S&P 500 faces test as 4 Big Tech earnings, Fed decision converge

The stock market's summer rally faces its biggest test this week as four Magnificent 7 companies report earnings and the Federal Reserve delivers a rate decision.

The S&P 500 enters a pivotal week as four Magnificent 7 earnings and a Fed rate decision test the durability of the 2026 rally. The benchmark fell 0.6% last week, with the mega-cap tech cohort declining 5.7% as investors grew nervous about AI capital expenditure levels, according to FactSet.

Blended earnings growth for the S&P 500 stands at 37.9% year-over-year, above the 23.3% expectation at the end of the quarter, FactSet data show. Excluding Alphabet, which reported last week, the growth rate would drop to 25.9%, showing how dependent the earnings expansion is on the mega-cap technology companies.

Meta Platforms and Microsoft report after the close Wednesday, followed by Apple and Amazon on Thursday. Alphabet saw revenue grow 24% year-over-year with Google Cloud revenue surging 82%, but the stock fell after the company boosted its 2026 capital expenditure forecast by $15 billion to a midpoint of $200 billion. Tesla fell 17.8% after a mixed quarter with higher spending on robots and autonomous vehicles weighing on profit.

The Federal Reserve meets Wednesday, with markets pricing a 25-basis-point rate hike in September and an additional hike in December, according to Fed funds futures. Resilient economic growth and elevated inflation have pushed rate hike odds higher. The first reading of second-quarter GDP arrives Thursday, with economists expecting growth of 2.1%.

Tech Selloff Broadens as AI Spending Scrutiny Intensifies

The 5.7% decline in the Magnificent 7 last week dragged the broader S&P 500 lower, with small-cap stocks also underperforming. The selloff was concentrated in mega-cap technology as investors repriced the returns from AI infrastructure investment. Alphabet's $15 billion increase in projected 2026 capital expenditure to a midpoint of $200 billion, with 2027 spending expected to be even higher, triggered the rotation out of the group.

The communication services sector, which includes Alphabet, was the primary driver of the increase in expected earnings for the quarter. Without Alphabet's contribution, the blended earnings growth rate would fall by 12 percentage points, according to FactSet.

Cross-Asset Dynamics Add Pressure

The 10-year Treasury yield edged higher last week as rate hike expectations repriced, adding pressure on growth stocks with longer-duration cash flows. The U.S. dollar strengthened, while oil prices remained supported by geopolitical risk premiums as the Iran conflict continued. Gold held near recent highs as investors hedged against the convergence of monetary policy uncertainty and geopolitical risk.

What's at Stake

This week's earnings will determine whether the AI investment cycle can sustain the market's valuation. Meta, Microsoft and Amazon face the same CapEx scrutiny that punished Alphabet, while Apple benefits from not being a significant participant in the AI spending cycle. The Fed's rate decision and forward guidance will set the macro backdrop for the rest of the quarter.

The convergence of earnings and monetary policy creates a high-stakes environment. Positive results combined with a dovish Fed could extend the rally, while disappointing numbers or a hawkish stance could trigger a sharp correction in the S&P 500 and Nasdaq 100.

This article is for informational purposes only and does not constitute investment advice.