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Policy, AI Spending and Energy Disruption Drive Markets

AI investment, Fed uncertainty, and energy shocks drive selective market gains as earnings expectations rise.

Sectors & Industries

Table of Contents

Fed Transition + Political Pressure — Policy Path Is Getting Less Clear

The latest Fed meeting exposed a meaningful shift beneath the surface.

Rates were held at 3.50–3.75%, but the decision came with an 8–4 vote split—the most divided outcome in decades and a clear sign that policymakers are no longer aligned on the path forward.

The breakdown:

  • One member pushed for a rate cut
  • Three opposed maintaining any easing bias, signaling resistance to cuts altogether

This reflects a clear divide:

  • One side sees slowing momentum and is ready to ease
  • The other is focused on inflation risks that are rebuilding

That inflation concern is no longer abstract:

  • CPI has moved back toward ~3.3%
  • The Fed explicitly upgraded its language, now calling inflation “elevated” and linking it to rising global energy prices
  • Middle East developments are now described as a “high level of uncertainty” for the outlook

At the same time, Powell indicated the center of the committee is shifting toward a neutral stance—meaning policy could move either direction depending on data, rather than being biased toward cuts.

He also made clear why the Fed is so divided: policymakers are trying to interpret an economy shaped by repeated supply shocks—pandemic disruptions, tariffs, and now the Iran-driven energy shock—which are pushing inflation higher while making growth harder to read.

Leadership is also in transition.

Powell confirmed he will remain on the Board after stepping down as Chair, while Kevin Warsh moves toward taking over—an unusual overlap that adds another layer of uncertainty.

Warsh is generally viewed as more open to rate cuts, but he is stepping into a committee already pushing back against easing, with three dissents against maintaining an easing bias and a broader shift toward neutrality across the Fed. Convincing the committee to ease further is likely to be an uphill battle.

The implication for markets:

  • Rate cuts are no longer a clear base case
  • Policy is increasingly reactive to inflation shocks—especially energy
  • The range of outcomes for rates is widening
  • MSFT, NVDA, AMZN → more sensitive to rate repricing
  • JPM, BAC → supported by higher rates, but exposed if credit tightens
  • XLU, XLRE → remain under pressure in a higher-rate environment

Earnings — Strong Growth, But the Market Is Getting More Selective

Earnings season has come in significantly stronger than expected.

  • S&P 500 earnings are tracking roughly mid-20% YoY growth
  • Big Tech continues to lead, with ~50%+ earnings growth driving index performance
  • Miss rates are near their lowest levels since 2021, with strength extending beyond tech into banks and small caps

That strength is why markets are holding near highs.

But the composition of that growth is shifting—and the market is reacting to it.

The biggest development this quarter is the scale of AI investment:

  • Hyperscaler capex is now expected to reach ~$700B+ in 2026
  • AMZN → Q1 capex up +77% YoY, maintaining ~$200B annual trajectory
  • GOOGL → raised capex to $180–190B, with further increases expected into 2027
  • META → raised to $125–145B, adding another ~$10B
  • MSFT → guiding toward ~$190B, including ~$25B in higher component costs

This is no longer incremental spending—it’s a full-scale infrastructure buildout.

At the same time, the payoff is still uneven:

  • MSFT → AI revenue run rate at $37B (+123% YoY), with Azure expected to re-accelerate
  • GOOGL → cloud growth +63% YoY with backlog nearly doubling, showing clear monetization
  • AMZN → AWS growth re-accelerating to 28% YoY, fastest in 15 quarters
  • META → strong ad growth, but stock fell on higher capex and limited visibility into AI returns

This is where the market is drawing a line:

  • Companies showing clear revenue + backlog conversion are being rewarded
  • Companies with rising spend and delayed payoffs are being questioned

You’re already seeing that divergence in price action:

  • GOOGL +7%, AMZN +3% post-earnings
  • META -9%, MSFT -2% despite strong prints

And beneath that:

  • Capex is accelerating
  • Free cash flow is being compressed
  • Buybacks are flat
  • Even “beats” are producing smaller moves

The key shift:

The market is no longer rewarding AI exposure—it’s rewarding AI efficiency and visibility.

What the Data Is Showing — Capex Surge, Buybacks Stalling

Image Above:

Consensus estimates for hyperscaler capex have moved sharply higher since the start of earnings season.

  • 2026 estimates increased from ~$673B to ~$751B (+83% YoY)
  • 2027 and 2028 projections were also revised higher, now approaching ~$900B+

This confirms what companies are saying:

AI spending is accelerating faster than expected—and still moving up.

Image Below:

At the same time, how companies are using cash is shifting.

  • Capex growth is now ~40%+ YoY
  • R&D is also rising (~20%+)
  • Buybacks are flat to down (~0–1%)

This is a clear change from prior cycles, where excess cash was returned to shareholders.

What It Means

  • Companies are reinvesting aggressively instead of returning capital
  • AI is driving a reallocation of cash toward infrastructure and growth
  • Shareholder returns (buybacks) are no longer the primary support for stocks

This reinforces the shift: markets are moving from capital return → capital investment, which raises the bar for future returns.

Iran + Energy — Earnings Are Now Reflecting Real Constraints

The Iran conflict is no longer just lifting oil prices—it’s disrupting supply chains and day-to-day operations.

Across earnings, the message is consistent:business remains solid, but disruptions are increasing.

Energy — Strong Results, But More Difficult Conditions

Halliburton delivered solid earnings but said the conflict reduced profits slightly and lowered activity in the Middle East.

Schlumberger reported disruptions, including paused projects and weaker performance in the region as operations were scaled back.

ExxonMobil described a more volatile environment, with tighter supply and more complex logistics requiring rerouting.

Chevron performed well overall, but still saw some production slowdowns tied to the region and emphasized the uncertainty in the external environment.

Higher oil prices are supporting results, but operations are becoming less predictable.

Airlines — Fuel Costs Are Driving Changes

United Airlines remained profitable, but fuel costs increased by $340 million, leading to capacity reductions and schedule adjustments for the rest of the year.

Airlines are responding by reducing flights in some markets, adjusting schedules, and raising fares where possible.

At the same time, Spirit Airlines shut down after failing to secure financing, highlighting how quickly rising costs are affecting weaker operators.

Avi Baron
Avi Baron is a financial analyst at LevelFields AI, specializing in event-driven investing and corporate action research.

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