Swissquote: AI dreams, real costs

October 28, 2026

Elsewhere, however, oil prices remain elevated, with US crude consolidating near $102.5 per barrel as Brent crude steadies above $110 per barrel. The stress across European bond markets seems to have eased, while the US 2-year yield, which is particularly sensitive to Federal Reserve (Fed) expectations, is up for the fourth consecutive session. So it’s in this environment that the Fed will conclude its two-day monetary policy meeting, and Google and Microsoft will open their books.

As I said on Monday, this week will present plenty of opportunities to either restore confidence or give investors more reasons to question Fed policy, the robustness of the AI trade and how much they are willing to pay for the AI dream in the broader scheme of things (mainly, when yields are so attractive!). So let’s start with the Fed and drill down to Microsoft and Google.

Fed to pause ahead of midterms

The Federal Reserve is widely expected to leave interest rates unchanged in the 3.75–4% range today, after raising them by 25 basis points in September. Expectations of a pause have reduced the sense of urgency around immediate rate action, and a hike just days before critical midterm elections would certainly be politically sensitive!

But the fact that US inflation remains sticky above the 2% policy target means that another rate hike in December remains a possibility. Fed funds futures currently imply a more than 80% chance of at least a 25bp hike before this year ends.

Of course, this probability could change in the blink of an eye if, suddenly, for example, the wars in Iran and Ukraine stop and energy prices crash. But because that looks more like an extreme-case scenario, chances are that the Fed will hike, with – we agree – no guarantee that the hikes will help bring inflation down, as price pressures are fuelled by the war-led energy crisis, but also by the AI buildout and government spending.

For the Fed, the challenge will be to act based on facts and justify the direction it takes. Again, even though inflation is not solely demand-driven, if higher energy costs feed through to the broader economy, rate hikes could temper part of the pressure. At the same time, the labour market has shown signs of softening. If that trend gains momentum, the need for further rate hikes will diminish – which would be great news for the markets.

We will therefore pay close attention to how Fed Chair Kevin Warsh describes the inflation outlook, the labour market and the impact of higher energy prices. No forward guidance is expected but markets will be listening for clues about how concerned the Fed is about tighter financial conditions, including the pressure that higher borrowing costs are putting on the AI investment boom, housing through higher mortgage rates, and consumer borrowing more broadly.

A more hawkish message from the Fed could push yields at the shorter end of the US yield curve higher, narrow the spread between US 2- and 10-year yields and weigh on technology stock appetite by reviving recession talk. The 2–10-year spread has eased to around 27bp. A negative reading here is seen as a ‘recession warning’, on the idea that higher borrowing costs today will squeeze economic activity enough to send it into recession. More disquietingly, if growth weakens while supply-driven inflation persists, stagflation would become a more plausible scenario. Yikes.

A more balanced tone from the Fed, on the other hand, could offer some relief. But even if the Fed holds today, investors will want to know what it would take for policymakers to raise rates again – and whether one more hike would be enough.

Overall, if yields rise after the Fed announcement, equities will remain under pressure. If yields ease, we could see some relief, but the degree of optimism will depend on what Microsoft and Google reveal in their latest reports.

Big Tech due to announce earnings

Here, what we want to know is how strongly their cloud businesses grew (to understand the strength of AI demand) and how much more they are planning to spend to generate that growth.

On the growth side, expectations for their cloud businesses are strong. Analysts expect Microsoft’s Azure cloud business to have grown by around 48% year-on-year, while Google Cloud is expected to have grown by around 95%, supported by demand for AI services. Microsoft is also expected to disclose Azure revenue in dollar terms for the first time, giving investors a clearer picture of the size of the business.

On the spending side, investors want to know: what is the cost of generating returns? Capital expenditure, cash flow, margins and any updates to spending plans could be the major market drivers – as was the case with Meta last week.

The thinking remains unchanged: growth and spending can no longer be assessed separately. Beating earnings expectations is no longer enough to convince investors to stay on board. Investors also want to make sure that costs remain reasonable – and that companies are not playing ‘who can pee farther’, as Meta gives the impression of doing. Zuckerberg has already acknowledged that Meta could end up misspending hundreds of billions of dollars in the AI race, but that the risk of falling behind is greater.

And if other Big Tech companies do the same, there’s a risk that trillions could be thrown out of the window. According to Gartner, more than $3.5 trillion of AI infrastructure spending could be at risk of impairment by the end of 2030 if companies continue their current pace of AI spending.

So it is no surprise that investors want reassurance that growth can keep pace with costs – especially when attractive bond yields offer an alternative to paying a high price for profits that may take years to materialise.  The US 10-year inflation-protected Treasury currently offers a real yield of around 2.66%.