AI bull market enters a "critical judgment week": as the market no longer buys in unconditionally, how will the earnings reports of the three cloud giants, the Fed decision, and PCE determine the market's direction?

Title context: AI bull market enters a "critical judgment week": as the market no longer buys in unconditionally, how will the earnings reports of the three cloud giants, the Fed decision, and PCE determine the market's direction? Text: The U.S. stock market is entering a highly decisive week. On the surface, this is a dense earnings window; in substance, it is a synchronized stress test of the foundational narrative of the artificial intelligence (AI) bull market. Last week, after suffering its most violent single-day selloff since June, the Nasdaq Composite barely stabilized on Friday with only a modest decline. Disappointing results from Meta (META.US), one of the hyperscale cloud service providers making massive investments in data center construction, and from Lam Research (LRCX.US), a semiconductor leader with impressive gains in this round of the AI rally, have brought the market's anxiety into the open. Clearly, investors are no longer willing to pay unconditionally for "AI capital expenditure," and this week's earnings from the three major hyperscale cloud service providersAlphabet (GOOOGL.US), Microsoft Corporation (MST.US), and Amazon.com, Inc. (AMZN.US)along with the Federal Reserve's policy meeting, earnings guidance from South Korea's two memory chip giants, and PCE inflation data will collectively determine whether the current rebound is a "healthy pullback" or "the prelude to a deeper correction." A Fed hold in October is all but certain, but Warsh's "silent signal" is the real source of risk This week, the central banks of the United States, Japan, and Europe will hold policy-setting meetings in succession, and the Federal Open Market Committee (FOMC) will announce its rate decision on Wednesday local time. As of press time, the CME Group Inc. Class A FedWatch tool shows that the market is pricing only about a one-in-ten probability of a 25-basis-point rate hike in October, with the federal funds rate highly likely to remain in the 3.75% to 4.00% range. In an economist survey conducted from October 16 to 20, 94 of 100 respondents expected no move this month, an expectation highly consistent with market pricing. However, the October "pause" is almost certainly not the end of the tightening cycle. In the same survey, all 100 economists expected a rate hike in December, compared with fewer than half holding that expectation in last month's survey. The FedWatch tool shows the market expects about a 72% probability of a December hike, reflecting that the market has already treated one tightening before year-end as the baseline scenario. David Mericle, Chief U.S. Economist at Goldman Sachs Group, Inc., wrote in a commentary: most Fed officials favor "raising rates by 25 basis points every other meeting," implying one hike each in December and March next year. The September dot plot showed that 16 of 18 officials expected at least one more rate hike within the year. More noteworthy than the rate decision itself is Chair Kevin Warsh's communication stance at the post-meeting press conference. Since taking office in May 2026, Warsh has been known for refusing to provide "forward guidance" to financial markets, a sharp break from his predecessor's communication paradigm. A team led by Matthew Luzzetti, Chief U.S. Economist at Deutsche Bank Aktiengesellschaft, said in a research note that Warsh's likely core message will be: recent data have done little to ease concerns about persistent inflation, and tighter financial conditions cannot substitute for further rate hikes. Luzzetti specifically noted that a key observation point is whether Warsh continues to describe overall financial conditions as "accommodative"if he avoids repeating wording from the July press conference that raised market doubts about the Fed's willingness to act, it could be interpreted as implicit endorsement of a December hike. Warsh's dilemma lies in the tearing of the dual mandate: inflation has been above target for a fifth consecutive year, while the unemployment rate remains near historic lows. Raising rates too slowly risks repeating the mistake of underestimating inflation in the early pandemic period; raising rates too quickly could trigger unnecessary tightening of financial conditions in a market already highly sensitive to AI capital expenditure. The upward pressure on energy costs driven by the Middle East conflict further complicates this trade-offthe Fed needs time to assess the transmission of fuel price shocks, which is precisely the tactical reason for "waiting" in October, yet far from sufficient as a strategic basis for stopping tightening. Walter Todd, Chief Investment Officer at Greenwood Capital, said he will watch for any hints from Warsh on the rate path at the post-decision press conference. "Will he give some clues about December, since the current expectation is a hike," Todd said. Alphabet, Microsoft Corporation, Amazon.com, Inc. earnings: the market's question has shifted from "how much to spend" to "when will it pay off" Despite headwinds such as surging U.S. Treasury yields and rising energy costs caused by the Middle East conflict, strong U.S. profit growth has supported this year's stock market rally. According to LSEG IBES data, more than 100 companies have reported so far, and S&P 500 third-quarter earnings are expected to grow more than 32% year over year. Next week will be the busiest week of the U.S. earnings season. The hyperscale cloud service providers, with combined capital expenditure approaching an annual scale of $800 billion, will continue to deliver their scorecards this week. But the nature of this AI investment boom has now changed significantly: in 2024 to 2025, the market rewarded companies that announced large-scale AI investments; since the second half of 2026, the threshold for punishment has been rapidly shifting lower. Nick Giorgi, Chief Equity Strategist at Alpine Macro, commented: "There are many uncertainties intertwined at present. More tech companies will report earnings this week, and the market is currently viewing all AI-related spending with a cautious eye. The market will not give unconditional trust to companies spending heavily on AI infrastructure, which in our view is actually very healthy, but still signals short-term pain." Alphabet will report earnings after the close on Wednesday U.S. Eastern Time. In the previous quarter, the company raised its full-year 2026 capital expenditure guidance by $15 billion to $195 billion to $205 billion, and warned that short-term margins and free cash flow would come under pressure due to a transitional strategy of using third-party compute capacity in the third quarter. In other words, Alphabet Inc. Class C is sacrificing current free cash flow in exchange for catching up on AI compute supply. The market's tolerance depends on whether Google Cloud can offset the erosion from depreciation and lease costs with sufficiently fast revenue acceleration. BofA Securities analyst Justin Post expects third-quarter Google Cloud revenue growth to reach 93%, significantly above the 89% market consensus, driven by incremental capacity deployment and the initial external sales of TPUs. Google Cloud's order backlog of up to $514 billion provides a floor for revenue visibility, but the real valuation risk is that the gap between capital expenditure and free cash flow is widening, while the depreciation cycle for AI infrastructure has only just begun. A less-discussed marginal variable is the prioritization of compute allocationreports suggest Alphabet Inc. Class C's cloud is prioritizing limited computing capacity for internal DeepMind models, which may raise concerns that some commercial customers could migrate to competitors. Microsoft Corporation will also report earnings after the close on Wednesday U.S. Eastern Time. Microsoft Corporation's narrative is relatively solid, but the absolute scale of capital expenditure constitutes an independent source of pressure. In the previous quarter ended June 30, 2026, Microsoft Corporation reported revenue of $90 billion, up 18% year over year. Azure and other cloud services revenue grew 43%, reflecting continued demand for cloud computing and AI infrastructure. Management guided September-quarter Azure revenue growth of about 44% to 45% at constant currency. However, Microsoft Corporation also expects first-quarter capital expenditure to exceed $50 billion, including the impact of lease reclassification after updating asset useful-life assumptions. This means investors will examine whether Azure growth, enterprise AI adoption, and profitability can keep pace with these massive investments; any slowdown in cloud business growth or weaker-than-expected guidance could trigger market concerns about future margins. The company's calendar-year 2026 capital expenditure plan of about $190 billion (including about $25 billion from component price increases, later revised down to $175 billion due to accounting changes, with the actual investment scale unchanged) represents roughly 61% growth over 2025. Amazon.com, Inc. will report earnings after the close on Thursday U.S. Eastern Time. Deutsche Bank Aktiengesellschaft, in a preview it published, raised its third-quarter AWS revenue growth forecast to 41%, with the fourth quarter seen at 44%, and set its third-quarter operating margin forecast at 37.1%, above 34.6% in the year-ago period. AWS acceleration will be the most directly positive variable in this earnings reportit answers the question of whether enterprise AI workloads are moving from pilots to scaled consumption. But the same research note also raised its 2027 capital expenditure forecast for Amazon.com, Inc. to about $330 billion, meaning spending expansion in the current fiscal year has not yet peaked and the timeline for free cash flow recovery is being pushed back. For investors holding Amazon.com, Inc., the tension between rising AWS margins and the trajectory of consolidated free cash flow will determine the stock's direction after earnings. SK Hynix and Samsung: profits in the AI hardware chain are being realized, but the "what comes after" question has emerged If the earnings of U.S. cloud giants test the strength and sustainability of AI demand, then the results of South Korea's two memory giants test the degree to which profitability in the AI hardware supply chain is being realizedand the answer is already quite clear. Samsung Electronics' preliminary guidance released earlier this month showed third-quarter operating profit reached 107.4 trillion won, a 782.5% surge from 12.17 trillion won a year earlier, marking the company's first-ever quarter with operating profit above 100 trillion won. SK Hynix (SKHY.US) will report official results after the close on Tuesday U.S. Eastern Time, with the consensus of 10 Korean brokerages expecting third-quarter revenue of 96.66 trillion won and operating profit of 75.97 trillion won, for an operating margin exceeding 75%. Combined operating profit is expected to be around 185 trillion won (about $139 billion), setting the highest single-quarter profit record in the history of the global memory industry. The driver of the earnings explosion is undoubtedly the commercial ramp-up of HBM4. The two companies are supplying sixth-generation high-bandwidth memory for NVIDIA Corporation's next-generation Vera Rubin accelerator architecture; HBM4 doubles data bandwidth versus the previous HBM3E generation and reduces power consumption by more than 40%. In the second quarter, SK Hynix accounted for about 50% of global HBM revenue, Samsung Electronics 33%, and Micron Technology, Inc. (MU.US) 18%Samsung, after resolving the packaging bottleneck of the HBM3E era, is catching up quickly and has guided that HBM4 will account for more than 60% of its second-half HBM revenue. At the same time, the synchronized rise in standard DRAM contract prices (third-quarter server memory contract prices rose 13% to 18%) provides a second layer of support for profitability. However, the "perfect earnings" of memory chips alone are not enough to dispel the overall anxiety around the AI trade, because of two fault lines that are about to be scrutinized more closely by the market. The first is the high concentration of profits. Samsung Electronics' operating profit comes almost entirely from its Device Solutions semiconductor division, while its foundry business and mobile division recorded losses in the same period, meaning any marginal softening in memory prices will hit profits with disproportionate leverage. The second is the signal from capital return allocation. Samsung's total shareholder return plan for 2026 is set at between 90 trillion and 110 trillion won, while SK Hynix has committed to returning at least 50% of cumulative free cash flow from 2025 to 2027 to shareholders and has completed the cancellation of 40 trillion won of treasury shares. With the bill for AI capital expenditure still swelling, memory makers choosing large-scale cash returns rather than reinvesting everything in capacity may prompt some market questions: they may be more cautious than buyers assume about how long this HBM super-cycle will last. In addition, other closely watched companies will report earnings next week, including chip companies Intel Corporation (INTC.US) and SanDisk (SNDK.US), pharmaceutical maker Eli Lilly (LLY.US), oil giants Exxon Mobil Corporation (XOM.US) and Chevron Corporation (CVX.US), and industrial equipment giant Carter's Incorporated Caterpillar (CAT.US). The inflation reading landing the day after the decision reprices the denominator for AI valuations On the economic data front, the U.S. September personal consumption expenditures price index will land on October 29the day after the Fed decision is announcedin the same week as third-quarter GDP data. This timing is expected to amplify the data's impact on the market: investors will be forced to independently reprice the inflation trajectory less than 24 hours after digesting the Fed decision. The currently known anchors are: August headline PCE rose 3.4% year over year and core PCE rose 3.0% year over year, both flat at the margin from July, but headline inflation remains significantly above the Fed's 2% target. Deutsche Bank Aktiengesellschaft expects September core PCE to rise to 3.1% to 3.2% year over year, based on broad CPI upside surprises. More critically, third-quarter GDP is expected to continue showing solid growth with stable labor market conditionsmeaning inflation stickiness is not the product of demand destruction but the result of demand continuing to exceed supply potential. For Warsh, this data combination means that, absent a substantial crack in growth, there is no reason to regard the current 3.75%-4.00% policy rate as sufficiently restrictive. The impact of PCE data on the AI trade lies in the fact that valuations of long-duration growth stocks are essentially a discounting of future cash flows, and the path of real interest rates is a core component of the denominator in that discounting process. When the numeratorthe payback period of AI capital expenditureis being scrutinized more harshly by the market, any upward revision to the denominator (rate expectations) will produce a multiplier-effect valuation compression. What makes this week unique is that the test of the numerator (earnings from the three cloud giants and the two memory giants) and the recalibration of the denominator (the Fed decision and PCE) occur within the same five-trading-day window.