful promotions and its Go5G plans.

Brinker International's shares rose more my almost 15% after reporting better-than-expected Q2 fiscal 2025 results, with earnings per share of $2.80 and revenue of $1.36 billion. The company also raised its full-year guidance, expecting EPS between $7.50 and $8.00, well above the consensus forecast, and projecting revenue between $5.15 billion and $5.25 billion.

ASML's fourth-quarter bookings surged to €7.09 billion, far exceeding expectations, driven by strong AI demand for its advanced chip equipment, pushing its shares up by 7.5%. Despite concerns raised by the launch of DeepSeek's model, ASML's CEO remains confident that the AI boom will continue to drive demand as AI model costs decrease, and the company expects sales growth of 7-25% in 2025.

Howard Lutnick, nominee for U.S. Commerce Secretary, has announced plans to implement restrictions to protect the U.S.'s AI leadership over China, citing concerns about DeepSeek’s alleged misuse of American technology. In line with this, the Trump administration is reportedly considering expanding curbs on Nvidia chips, including its H20 models, as part of broader efforts to address China’s growing capabilities in AI development.

Alibaba has released its Qwen 2.5-Max AI model, claiming it surpasses DeepSeek-V3, following pressure from the Chinese startup's rapid rise. DeepSeek's success has sparked a race among domestic competitors, with companies like ByteDance and Baidu responding with upgraded AI models to compete with DeepSeek's low-cost, high-performance offerings.

SoftBank is in talks to invest up to $25 billion in OpenAI, as part of its broader commitment to the Stargate venture, aimed at advancing the U.S.'s position in the global AI race. The discussions come amid growing competition from China's DeepSeek, which has caused a selloff in SoftBank’s shares, despite the initial surge in reaction to the Stargate project.

Shares of Uber and Lyft fell sharply after Waymo, owned by Alphabet, announced plans to expand its autonomous vehicle testing to 10 new cities by 2025, including Las Vegas and San Diego. The move raises concerns for Uber and Lyft, as Waymo's push towards a potential robotaxi service intensifies competition in the ride-hailing market.

Renault is demanding a premium for its 36% stake in Nissan if Honda takes over the Japanese automaker, according to reports. The French company, as Nissan's main shareholder, is seeking to ensure the full value of Nissan is recognised in any potential merger.

President Donald Trump intervened in a NASA mission, urging SpaceX to return two astronauts, Butch Wilmore and Suni Williams, from the International Space Station sooner than planned, as they had been delayed due to issues with Boeing's Starliner capsule. NASA affirmed that it would work to return the astronauts "as soon as practical," while managing the delicate coordination of future crew rotations aboard the ISS.

Shares of FTAI Aviation fell 5% following a report from Snowcap Research, which raised concerns about the overstatement of the company's Aerospace Segment. The report, which includes allegations of inflated profits and misleading financial reporting, echoes previous claims made by short seller Muddy Waters.

Jefferies sees fresh AI-driven investment opportunities beyond hyperscalers, identifying companies like Uber, Reddit, and Etsy as key beneficiaries of AI advancements. The brokerage raised price targets for CarGurus, Carvana, and Reddit, while lowering its targets for Lyft and Opendoor, and expects Uber's mobility segment to outperform with potential upside from share repurchases and Waymo partnerships.

CFRA downgraded LVMH to Hold from Strong Buy, citing margin pressure and muted revenue growth, despite the company's strong brand positioning. The firm lowered its price target to €750, while still viewing LVMH as a dominant luxury player with strong long-term potential, despite a miss on earnings per share and a decrease in operating margin.

Oppenheimer downgraded Apple, citing weaker iPhone sales and increasing competition in China, alongside concerns over valuation and near-term growth. The firm revised its earnings estimates for FY26, lowering revenue and iPhone sales projections, and expressed doubt about Apple's ability to drive a significant AI-driven upgrade cycle.

Bernstein named Block as its "new best idea" for 2025, citing factors like Square GPV acceleration, significant EBITDA growth, and reduced regulatory risks, with strong profitability potential driven by efficiency gains and product enhancements. The firm forecasts robust growth for Cash App and operating income, with an attractive risk-reward profile given Block's valuation and cash-rich balance sheet.

Jefferies raised its price target for Spotify to $630, citing strong long-term growth prospects, including improved gross margins and the shift to video content to boost ad revenue. The firm also expects positive subscriber trends, a price hike in 2026, and significant operating income growth in 2025, projecting a 42% EBITDA compound annual growth rate from 2024 to 2027.

Mizuho initiated coverage of MicroStrategy with an "Outperform" rating and a $515 price target, citing its strategy of accumulating Bitcoin through debt and equity issuance. The firm expects Bitcoin to grow at a 25-30% compound annual growth rate through 2027, benefiting MicroStrategy’s unique structure and potential for significant upside despite volatility.

RBC Capital Markets upgraded EssilorLuxottica to "outperform," raising its price target to €290, driven by strong growth opportunities in the ophthalmology sector and recent acquisitions, including Heidelberg Engineering. The analysts also see potential for expansion in contact lenses and diagnostics, with strategic acquisitions such as Bausch & Lomb supporting future growth in key markets.

Upcoming data and events

Key data releases for today include US GDP growth, Initial Jobless Claims, and Pending Home Sales. Additionally, earnings season continues with major companies such as Apple, Visa, Intel, and Caterpillar reporting, while the European Central Bank's rate decision will be closely monitored by investors for signals on monetary policy.

For more information visit https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning investments or investment decisions, or tax or legal advice.