Strong Tech earnings outweigh doubts about further rate cuts in 2025

Big tech names performed strongly last week, carrying the S&P 500 into positive territory.  Fears of an AI bubble are making investors wary of the breakneck pace of capital expenditures. Amazon’s (AMZN) stellar earnings after Thursday’s close indicate the capex boom is pressing on, however. Amazon Web Services (AWS), the company’s cloud computing unit, beat revenue expectations and grew its top line by 20 per cent year over year. AI model training and inference require great amounts of computing and data storage capacities, benefiting cloud businesses such as AWS. Despite accounting for 18 per cent of Amazon’s total revenue, AWS’ high margins mean the business accounts for nearly two-thirds of total operating income. AMZN was up 9.6 per cent on Friday, bringing year-to-date (YTD) returns to 11.3 per cent.

Meta Platforms (META) didn’t fare as well. Despite beating revenue expectations, Meta incurred a one-off $16 billion tax charge relating to the One Big Beautiful Bill Act. As a result, META shares declined 12.2 per cent last week, bringing YTD returns down to 11 per cent. While the tax charge was nonrecurring, the market might be sensitive to Meta’s higher overall expense profile. Capex for Q3 ($19.4B vs. $18.5B) and what management expects for the full year ($70-72B vs. $68.4B) both exceeded expectations.

Nvidia (NVDA) and Apple (AAPL) also performed well last week. NVDA advanced 8.7 per cent and became the only company ever to achieve a $5 trillion valuation. Apple was up 2.9 per cent after beating earnings expectations and announcing that it expects a double-digit year-over-year increase in iPhone sales next quarter.

Greater uncertainty regarding the future path of interest rates partially offset strength in the Tech names. On Wednesday, the Federal Open Market Committee (FOMC) cut the Fed funds rate by 25 basis points, bringing the target range to 3.75-4.00 per cent. The market’s positive price action quickly changed course after Fed Chair Jerome Powell’s press conference. Noting that two FOMC members dissented from the overall decision, Powell stated that another rate cut at December’s meeting is “not a foregone conclusion.” While inflation persists above the Fed’s two per cent target, growth concerns continue to brew.  The Fed must rely on alternative jobs data points during the government shutdown.  Chipotle’s earnings release on Wednesday underscored the presence of headwinds when management noted its young consumer cohort is under pressure. Hiring has slowed, particularly among the younger population. Unemployment for Americans aged 20-24 is 9.2 per cent, up from 7.9 per cent last year and higher than 4.3 per cent for the overall labor force.

Earnings season marches on this week. When McDonald’s (MCD) reports earnings on Wednesday, the market will see whether Chipotle’s warnings were idiosyncratic or if they have universal relevance.