Major indexes closed higher this week as Big Tech earnings and the Federal Reserve’s policy decision took center stage. The Fed kept interest rates unchanged for a fifth consecutive meeting, though three policymakers dissented in favor of a hike.
Microsoft delivered a standout quarter, with Azure cloud revenue up 43% year-over-year and full-year segment revenue topping $100B, sending shares more than 15% higher. Amazon surged over 15% after a blowout quarter, with revenue of $200.6B (+20% Y/Y) topping the $197B consensus and operating income climbing 43% to $27.5B. Apple fell more than 7% — its worst single-day post-earnings slide since 2013 — after weaker-than-expected fourth-quarter revenue guidance (9%-11% growth vs. the 12.1% analysts expected), compounded by softness in Services revenue and Greater China sales.
The Fed decision to keep interest rates unchanged triggered a sharp steepening of the yield curve: 30-year yields climbed to their highest level since 2007 and the 10-year Treasury yield rose to around 4.70%-4.71% in the days following the meeting, pressured further by renewed Middle East tensions.
For the week, the S&P 500 advanced 1.05%, the Nasdaq climbed 1.59%, and the Dow added 1.04%, driven largely by megacap earnings surprises.
Future Wealth’s View
In the Q&A session on Wednesday, Fed Chair Kevin Warsh downplayed the inflationary implications of AI related infrastructure spending and suggested that tighter financial conditions via higher market rates could do some of the Fed’s work for it. Well, the reason why rates went up was not because it wanted to do the work for the Fed but instead expected that Warsh may not be aggressive enough in raising rates given his appointment by Trump, who has called for lower interest rates. Despite repeatedly stating during the session that the Fed is committed to lowering inflation to 2%, the Fed Chair ended the meeting with a growing credibility problem for the central bank.
10 Year treasury yields rising beyond 4.75% typically ushers in a rotation from equities to bonds as bond yields become more compelling than taking risk with equities. If this were to occur in the next few months, we could see a 2-5% correction in equities brought on by the Fed turning a blind eye to the message the bond market’s higher yields are sending about the inflation risks.
The bond market wants a rate hike, but is getting nothing in return.