AI Stocks Stumble as Fed Decision and Big Tech Earnings Create High-Stakes Showdown

The Fed and Big Tech's High-Stakes Collision

Markets are bracing for a period of intense volatility as two major forces converge: monetary policy from the US Federal Reserve and a reality check for the AI spending frenzy. The Fed is widely expected to hold interest rates steady, but all attention will be on what could be Chair Jerome Powell's final press conference for clues about future cuts. His term expires on May 15th. In a related move, the Senate Banking Committee is expected to vote on the confirmation of his nominated successor, Kevin Warsh, today.

Hours later, tech giants including Microsoft, Alphabet, Meta, and Amazon will release their earnings. These results are critical because their spending plans on data centres and AI chips are seen as the primary fuel for the entire AI investment narrative. The last thing the market needs is for any of these huge companies to hint at a slowdown in capital expenditure. Any sign of weakness could have significant ripple effects across the market.

The AI Spending Reckoning

Tuesday saw a sharp sell-off in semiconductor shares after reports emerged that OpenAI's finance chief privately questioned how the company could fund its colossal computing costs. These fears, which sent chip stocks tumbling, intensified with new reports that OpenAI has missed its internal targets for both user growth on ChatGPT and overall revenue, falling short of its goal of one billion weekly users by the end of 2025. However, in a joint statement, OpenAI's CEO Sam Altman and CFO Sarah Friar called the report "ridiculous," adding a layer of uncertainty to the narrative.

With competitors like Google's Gemini and Anthropic gaining market share, OpenAI's growth is under scrutiny. The company, which raised a staggering $122 billion at an $852 billion valuation, expects to burn through that capital within three years if revenue does not accelerate. This makes the spending guidance from its Big Tech partners absolutely crucial. If they hold the line and commit to high levels of investment, the recent dip could be a wobble. However, if they trim forecasts, it could signal a more serious break in the AI growth story.

The ASML Bottleneck

The entire AI hardware industry relies on one Dutch company: ASML. It is the sole supplier of the extreme ultraviolet (EUV) lithography machines required to make advanced AI chips. While Microsoft, Meta, and others are spending over $600 billion on AI infrastructure, that money all flows upstream to ASML, which is struggling to keep pace. Even with a 36% ramp-up in production, the complexity of its machines creates a significant bottleneck, meaning more spending from tech giants doesn't automatically translate into more chips.

Shifting Tides: Energy Volatility and a New Bond Warning

Beneath the main headlines, several other important shifts are taking place, from new dynamics in the global energy market to stark warnings about the stability of government debt.

Energy Sector Heats Up

The path for central banks to cut interest rates is being complicated by rising energy prices. Brent crude, a global oil benchmark, climbed as high as $108 a barrel amid geopolitical tensions. The average price for petrol in the US just hit a four-year high, which directly impacts inflation and squeezes consumer spending power. A recent poll showed 55% of Americans feel their financial situation is worsening, with energy costs being a primary concern.

This trend is beneficial for energy producers. BP recently reported a better-than-expected underlying profit of $3.2 billion, reinforcing that oil and refining companies are in their strongest profit cycle since 2022. Adding to the volatility, the United Arab Emirates (UAE) confirmed it will leave the oil-producing group OPEC this week after nearly 60 years. The UAE, the group's third-largest producer, has long been frustrated by production limits. While this move is unlikely to change prices in the short term, it will likely depress them in the long term as the UAE ramps up production to meet its 5 million barrels per day goal by 2027. This fracturing of the OPEC alliance not only leaves the group in a diminished state but also hampers Saudi Arabia's ability to manage the cartel and influence prices.

Jamie Dimon Warns of Looming 'Bond Crisis'

In a stark warning, JPMorgan Chase CEO Jamie Dimon has said investors are destined to face “some kind of bond crisis” if world leaders do not tackle high levels of government debt. "The way it’s going now, there will be some kind of bond crisis, and then we’ll have to deal with it," he warned at an investment conference. Dimon highlighted that large government deficits are inherently inflationary because they pump more money into the system. He argued that action should be taken to prevent a crisis rather than waiting to clean up the aftermath.

Higher debt forces governments to spend more on interest payments, creating a dangerous feedback loop that raises concerns about a nation's ability to pay back its loans. This is a significant long-term risk that could destabilise markets if inflation becomes more deeply ingrained in the economy.

Market Rotation and Tech Sector Pivots

While technology shares faced pressure, with both the S&P 500 and Nasdaq Composite pulling back from recent record highs, the rest of the market showed signs of resilience, pointing towards a rotation of money rather than a wholesale exit by investors.

Investors Seek Safety in Traditional Stocks

The tech-heavy Nasdaq index fell almost 1%, but the Dow Jones Industrial Average remained flat. This was thanks to strong performances from more defensive, traditional companies. Coca-Cola's shares jumped 6% on strong results, and carmaker General Motors rose after raising its profit forecast. Further bolstering this trend, several major European banks, including UBS, Santander, and Deutsche Bank, posted strong profit beats.

This split indicates that investors are moving money from high-growth, high-risk AI-related stocks into safer, more stable sectors like consumer staples, industrials, and financials. This is a classic defensive manoeuvre when uncertainty rises.

Microsoft Overhauls OpenAI Deal

In a significant strategic pivot, Microsoft has rewritten its partnership deal with OpenAI. The key changes include:

• End of Exclusivity: Microsoft no longer has exclusive rights to OpenAI's models, meaning competitors like Amazon and Google can now access them directly.
• Removal of AGI Clause: A clause that could have severed Microsoft's access if OpenAI's technology became too advanced has been removed, reducing a major risk for Microsoft.

The new deal removes a significant risk for Microsoft but also weakens its competitive advantage in the cloud computing race. The company must now prove its own in-house AI models are strong enough to compete, a topic sure to be central to its earnings call.

Corporate Headlines

• Starbucks Surges on Turnaround: The coffee chain's shares jumped roughly 5% in pre-market trading after beating second-quarter expectations and raising its full-year outlook. CEO Brian Niccol called the results a "milestone" and "the turn in our turnaround," citing traffic growth driven by new products.
• Musk vs. OpenAI Trial Underway: The high-profile legal battle between Elon Musk and OpenAI CEO Sam Altman continues, with Musk taking the stand to testify about the founding of the AI company. The trial has put Silicon Valley's internal rivalries on full display.
• Visa Sees Resilient Consumers: The payments giant beat earnings expectations, with revenue jumping 17%. The company cited healthy consumer spending despite inflation worries, but faces long-term threats from new technologies like stablecoins, which offer merchants lower transaction costs.
• Spotify's Mixed Signal: The music streaming service reported a record operating income and saw paid subscribers climb to 293 million. However, its forecast for new subscribers in the next quarter fell short of expectations, causing its shares to fall sharply.
• GM's Tariff Windfall: General Motors beat earnings expectations and raised its 2026 guidance, partly helped by a $500 million windfall from a court ruling that deemed certain past tariffs illegal.
• Tesla's Mammoth Payday for Musk: Tesla has filed paperwork to issue around 304 million shares for Chief Executive Elon Musk's reinstated pay package, worth approximately $114 billion.
• UPS Disappoints Investors: The logistics giant beat revenue and profit estimates but saw its shares fall as its domestic revenue slipped and overall revenue declined from the previous year.
• Airbus and Corning Feel the Pinch: Planemaker Airbus missed earnings expectations amid global uncertainty, while tech component maker Corning saw its shares fall after weak demand for smartphones overshadowed strong performance in its data centre business.

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NOTE: This content is for informational and educational purposes only and does not constitute financial advice. Always do your own research. Not financial advice (NFA).