Tech Earnings Falter Ahead of Midterms

Weekly Summary

Technology stocks faced renewed pressure as disappointing earnings, heavy AI infrastructure spending and elevated financing costs raised questions about valuations.

With the US midterm elections approaching, investors are watching corporate cash generation, Federal Reserve policy and upcoming economic releases.

Technology Earnings and AI Spending Pressure US Stocks

This week’s sharp declines in Alphabet and Intel showed how little room technology companies have for disappointing results or guidance. The S&P 500 finished down 0.6% and the Nasdaq lost 2.0%, while the Russell 2000 gained 1.3%. The divergence reflects a reassessment of the price of future technology growth, rather than uniform weakness across the market.

Alphabet’s Class A shares fell 12.6% on Thursday, their worst day on record, after revenue disappointed and quarterly free cash flow was negative. Intel dropped 28.6% on Friday, its steepest decline since 1974, as its fourth-quarter outlook disappointed despite better-than-expected third-quarter adjusted earnings. Management also warned that the PC slowdown could persist through at least the first half of 2027. These reactions underline the distinction between past growth and what comes next. The market is placing greater weight on whether ambitious investment plans can produce earnings and cash flow, rather than treating higher spending as evidence of future returns.

There was still evidence of strong demand. Amazon reported 39% year-over-year growth in AWS sales to $46 billion, yet its trailing twelve-month free cash flow was negative $42.4 billion. The cash outflow primarily reflected higher investment in property and equipment. That combination helps explain why enthusiasm for AI infrastructure is becoming more selective. We remain constructive on the technology’s long-term potential, while placing more weight on margins, funding needs and the time required to earn an adequate return on capital.

US GDP Growth, PCE Inflation and Federal Reserve Policy

The economic data did little to ease the valuation challenge. Third-quarter GDP grew at a 3.4% annualized pace, but September PCE inflation remained elevated at 3.6% year over year. The Fed held its policy rate at 3.75% to 4.00% on Wednesday, with two officials preferring an increase. Continued growth supports corporate revenues, but persistent inflation limits the case for easier policy. Companies relying on distant profits remain particularly sensitive to the cost of capital.

2026 Midterm Elections: Implications for Financial Markets

Next week’s midterm elections on Tuesday, November 3, add political uncertainty. Control of Congress will influence the scope for changes in taxes, spending and regulation. Clear results could remove one source of uncertainty, while closely contested races may prolong it. We would be cautious about treating either party’s performance as a reliable market signal; the implications will depend on specific policies and whether they can become law.

Quantel's Take: What Investors Should Watch Next

Earnings and economic evidence will remain important beyond election headlines. AMD’s Tuesday results offer another test of AI demand, while Friday’s October employment report will help assess the balance between growth and inflation pressure. We favor a selective approach, focusing on businesses with credible cash generation and balance sheets that can absorb sustained investment. A lasting recovery would need stronger evidence of investment returns and more stable financing conditions, rather than political relief alone.