“We know the reality of paradise, but to keep the heart content, Ghalib, it is a pleasant thought.”
The couplet by 19th-century Urdu poet Mirza Ghalib reflects the idea that people may recognize the gap between an ideal and reality, yet find comfort in holding on to a hopeful or pleasing thought.
For most of this year the market took its cues from one man in Washington. From February until the Federal Reserve’s quarter-point hike in September, a post, a tariff pause or a hint from Tehran could move the Nasdaq in an afternoon. Then the Fed raised rates instead of cutting them, and the story changed. This week showed how far.
The Fed held, but the hawks did not leave
On Wednesday, the Fed kept rates at 3.75 to 4.00 percent, which ended the talk of an October hike. It did not end the worry. Two officials dissented in favor of raising rates, and Chairman Kevin Warsh told investors not to assume the Fed will tolerate inflation in the twos. He said economic activity is expanding strongly while inflation stays elevated, and he insisted that politics, with the midterms six days away, played no role in the decision.
He also announced that the Fed will hold fewer rate-setting meetings, seven next year and six in 2028, and give less forward guidance. A Wells Fargo strategist read that plainly: less communication could mean more volatility. Treasury Secretary Scott Bessent, meanwhile, publicly urged officials to treat the oil-driven price surge as a transitory supply shock. Washington is asking the Fed for patience. The Fed is not promising it.
Big Tech’s bill arrives
The earnings reports then answered the question the Fed left open. Demand for AI is not the problem. Microsoft’s Azure grew 48 percent, and Amazon’s AWS grew 39 percent, its fastest pace in nearly five years. The problem is what that growth costs.
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Alphabet missed on earnings, burned about $9 billion of free cash flow in the quarter and held its 2026 capital spending plan at $195 to $205 billion. Its shares fell roughly 12 percent. Amazon followed on Thursday evening with a miss on earnings and revenue, a record operating margin, trailing free cash flow of negative $42 billion, and a plan to spend about $220 billion this year and more in 2027. Its stock was down about 7 percent before Friday’s open.
Even Microsoft, which beat expectations and trimmed its capex forecast to $170 billion, warned that chip delays from third-party suppliers will push some capacity into the first half of 2027.
The Nasdaq fell more than 1 percent on Thursday, and futures pointed to a worse Friday, with Intel’s disappointing results adding to the damage. Analysts expect hyperscaler spending to top $1 trillion next year. A year ago the market cheered every increase. Now it punishes them, because a company that spends more than it earns has to borrow, and the Fed is leaning toward higher rates.
Washington and the Gulf
The political backdrop is not helping. Nonpartisan forecasters see a strong likelihood that Democrats flip the House on Nov. 3. Decision Desk HQ gave them 79 percent on October 26, and the Senate is close to a toss-up, with Democrats at 57 percent in the same model. Divided government would limit what Washington can do about inflation, spending or tariffs just as markets want clarity.
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In the spring the White House could lift stocks with a headline. This week it has nothing comparable to offer. The Fed is independent, earnings belong to the companies, and oil depends on the Strait of Hormuz. The Iran war that began in late February left Brent near $97 in September, nearly 40 percent above its pre-war level, and the talks since have been uneven. Higher oil feeds the inflation that keeps the Fed hawkish, and a hawkish Fed makes AI borrowing costlier. Each link in that chain sits outside the President’s control.
What I am watching
- Tuesday’s election. A Democratic House is the consensus. The Senate is the swing.
- Leverage. FINRA margin debt reached a record $1.50 trillion in June and was $1.45 trillion in August. The September and October figures will show whether borrowers are buying the dip or being forced out.
- Credit. CoreWeave’s bonds and the 30-year Treasury yield are the early warnings. Broad high-yield spreads have not yet confirmed stress.
- December. The next Fed decision, with a committee that is already split.
So far this is a repricing, not a rout. The big AI companies are profitable, and demand is real. But the debate has changed from whether AI will deliver to who pays for it and at what interest rate. Cheap money builds the story, and expensive money tests it. The earnings season has now sent the invoice.
This column is analysis, not investment advice.