Investor sentiment boosted by earnings season

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Last week was a busy one for markets, with a combination of factors to absorb.

The market narrative was dominated by three key themes:

• Unprecedented capital expenditure (CapEx) commitments from the largest technology firms.
• Various monetary policy decisions from heavily scrutinised central banks.
• A tactical de-escalation in the protracted China-U.S. trade conflict, which saw a major pivot in advanced chip technology speculation.

‘Hyperscaler’ earnings: Justifying the AI investment surge

‘Hyperscalers’ reported results last week amidst concerns over their investment plans.

Source: LSEG Datastream

The week’s earnings reports from the major “hyperscalers” – Alphabet (which owns Google), Microsoft, Amazon, and Meta – revealed a collective and aggressive ramp-up in infrastructure investment, with 2025 CapEx guidance being raised across the board. The collective spending is now estimated to exceed previous forecasts, driven almost entirely by the relentless demand for AI computing capacity.

The size of the short and longer-term investment commitments is unnerving for investors, as it reminds them of previous investment cycles where long-term demand was slower than expected. This led to longer periods of underused capacity.

Large investments in telecommunications infrastructure during the late 1990s, or mining capacity during the early 2000s, led to correspondingly high depreciation charges, with little offsetting revenue and, often, asset writedowns (when the recorded value of an asset is reduced because the market value has fallen below its book value). This is why people worry about an AI investment bubble.

Instead, companies reported that their spending is based on the concrete evidence of robust, immediate demand – mitigating concerns over a potential AI spending bubble.

Executives were unanimous in reporting that AI demand continues to exceed available capacity. Microsoft’s CFO Amy Hood noted that the company is still operating from a “constrained capacity place,” primarily in power and data centre space, rather than just chip supply. Amazon CEO Andy Jassy echoed this sentiment, stating that despite aggressive building, “as fast as we’re bringing it in, right now, we are monetising it,” indicating a rapid and visible return on deployed assets.

Crucially, Microsoft disclosed that it still has a remaining performance obligation (RPO) backlog of $392 billion, an increase of 51% year-on-year. This represents the revenue that Microsoft expects to earn from services or products it has yet to deliver to clients and customers. This figure, which is expected to take about two years to realise, proves that Microsoft has committed customer contracts and a certainty of near-term revenue, which directly supports its elevated CapEx roadmap for the forthcoming years.

Alphabet raised its 2025 CapEx forecast and signalled a “significant increase” expected for next year, driven by a $155 billion backlog in demand for cloud business.

Central banks: Policy divergence and political scrutiny

The Federal Reserve cut interest rates

Source: LSEG Datastream

Central bank activity underscored a notable divergence in global monetary policy, while the U.S. Federal Reserve and the Bank of Japan continued to face unique political pressures.

• Federal Reserve (the Fed): The Federal Open Market Committee (FOMC) cut the federal funds rate by 25 basis points to a range of 3.75% to 4%. The cut was characterised as a pre-emptive easing measure designed to address rising downside risks to the employment mandate (its mandate from Congress to promote maximum employment). Fed Chair Jay Powell affirmed that future policy would remain data-dependent, even as the narrative continues to focus on the administration’s strategy of using political appointments to the Board of Governors to pressure the rate-setting process.
• European Central Bank (ECB): The ECB held its key interest rates steady, keeping the deposit rate at 2% for the third consecutive meeting. With Eurozone inflation stabilising near the ECB’s 2% target, it provided minimal forward guidance, suggesting a prolonged pause. Market expectations are pointing to rates staying unchanged well into 2026. No new economic forecasts were issued at this meeting.
• Bank of Japan (BoJ): The BoJ also held its main interest rate unchanged at 0.5%. At the subsequent press conference, Governor Kazuo Ueda was inevitably asked about the stance of the newly installed prime minister, Sanae Takaichi, who’s known to favour accommodative monetary policy.

Ueda made it clear that while the bank would “stay in close contact with the government and maintain necessary communication,” the BoJ’s decision to maintain its current stance was based solely on the need to evaluate more data, particularly concerning domestic wage trends and the impact of U.S. tariffs. He pledged to “adjust the degree of monetary accommodation when we are convinced, irrespective of the political situation”, an explicit verbal defence of the central bank’s independence against both domestic and external (U.S. Treasury) pressure to quicken its tightening pace.

Trade spats: A tactical China-U.S. truce and chip policy volatility

The last few weeks have seen an intensification of trade stresses between the U.S. and China, with tech restrictions and tariffs from the U.S. prompting rare-earth metal export restrictions and other countermeasures from China.

But more recently, relationships seemed be thawing, resulting in a temporary de-escalation. However, volatility in the semiconductor sector underscored the fragility of the tech relationship.

The rare-earths and tariffs deal

Beijing secured short-term relief for key industries by agreeing to a one-year suspension of its latest, more restrictive rare-earth export control measures, and committing to resuming large purchases of American agricultural products (notably soybeans).

In return, the U.S. offered tangible concessions, agreeing to reduce existing tariffs by 10% on certain categories of Chinese goods. This marks a tactical retreat by both sides to stabilise markets, though the underlying structural controls remain in place.

The Blackwell chip drama

Market attention was intensely focused on the potential relaxation of export controls on Nvidia’s advanced Blackwell AI chips (B-series).

Speculation began when U.S. President Donald Trump publicly signalled he might discuss the sale of a downgraded variant (e.g., the B30A) with Chinese President Xi Jinping. This talk ignited a massive rally in semiconductor stocks, driving Nvidia’s market capitalisation briefly toward the $5 trillion mark on Wednesday, as investors anticipated access to the vast Chinese market.

However, the market impact proved short-lived. On Thursday, President Trump clarified that while semiconductors were discussed broadly, the advanced Blackwell chips were not specifically on the table, instantly cooling market optimism. Analysts and U.S. lawmakers had vehemently opposed any relaxation, arguing that exporting even a scaled-down Blackwell chip would functionally end the existing export control regime and severely erode America’s critical advantage in AI computing power.

Technology remains the dominant force behind the economy and the market, with technological supremacy becoming the prevalent geopolitical issue.

Coming up

• Earnings season: More than half of companies have now reported.
• Purchasing managers indices: A host of business surveys may take on renewed importance as the U.S. government shutdown delays the production of official data.
• OPEC+ meeting: This week, the Organisation for Petroleum Exporting Countries (OPEC+) is expected to boost output for the ninth consecutive month.

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