U.S. stocks face election, earnings and jobs test as AI trade weakens

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U.S. stocks face election, earnings, jobs test

Highlights

Alphabet fell over 12% after earnings miss and cash burn, pressuring major indexes and raising concerns about AI investment sustainability.
Over 100 S&P 500 companies report next week, with Q3 earnings on pace for 31% growth according to LSEG IBES, supporting equities despite volatility.
Tuesday’s midterm elections and Friday’s jobs report will drive sentiment, with a Democratic sweep viewed as negative for AI and broader tech stocks.

Key catalysts converge for equities

As reported by Reuters, the latest bout of pressure on AI-linked stocks follows Alphabet's quarterly results, which showed cash burn and disappointing revenue that sent the Google parent down more than 12% on Thursday and weighed on major indexes. The report adds to investor concern over the financing required to sustain the AI investment theme that has been central to the U.S. bull market.

Several major technology and AI companies are due to report next week, including Apple, AMD and Palantir, keeping attention fixed on whether earnings can justify elevated expectations. Chris Galipeau, head market strategist at the Franklin Templeton Institute, says the earnings hurdle is high, and companies that fail to clear it are being punished by investors.

More than 100 S&P 500 companies are scheduled to report, including McDonald's, Amgen and ConocoPhillips. With about half of the index having posted third-quarter results, earnings are on pace to rise 31% for the period, according to LSEG IBES data cited on Thursday, helping explain why equities have held up despite sharp reactions to individual disappointments.

Election and economic signals shape market outlook

Tuesday's midterm elections are set to determine whether Democrats can take control of Congress from President Donald Trump's Republican party, with the House seen as more likely to switch than the Senate. Investors are watching the outcome closely because a Democratic sweep is expected to bring greater scrutiny of AI, data centers, Wall Street banks and crypto firms.

Market participants are also tracking local and state races in Texas and other areas for what they could mean for data center construction, which is facing opposition over energy costs and environmental impact. Rick Meckler, partner at Cherry Lane Investments, says a strong Democratic showing would likely be viewed negatively for AI shares, parts of the broader technology sector and potentially the wider market.

Next Friday's October jobs report adds another major test for sentiment after data on Thursday showed the U.S. economy grew in the third quarter at its fastest pace in a year, supported by consumer spending and business investment in AI. The Federal Reserve kept interest rates steady this week and upgraded its assessment of the economy, but Matthew Miskin, co-chief investment strategist at Manulife John Hancock Investments, says the missing piece in the growth narrative is weaker job creation.

As AI and related technology stocks struggle, other corners of the market are providing support. Energy, financials, utilities and healthcare are on track for solid October gains, leaving the S&P 500 up about 1% for the month and more than 12% for the year.

In our earlier article on U.S. AI data center expansion, we examined how rising financing costs, construction delays, and power-grid constraints are starting to challenge the pace of new capacity buildouts. We also noted that only a minority of planned projects are viewed as credible, while local opposition and cost overruns are adding to investor doubts about whether the AI infrastructure boom can be delivered on time and on budget.

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