A Fed Decision Is Coming Up, and Microsoft and Alphabet’s AI Costs Are What’s Making Markets Move

The outlook for U.S. stock futures is varied as investors anticipate a significant interest rate decision by the Federal Reserve and the possibility of insights into the future borrowing expenses from the central bank. Microsoft (NASDAQ:MSFT) and Google-owner Alphabet (NASDAQ:GOOGL) caution that investment in advancing their artificial intelligence capabilities will increase this year, counterbalancing a robust set of quarterly earnings from the tech giants.

In another location, a Delaware judge has invalidated Elon Musk’s substantial Tesla (NASDAQ:TSLA) compensation package, which was valued at nearly $56 billion.

Fed Decision Coming Up

There is a strong expectation that the Federal Reserve will maintain interest rates at their current level after the conclusion of the central bank’s recent two-day policy meeting on Wednesday. As a result, any statements made by officials regarding the future direction of interest rates will be closely scrutinized.

Borrowing costs are at their highest level in over twenty years, ranging from 5.25% to 5.50%. This increase in rates is a result of the Federal Reserve’s aggressive efforts to combat high levels of inflation in the United States.

Recent data indicates that the current tightening cycle may be yielding the intended outcome. Although the rate of inflation is still higher than the Federal Reserve’s desired 2% target, there are indications that it is gradually decreasing towards this level. The economy has shown remarkable resilience, as demonstrated by the unexpectedly initial solid estimate of fourth-quarter U.S. gross domestic product released last week.

The data has raised optimism that the Federal Reserve could successfully combat inflation without triggering a more widespread economic crisis, commonly referred to as a “soft landing.”

In December, policymakers indicated the possibility of up to six rate reductions in 2024, creating excitement towards the end of last year that a cut of twenty-five basis points could occur in March.

However, a number of Federal Reserve officials, cautious about triggering a resurgence in inflation, have subsequently dampened these anticipations. The remarks made by the Federal Reserve, especially Chair Jerome Powell, have the potential to influence how the market perceives the future trajectory of interest rates in the upcoming months.

The Judge Throws Out Musk’s Enormous Compensation Package for Tesla

A judge in Delaware has invalidated Elon Musk’s massive $55.8 billion compensation package for Tesla, deeming it excessive and unfairly disadvantageing shareholders.

The ruling, which rejects the most significant compensation package in corporate America, suggests that Musk’s charismatic persona may have influenced the board members of the electric car maker. The lawsuit was filed by specific Tesla stakeholders who felt that the remuneration was too high.

If the ruling stands, Musk would forfeit his rights to over 303 million Tesla shares, which accounts for approximately 10% of the company. This falls significantly short of his initial target of owning 25% of the company.

Tesla’s stock experienced a slight decline during premarket trading on Wednesday.

The Futures Market Was Mixed

U.S. stock futures were fluctuating around the neutral mark as investors anticipated the Federal Reserve’s decision and assessed a new wave of significant corporate earnings.

At 05:26 ET (10:26 GMT), the Dow futures contract had increased by 34 points or 0.1%, while S&P 500 futures had declined by 27 points or 0.5%, and Nasdaq 100 futures had dropped by 224 points or 1.3%.

According to a note by Michael Hewson, Chief Market Analyst at CMC Markets (LON:CMCX), the Federal Reserve may finally dismiss the notion of an upcoming rate cut on Wednesday. “It would come as a surprise if the Fed were to indicate a decrease in rates in March, although they may consider the possibility in the second quarter,” Hewson commented.

In other news, premarket trading saw a decline in Microsoft and Alphabet shares. Concerns arose on Wall Street regarding the significant expenses that both tech giants are expected to face in their efforts to create AI-powered products (more details below). Additional earnings reports are scheduled for release today, including figures from the troubled aircraft manufacturer Boeing (NYSE:BA) and pharmaceutical company Novo Nordisk (NYSE:NVO).

In the previous trading session, the S&P 500 index ended slightly lower by 0.1% but remained just below the record high achieved on Monday. Meanwhile, a decline in large-cap stocks such as Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) weighed on the technology-focused Nasdaq Composite, causing it to drop by 0.8%. The Dow Jones Industrial Average, consisting of 30 stocks, experienced a 0.4% increase.

Microsoft and Alphabet Discuss the Costs of Artificial Intelligence

Microsoft and Google’s parent company, Alphabet, have indicated that they anticipate an increase in capital spending this year. This move is aimed at strengthening their position in the competitive race to tap into the growing demand for generative AI.

Based in Redmond, Washington, During a recent earnings call, Microsoft informed analysts that it anticipates a significant rise in expenses in various areas, such as data centers and servers, due to the need to expand its AI infrastructure. According to Chief Financial Officer Amy Hood, Microsoft, which recently overtook Apple as the world’s largest company, is now prioritizing an “AI-first position.”

Alphabet also mentioned a significant increase in spending in 2024. The company is focused on expanding its AI offerings in its advertising and cloud services divisions. Specifically, Alphabet plans to release a highly improved version of its generative AI chatbot, Bard, in the coming months.

The finance chief, Ruth Porat, expressed enthusiasm for the vast potential of AI applications for users, highlighting the remarkable opportunities it presents for long-term growth.

Both companies reported stronger-than-expected earnings and revenues in their latest financial quarters. However, the lukewarm response from Wall Street suggests that there are concerns about their ability to sustain the high levels of investment required to achieve successful generative AI.

“Looking at the bigger picture, it’s evident that the current earnings season is highlighting a crucial trend: investors are keen to identify the players with the financial strength to lead the anticipated battle of innovation once economic conditions start to improve,” commented Thomas Monteiro, a seasoned analyst at Investing.com. “In this scenario, investors are primarily interested in witnessing enhanced profit margins and increased free cash flows. This will provide them with confidence that the company is well-positioned to compete in the AI arms race.”

The Price of Crude Falls After Weak Manufacturing Data From China

Oil prices slightly declined due to underwhelming production activity information from China, which is the largest importer of crude oil, dampening overall market sentiment.

At 05:27 ET, the U.S. crude futures experienced a 1.2% decline, settling at $76.89 per barrel, while the Brent agreement saw a 1.1% drop, reaching $81.59 a barrel.

According to official data, manufacturing activity in China declined for the fourth consecutive month in January, casting more uncertainty on the robustness of the economic rebound in this crucial oil market.

The rough indicators are still set to achieve their initial monthly increase since September, as escalating conflicts in the Middle East have intensified worries about the supply in this oil-abundant area.

According to the most recent report, the American Petroleum Institute’s data showed a decrease in crude stockpiles of 2.5 million barrels for the week ending January 26.