Market update: caution reigns as peace talk hopes dashed again
Susannah Streeter, chief investment strategist, Wealth Club: “The rug has been pulled by the Trump administration, sending plans for talks over Iran skidding once again. The president said negotiators would be wasting their time heading to Pakistan and the lack of progress has hit sentiment at the start of the week. There’s a distinct lack of Monday motivation for stocks, with the Footsie flat in early trade. Oil prices have cruised higher again, but some hopes of a resolution are being kept alive, with reports that Iran has put another proposal on the table which aimed at de-escalating the conflict and potentially seeing the key Strait of Hormuz reopen. But details are scant about the offer and patience on both sides is clearly frayed.
Key central bank meetings in focus
Central bankers meet this week just as warnings about a severe energy crunch mount. While no change is expected at the Bank of England, the Fed or the European Central Bank, outlook statements will be closely watched for guidance about what could lie ahead for interest rates. Officials at the Bank of England are set to stay super wary. While price pressures are clearly mounting, the economy is set to struggle and that could limit the chances of inflation becoming embedded. So, while they are likely to indicate that a fresh hike could be ahead, there are unlikely to be any knee-jerk moves, until there’s more clarity about the length of the Iran conflict.
The Federal Reserve is also overwhelmingly expected to keep rates unchanged at the meeting this week which could also be Jerome Powell’s last as Fed chair. This is because a criminal investigation into Powell has been dropped, which is set to ease the path of the confirmation of Kevin Warsh, to replace him. While there had been worries he might go soft on inflation, a Fed led by Kevin Warsh is more likely to herald a shift in tone rather than a sudden policy jolt. He has recently signalled support for lower interest rates, but such a move would be likely to be delayed by worries about stubborn inflation and hot energy prices. His belief that AI could boost productivity and ease price pressures may open the door to looser policy over time. However, with decisions shaped by the broader committee and political pressure lingering, change is expected to be gradual, with credibility and independence firmly in focus.
King’s visit to the US
The King’s visit to the US comes at a fractious time in relations between the US and the UK. There’s hope that King Charles can help repair the historic relationship, which, while no longer referred to as special, is still hugely significant. There will be hopes that Trump’s enthusiasm for the monarchy will help lead to more favourable economic decision-making and potentially help UK investment, but given the capriciousness of the Trump administration, any promises may be short-lived.
Tech in the spotlight
Tech is stepping firmly into the ring this week, with the industry heavyweights lining up for a closely watched round of results. With expectations high, these updates could go a long way in determining whether the current momentum can be maintained, given the outsized impact the tech giants have on indices.
Amazon has powerlifted its way to a record valuation, as AWS has flexed its muscle once again. Investors have cheered deals struck with Meta and Anthropic to bulk up their computing capacity. With the demand locked in over multiple years, it’s providing reassurance that the huge capital expenditure outlay will keep bearing fruit. There will be a close eye trained on margins in these results to assess if returns will be on track. The circular nature of some of the deals being struck in the AI world has raised eyebrows. AWS is investing £5bn into Anthropic, with another $20bn expected over time, while Anthropic pledges to spend $100bn on AWS products and services. While the AI juggernaut is powering ahead and underlying demand looks so strong, given its constrained by capacity and not demand, such an ecosystem appears robust. But if growth disappoints in the future or if market share shifts, such circular relationships could start to see cracks appear and become more fragile. Amazon’s huge e-commerce arm is expected to continue to show improved profitability and any update on further automation progress is likely to be well received. While Amazon’s growing army of robots does not bode well for some human warehouse workers, its set to stay the direction of travel, and boost the company’s aim for further geographical expansion.
Apple enters the ring this week with a strong recent run, supported by a healthier iPhone upgrade cycle demonstrating its superstar brand power. However, the announcement that Tim Cook will step aside, handing over to John Ternus, marks a significant changing of the guard, and investors look set to stay cautious as the change at the top takes place. John Ternus had been clearly in the frame for some time, as part of a long-term succession strategy, and given he has experience in every corner of the business, there is hope he won’t stumble on the competitive road ahead for tech.
Apple has taken a softly-softly approach to the AI revolution which seems to be more in tune with many consumer and company attitudes so far. But as rapid advancements evolve elsewhere, Apple does not want to be left behind, and there will be keen interest in any developments with partners to help it deliver AI services, like Google and OpenAI and its latest acquisition – Q.AI
Meta results are likely to show that AI is continuing to support its advertising business by improving targeting and engagement. That’s been helping drive stronger revenues, but investors also want to see discipline as well as the company gunning for growth. The backdrop of plans to cut around 10% of its workforce, alongside further layoffs announced this week, highlights the extent of the restructuring underway as Meta tries to stay in the top pack leading the AI race while keeping a tighter rein on costs.
Microsoft is also stepping between the ropes and is in the limelight this week facing pressure to justify its heavy AI investment. There is still rampant demand for Azure cloud computing services, which clocked growth of 38% at the last count but that still wasn’t enough to stop a big wobble. The 66% uplift on capital expenditure unnerved investors in January and although the stock has rebounded 16% on the month, it’s not yet clawed back the year’s losses. Appetite for cloud infrastructure is voracious, but Microsoft can’t keep up with demand, so although spending is ramped up, growth isn’t yet keeping pace with expectations. But as more infrastructure comes online, there are hopes that it will accelerate revenues.
Investors will also be watching Alphabet’s results closely to work out how much stamina it has as the AI fight intensifies. Cloud growth is beating expectations at the last count, but there appears to be concerns mounting that rivals like Anthropic are landing more punches by offering more attractive tools, especially for coding, to businesses than Gemini currently offers. To stay fleet of foot, investment in AI infrastructure is being ramped up significantly, and while it’s necessary to keep pace, it risks taking a toll on cash flow and margins. So, investors will be keen to find out if that spending will turn into top-line growth, or whether returns look likely to take longer to come through. Google Search is still Alphabet’s champion, and the integration of AI tools, including enhanced results and overviews, has so far helped maintain engagement and advertising strength. This round of results will show whether that strategy is holding firm as new AI-driven challengers look to chip away at its dominance here as well.”