The Fed and Big Tech earnings are poised to shake up markets this week

The stock market is heading into its next big test this week

Traders are gearing up for a potentially volatile week as markets come to two two big hurdles: the Fed’s next policy meeting, and a slew of earnings from some of the market’s biggest AI names

The updates are coming at a crucial moment for the bull market, which has been challenged recently by a wave of volatility. In addition to fleeing some hot chip makers in recent weeks, investors punished AI spenders after key earnings last week. Shares of Alphabet and Tesla tumbled after earnings, with the declines prompted by investor skittishness about higher capex outlooks for both companies

“Until there is a clear uptrend established once again, investors would be wise to err on the side of caution,” David Rosenberg, a top economist and the president of Rosenberg Research, said on Friday

Here’s what investors need to know about the week ahead

Could the Fed decision be a hike?

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The market’s first test comes on Wednesday with the conclusion of the Fed’s policy meeting. Investors are expecting the Fed to keep rates unchanged after a cooler-than-expected June inflation report, but there are concerns about a surprise rate hike

The probability that the Fed hikes rates by 25 basis points at its July meeting ticked up to nearly 36% on Friday, up from 13% a week ago, according to the CME FedWatch tool. The baseline expectation is that the Fed will hike rates once or twice by the end of the year

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The argument for a hike now is simply, why wait? Neil Dutta, the chief economist at Renaissance Macro Research, argues that a hike next week would give the Fed room to maneuver as the conditions supporting higher inflation remain in place

Fanning inflation concerns is the latest spike in oil prices. Brent crude, the international benchmark, topped $100 a barrel last week for the first time since May as the war reignited and tankers were attacked in the Red Sea

Fed Chair Kevin Warsh reiterated that the central bank has “no tolerance” for high inflation when speaking to Congress earlier this month

“Red sea, Hormuz, war escalation, and central banks will be in focus. Oil retraced to pre-MOU levels, pushing rates higher,” Bank of America wrote on Friday, adding that the uncertainty around a July rate hike looked “highly unusual.”

Big Tech earnings

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All eyes will be on the AI trade this week as markets await tech giants’ results for the second quarter. Hyperscalers have been under more scrutiny, with investors getting antsy about seeing a return on ballooning capex

Here are the Mag Seven names that are on deck to report earnings this week:

Tesla and Alphabet, two giants in the Mag Seven circle, were dinged by investors last week. Tesla missed on earnings for the quarter. and its capex forecast added to pressure on the stock. Alphabet beat estimates, but said it was lifting its capex guidance for the full year, triggering a 7% drop in the stock midweek

The Roundhill Magnificent Seven ETF is down 3% for the year

“Technology earnings and spending trends will remain in focus over the coming week,” Brock Weimer, an investment strategy analyst at Edward Jones, wrote on Friday

“If hyperscalers can’t convince investors that it’s still worth investing in AI infrastructure, then it could spell trouble for the entire stock market and, thus, the economy because it’s so tech driven,” Hardika Singh, an economic strategist on Fundstrat’s market intelligence team, said