AI optimism faces fresh test as markets reassess technology leaders

The Nasdaq 100 (USTEC) rebounded after a volatile trading session as investors reassessed the outlook for artificial intelligence (AI) following another round of major technology earnings. Strong results from Microsoft helped lift sentiment across the technology sector, while weaker guidance from Meta highlighted that markets are becoming increasingly selective, rewarding companies that demonstrate tangible returns on AI investment rather than AI spending alone.

That marks an important shift in market leadership. For much of the past year, enthusiasm around AI infrastructure and semiconductor demand supported broad gains across technology stocks. More recently, investors have begun to differentiate between companies that are successfully monetising AI and those where rising capital expenditure is weighing on profitability. As a result, earnings quality and capital discipline are becoming increasingly important drivers of market sentiment.

The broader macroeconomic backdrop remains another key consideration. While the Federal Reserve kept interest rates unchanged, policymakers maintained a cautious tone on inflation, reinforcing expectations that financial conditions could remain restrictive. Elevated Treasury yields continue to present a headwind for richly valued growth stocks, even as resilient corporate earnings provide support for the broader technology sector.

Geopolitical developments have added another layer of uncertainty. Higher oil prices, driven by renewed tensions, continue to cloud the inflation outlook and could complicate the path for monetary policy if energy costs remain elevated. Together with higher bond yields, that has encouraged investors to become more selective in their exposure to high-growth sectors.

"The AI investment theme is evolving from one driven primarily by expectations to one increasingly shaped by execution. Markets are becoming more selective in assessing how companies convert AI spending into earnings growth, while elevated bond yields continue to influence valuations across the technology sector. Against that backdrop, investors are likely to remain focused on corporate guidance, inflation data and the broader interest-rate outlook," says Agustina Patti, Financial Market Strategist at Exness.

The US economy grew at an annualized 1.5% in Q2, slowing from 2.1% in Q1 and missing expectations, as weaker government spending, investment, and exports offset stronger consumer spending. Meanwhile, inflation continued to ease, with the headline PCE price index falling 0.1% month-over-month and annual inflation slowing to 3.7%, while Core PCE rose 0.1% on the month and eased to 3.3% year-over-year, reinforcing signs of moderating price pressures.