Mixed Tech Earnings and Fed Patience Drive Volatile Market Session

Key points

• Microsoft advanced 3% after fiscal first-quarter results showed beats on top and bottom lines, driven by growth in Azure cloud infrastructure.
• Alphabet shares fell 9% after adjusted earnings per share and revenue missed expectations, with the company posting negative free cash flow of $9.07 billion and maintaining a capital expenditure forecast of $195 billion to $205 billion.
• The Federal Open Market Committee held the benchmark interest rate range at 3.75%-4.00%, noting that inflation remains elevated but stating it is awaiting more information before further action.
• ServiceNow shares dropped 18% in extended hours after reporting adjusted profit of $1 per share, missing the consensus expectation of $1.02, with fourth-quarter subscription revenue guidance slightly below consensus.
• Lumentum shares surged 11% after Bloomberg reported that Marvell Technology is in talks to acquire the optics maker, with a potential announcement as early as next week.
• The S&P 500 rose for a third straight day during regular session, led by Micron Technology jumping 6% and Broadcom adding 2%, while the Nasdaq Composite advanced 0.3%.

Background

Recent market volatility has been influenced by the Federal Reserve's decision to hold rates steady in a split vote, with two officials dissenting in favor of a hike. The central bank's Chair Kevin Warsh signaled a pause to assess economic conditions, while AI and semiconductor shares surged following strong earnings from companies like SK Hynix and Oracle. Additionally, Chipotle reported third-quarter results with same-store sales growth but missed earnings expectations due to margin compression, navigating food safety concerns including a salmonella outbreak linked to jalapenos.

Why it matters

The divergent performance of major tech companies highlights the fragility of the artificial intelligence trade, with investors scrutinizing capital expenditure forecasts and free cash flow. The Federal Reserve's decision to hold rates steady, despite elevated inflation, signals a cautious approach that could impact future monetary policy and market sentiment. The potential acquisition of Lumentum by Marvell Technology underscores the ongoing consolidation in the AI infrastructure space, while ServiceNow's sharp decline reflects investor sensitivity to profit margins and guidance in the enterprise software sector.

What to watch

Investors will focus on the Personal Consumption Expenditures price index report for September, the first reading of third-quarter GDP, and weekly jobless claims due Thursday. Quarterly reports from Caterpillar and Eli Lilly are expected in the morning, followed by Amazon and Intel after the market close. Amazon is expected to report third-quarter revenue of $202.22 billion, with key focus on Amazon Web Services growth and adoption of custom Trainium chips.