With Fed mum on next move, investors look to earnings to keep stocks afloat

By Laura Matthews

NEW YORK, Aug 14 (Reuters) – Investors head into next week weighing familiar concerns over interest rates, inflation and geopolitical tensions against another robust earnings season that continues to keep stocks supported.

With little fresh guidance from policymakers and uncertainty brewing over the U.S. Federal Reserve’s next move, many investors are increasingly looking to corporate earnings — fueled in part by spending on AI infrastructure — to validate bullish assumptions and offset macroeconomic risks.

“The primary thing is going to continue to be the Federal Reserve,” said Shawn Snyder, economic strategist at Potomac Fund Management. He sees the August 27 to 29 Jackson Hole symposium as the next major opportunity for policymakers to provide clarity on how they are interpreting inflation and growth.

“If you can’t look to the Fed for guidance, then you have to increasingly look to earnings for guidance.”

NEEDING REASSURANCE 

For investors like Snyder, the focus is less on a specific rate signal and more on whether policymakers can articulate a credible framework for navigating inflation and growth after bouts of mixed messaging.

That uncertainty has kept markets closely focused on real Treasury yields — returns adjusted for inflation — a key driver of asset prices. Rising yields can pressure technology stocks and other long-duration assets by increasing financing costs.

The dynamic is particularly important for AI-related companies and hyperscalers whose shares have been among the market’s biggest drivers this year.

The S&P 500 hit a record high on Thursday as technology shares climbed and falling oil prices boosted risk appetite after a softer-than-expected U.S. producer price report. Treasury yields also fell as markets pared back rate-hike expectations next month.

Stocks and the S&P 500 information technology index have notched modest gains this week.

Even so, investors remain alert to signs inflation could reaccelerate. Elevated energy prices and stalled U.S.-Iran talks have raised concerns that oil markets could jolt higher, potentially adding pressure to consumer prices and bond yields.

For now, however, strong corporate results have helped contain volatility. About 85% of S&P 500 companies reporting have beaten earnings estimates, with profits up 32.7% excluding mark-to-market gains at Alphabet and Amazon, according to LSEG data. 

Earnings results from Walmart and chipmaker Analog Devices will offer fresh clues into the health of the U.S. consumer and broader economy.

“Not only have we seen earnings beats and revenue beats so far, we’re also seeing a lot of upside guidance as well and limited downside guidance from companies. They’re the ones telling us, ‘hey, the party is still on’,” said Andy Pratt, director of investment strategy at Burney Company. “When you look at what are the things driving inflation right now, they’re … one-time shocks rather than something more persistent.”

Earnings strength has been especially notable among companies tied to AI-related infrastructure spending, a theme investors expect to remain front and center in coming weeks.

‘EARNINGS TRUMP ALL OTHER PROBLEMS’

For Chris Grisanti, chief market strategist at MAI Capital Management, hyperscaler spending plans are among the most important developments to watch. Recent earnings reports, he said, have increasingly clarified which companies stand to benefit most from the AI boom.

Big Tech’s AI spending is set to rise past $700 billion this year from $400 billion in 2025, and the scale of those investments has fueled questions about whether hyperscalers can generate sufficient returns to justify the massive capital outlay.

Yet, Grisanti dismissed concerns that those companies are overextending themselves financially, arguing their balance sheets remain among the strongest in corporate America and that aggressive investment reflects strong demand.

“If you were running that business, you would beg, borrow, and steal to get more money to put into that business,” he said, referring to some of the fast-growing cloud businesses. 

Still, investors acknowledge that oil prices and geopolitical developments could yet complicate the inflation and interest rate outlook. But after another earnings season marked by upbeat guidance and heavy AI investment, many see corporate America as the strongest current defense against those risks.

“It’s a nice time to be an equity investor because earnings trump all the other problems,” said Grisanti. “I think that will become clear as the second half (unfolds).”

(Reporting by Laura Matthews in New YorkEditing by Rod Nickel)