Investors punish AI spending that delivers slower growth

General market commentary

Equity markets closed modestly lower on Wednesday, despite the Federal Reserve's widely anticipated decision to hold interest rates steady. The S&P 500 briefly crossed the 7,000 mark for the first time before retreating, as investor sentiment shifted amid the Fed’s cautious stance. The energy and technology sectors stood out as the primary gainers, buoyed by stronger demand and positive sentiment towards tech innovation. In contrast, interest-rate-sensitive sectors such as real estate, consumer staples, and healthcare struggled, pulling back as bond yields continued to rise. The 10-year Treasury yield climbed to 4.24%, reflecting market expectations of prolonged higher interest rates. Other markets showed mixed reactions, with Asia finishing higher overnight, while European markets ended the day in the red.

In after-hours trading, the earnings season continued to unfold, with major tech shares reacting differently to their respective quarterly results. Microsoft’s shares fell 4.6% after its earnings report, while Meta Platforms, IBM, and Tesla saw notable gains of 10%, 8%, and 3.1%, respectively, reflecting strong investor confidence in their performance. Overall, the Nasdaq Composite rose 0.2%, while the S&P 500 remained nearly unchanged. Market sentiment showed a growing expectation that the Fed may pause interest rate hikes in March, with a shift in investor focus towards earnings growth, particularly in the technology sector. As the earnings season continues, a broader market rally is expected if growth remains strong across a wide range of sectors.

Latest market and economic update

Asian equities edged lower on Thursday, with technology shares retreating after recent gains. South Korea’s KOSPI fell 0.3%, while Japan’s Nikkei 225 and TOPIX both eased 0.2% and 0.3%, respectively. Hong Kong’s Hang Seng dipped 0.2%, and Australia’s ASX 200 slid 0.6%. Chinese markets were largely muted, with little movement in the Shanghai indices.

U.S. equity futures dipped slightly overnight as investors processed mixed tech earnings and the Federal Reserve's decision to hold rates steady. Meta and Tesla shares rose in after-hours trading, while Microsoft fell 7% due to slower cloud growth. Investors are now focusing on upcoming earnings from Apple, Caterpillar, and Lockheed Martin for further direction.

European equities declined on Wednesday, with the DAX down 0.2%, the CAC 40 falling 1.1%, and the FTSE 100 slipping 0.5%, as investors awaited the US Federal Reserve's interest rate decision. ASML fell despite strong earnings and upbeat guidance, while Volvo, Lonza, and Wacker Chemie posted mixed results, dampening sentiment.

The dollar remained weak on Thursday, following earlier losses driven by concerns over U.S. economic policies and geopolitical tensions. It fell 0.5% against the Swiss franc and hovered near multi-year lows. The euro traded just below $1.20 at $1.1979. Supportive comments from the White House and European officials helped stabilise the dollar.

Oil prices rose for a third consecutive day on Thursday amid escalating concerns over potential U.S. military action against Iran, which could disrupt supply. Brent crude reached $68.90 a barrel, while U.S. West Texas Intermediate rose to $63.79. Prices were also supported by a surprise drop in U.S. crude inventories and tightening supply-demand balance.

The Federal Reserve held interest rates steady at 3.50%-3.75%, halting a series of rate cuts. Fed Chair Powell noted improved economic data with inflation still elevated but refrained from commenting on the Trump administration’s investigation into the Fed. He stated that future decisions would be made on a meeting-by-meeting basis, with potential cuts expected in 2026.

Equities on the move

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

Microsoft's shares fell 6.5% after reporting slower cloud growth and high AI spending, which has exceeded $200 billion since fiscal 2024. Despite its partnership with OpenAI, competition from Google’s Gemini and others poses risks. Microsoft’s Azure revenue grew 39%, but rising costs and reliance on OpenAI raised concerns among investors.

Meta increased its 2026 capital spending plans by 73% to fund its pursuit of "superintelligence" AI, aiming to offer deeply personalised services. The company’s Q4 advertising revenue surged 24%, helping support its ambitious AI investments. Despite rising costs, Meta’s shares gained 10%, and it forecast stronger-than-expected first-quarter revenue.

Samsung Electronics forecast a worsening chip shortage due to the AI boom, with strong memory demand boosting its chip business but raising costs for smartphones and displays. The company posted a record Q4 operating profit, driven by memory chips, but warned of cost pressures ahead. It also plans to deliver next-gen HBM chips to Nvidia.

Tesla plans to more than double capital spending to over $20 billion in 2026, focusing on autonomous vehicles, humanoid robots, and AI-driven projects, rather than traditional electric vehicles. CEO Elon Musk announced the shift, highlighting investment in production lines for robotaxis and robots. Despite this, Tesla remains reliant on EV sales for most revenue.

IBM exceeded Wall Street expectations for Q4, reporting $19.69 billion in revenue and $4.52 per share in adjusted earnings. Shares rose 9% in after-hours trading. Strong AI demand boosted software sales, particularly in automation and data units. However, growth in its hybrid cloud segment slowed due to a U.S. government shutdown impact.

ServiceNow forecast annual subscription revenue above estimates, driven by strong AI demand and partnerships with Anthropic and OpenAI. Despite spending on acquisitions, including cybersecurity firm Armis for $7.75 billion, the company expects fiscal 2026 subscription revenue between $15.53 billion and $15.57 billion. Shares fell 2%, reflecting market concerns over its spending strategy.

NVIDIA, Microsoft, and Amazon are in talks to invest up to $60 billion in AI startup OpenAI, according to reports. NVIDIA is considering a $30 billion investment, with Microsoft and Amazon each exploring multi-billion dollar stakes. OpenAI is raising up to $100 billion to fund its AI and data centre projects, valued at $830 billion.

SpaceX is considering a mid-June IPO, aiming to raise up to $50 billion at a $1.5 trillion valuation, according to the Financial Times. The company, valued at $800 billion in a recent share sale, sees growing investor interest driven by satellite demand and the success of its Starlink service. Four banks are lined up for the listing.

Chinese property shares surged on Thursday after reports that authorities may ease the “three red lines” leverage restrictions. The potential shift boosted hopes for more policy support for the struggling sector. Sunac China, Country Garden, and CIFI Holdings all saw significant gains, with several mainland developers also hitting daily trading limits.

Seagate delivered strong second-quarter results, beating expectations on earnings, revenue and margins as AI data centre demand lifted hard drive sales, sending shares up 20%. Adjusted EPS reached $3.11, revenue climbed to $2.83bn and cash flow surged, while upbeat third-quarter guidance prompted analysts to raise forecasts across Wall Street.

GE Vernova warned of a $250 million revenue hit in 2026 due to installation delays at the Vineyard Wind project, with losses of around $400 million from 11 uninstalled turbines. Despite this, strong demand in its power and electrification units, especially linked to data centres, positions the company for significant momentum and revenue growth.

ASML reported stronger-than-expected bookings of €13.2 billion for Q4, driven by increased investment in AI chipmaking. The company raised its 2026 sales outlook to €34-39 billion, surpassing analysts' expectations. CEO Christophe Fouquet highlighted positive market assessments and robust AI demand from cloud giants like Microsoft, Amazon, and Google.

The White House will meet with banking and cryptocurrency executives on Monday to discuss stalled crypto legislation, focusing on stablecoin interest and rewards. The summit, hosted by the White House’s crypto council, aims to resolve conflicts between the sectors and push forward a compromise, reflecting the administration’s commitment to advancing the bill.

Intel's shares rose 11% after a report revealed Nvidia plans to collaborate with Intel on next-gen semiconductors, including Feynman GPUs set for 2028 release. The partnership also involves Apple and aims to meet U.S. chipmaking rules. The news follows Nvidia’s $5 billion Intel share purchase amid Intel’s AI server chip struggles.

Carvana shares fell 14% after Gotham City Research accused the company of accounting irregularities and undisclosed related-party transactions. The report claims Carvana’s earnings are overstated by over $1 billion and highlights its ties to DriveTime, controlled by the CEO’s father. It also alleges inflated loan sales and accounting issues. Carvana has not responded.

Novo Nordisk spent nearly $500 million on U.S. advertising for its GLP-1 drugs Wegovy and Ozempic in 2025, more than double Eli Lilly's $214 million. The spending surge reflects increased supply and market competition, as Lilly's Zepbound overtook Wegovy in prescriptions. Novo plans further advertising for its new Wegovy pill amid rising demand.

German federal police raided Deutsche Bank offices in Frankfurt and Berlin on Wednesday as part of a money laundering investigation. The operation targeted bank employees and other unnamed individuals, according to Spiegel. Authorities have not disclosed specific details about the allegations, and the investigation is ongoing.

Blackstone is considering increasing its financial commitment to Oracle’s Michigan data-centre project, with discussions now including a potential debt investment. Bank of America is leading efforts to raise up to $14 billion in debt. The project has faced scrutiny after Oracle confirmed Blue Owl Capital would not contribute equity as initially planned.

Mizuho upgraded Applied Materials to Outperform and raised its price target to $370, citing stronger semiconductor equipment spending. It forecasts a 13% rise in wafer fabrication equipment spending in 2026, boosting Applied’s revenue. Despite China headwinds, Mizuho expects faster growth from other regions and higher capital spending from TSMC and Intel.

Texas Capital initiated coverage of NuScale Power with a Buy rating and a $23 target, highlighting its regulatory approval advantage and lower execution risk. NuScale's small modular reactor, approved by the US NRC, offers a safer development path. The bank sees strong market potential, supported by key agreements and rising power demand.

RBC Capital Markets downgraded Banco Bilbao Vizcaya Argentaria (BBVA) to "sector perform" from "outperform," citing full valuation despite strong metrics. The bank's shares fell over 2.8%. RBC raised the price target to €19.75, implying 8% downside, and shifted preference to Santander, noting risks in Turkey and cost control challenges.

Upcoming data and events

Thursday's key US economic data includes consumer confidence, nonfarm productivity, jobless claims, trade balance, and factory orders. Earnings reports are expected from major companies like Apple, Visa, Samsung, Mastercard, SAP, Caterpillar, Roche, Thermo Fisher, and KLA.

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