Markets Are Being Driven by AI, Not the Fed. Where Stocks Go From Here.

Federal Reserve Chair Jerome Powell (Chip Somodevilla/Getty Images)

Nobody likes a party pooper, but Fed Chair Jerome Powell is not trying to win a popularity contest. The central bank’s job is to take away the punch bowl just as the festivities get going and Powell is doing his best to be a killjoy, but it might not be possible in an AI-driven market.

The Fed chief struck a hawkish tone alongside the central bank’s decision to keep interest rates steady Wednesday. He said it is still “early days” in assessing how tariffs will affect inflation and brushed off President Donald Trump’s pressure to lock in a September cut.

That briefly looked like it might puncture the positive market mood. Traders reduced their bets on a September rate cut to below a 50% chance, according to the CME FedWatch tool, from around 65% Tuesday. Investors might also have been eyeing data showing slower GDP growth in the first half of the year.

But artificial intelligence is what has powered the market rally, sending the S&P 500 up 14% over the past three months, and Microsoft and Meta Platforms earnings kept the feel-good vibe going. Microsoft’s 39% growth in its Azure cloud-computing division suggests booming AI demand from corporate clients. And Meta’s results showed AI is keeping consumers hooked on social-media feeds, boosting time spent on Instagram by 6%.

Big Tech dominates even amid high interest rates, because huge technology companies are funding AI investment out of their own cash flow rather than borrowing. And while some might be concerned about a limited group of massive companies powering the rally while smaller companies struggle with the high cost of loans, the market strength isn’t that narrow—AI infrastructure spending should also flow through to utility and energy stocks.

Right now, by keeping rates high, it feels like the Fed is trying to keep things from getting out of hand but that might not be enough to stop the AI-driven market from partying hard.

— Adam Clark

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Fed Holds Rates Steady Ahead of July Jobs Report

Federal Reserve Chairman Jerome Powell refused to tease a September cut, saying he expects to see tariff inflation in data coming ahead, though he said it is possible that price increases are temporary. The market sees the chance a September rate cut doesn’t happen.

• Powell said that it appeared to him and nearly the whole policy committee that the economy wasn’t performing as though monetary policy was holding it back inappropriately. He said modestly restrictive policy seemed appropriate. The path forward will depend on the labor market and inflation data.
• Asked whether a delay in cuts would encourage companies to hold back on raising prices, Powell said some companies would raise prices when they can. There’s now a 54% probability that the Fed holds rates steady in September, according to CME’s FedWatch tool. That’s up from 35.4% on Tuesday.
• Consumer spending has been surprisingly resilient over the past five years, bucking multiple projections for a slowdown. But now, that appears to be ending, Powell said. It’s one of the data points the Fed pays the most careful attention to, and Powell said there’s no question it has slowed.
• Powell has stood firm on the Fed’s patient approach to rate policy despite repeated urging by President Donald Trump for the Fed to cut rates. On Wednesday Powell defended the idea of an independent Fed. Without one, there’d be a temptation to use interest rates to affect elections, he said.

What’s Next: Friday’s nonfarm July payrolls report will be the first of several data points that factor into the Fed’s ultimate decision in September. In place of an August meeting, the Fed has its annual conference in Jackson Hole, Wyo. Powell will speak there and could signal future policy moves.

— Nicole Goodkind, Emily Russell, and Janet H. Cho

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Microsoft’s Earnings Could Propel Its Stock to Rarefied $4 Trillion Level

Microsoft’s recent quarter could provide the catalyst that sends its market value to the rarefied $4 trillion level currently occupied by just Nvidia. It surged on better-than-expected financial results and strong guidance. The beat was driven in part by double-digit revenue growth in its closely watched Azure cloud business.

• The tech giant reported adjusted earnings of $3.65 a share on revenue of $76.4 billion for the fiscal fourth quarter. Total cloud revenue rose 27% in the quarter from the previous year to $46.7 billion, while revenue for Azure’s public cloud business rose 39%.
• Microsoft also reported fourth-quarter capital expenditures of $24 billion, above estimates of $21.4 billion. On top of reporting strong financials, Microsoft CFO Amy Hood said on the conference call that the company expects double-digit revenue and operating income growth in fiscal 2026.
• Microsoft is also among the largest tech companies that are spending billions to build AI infrastructure. The company said on its last earnings call that it expected spending to grow at a lower rate in fiscal year 2026 than it did in 2025, something Hood confirmed to investors on Wednesday.
• Hood also said that first-quarter capital expenditures are expected to be $30 billion. The big spending comes amid an arms race to dominate the AI sector. Microsoft now counts more than 400 data centers in 70 regions across the world, CEO Satya Nadella said.

What’s Next: Microsoft has been trying to boost its Copilot AI assistant, with plans to further integrate the product into the search functions on its Edge browser. The plans include letting the AI bot browse through open tabs.

— Angela Palumbo and Liz Moyer

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Meta Platforms Also Cites AI as Fuel for Earnings Blowout

Meta Platforms also credited artificial intelligence for boosting its latest quarterly results. CEO Mark Zuckerberg said AI allowed the parent of Facebook and Instagram to unleash greater efficiency and gains in its advertising operations even as it invests billions of dollars in AI capabilities.

• The social media company reported earnings of $7.14 a share and revenue of $47.5 billion, both above expectations. Revenue rose 22% from a year ago, and important metrics—daily users, ad impressions and price-per-ad—all exceeded the Wall Street consensus.
• The company spent $17 billion for new AI data centers to further its push into “superintelligence.” Zuckerberg believes that the future of Meta hinges on its success in this effort. To fund that investment, Meta banked $26 billion in second-quarter operational cash flows.
• In the first half of 2025 Meta has spent $31 billion on capex, putting it behind schedule for its annual guidance of $66 billion-$72 billion. That guidance is narrowed slightly from previous guidance.
• But it isn’t cutting back. CFO Susan Li said they expect to raise their investments significantly in 2026. Meta has also been on an AI hiring spree, poaching expensive researchers from Alphabet, OpenAI, and others for the superintelligence group.

What’s Next: Meta projects third quarter total revenue to be in a range of $47.5 billion and $50.5 billion. Full year 2025 expenses are expected to be in the range of $114 billion to $118 billion, which is a narrower range than previously forecast.

— Adam Levine and Liz Moyer

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FDA Vaccine Chief Suddenly Leaves Amid Agency’s Turmoil

The sudden departure of the Food and Drug Administration’s top vaccine regulator, Dr. Vinay Prasad, is the latest turmoil at an agency that has been wracked by thousands of layoffs and several leadership changes, and could worsen the picture for drugmakers in coming months.

• A Health and Human Services Department spokesperson confirmed that Prasad, who led the FDA’s Center for Biologics Evaluation and Research (CBER) and was a close ally of FDA Commissioner Dr. Marty Makary, had departed less than three months into his role. Prasad couldn’t be reached.
• Conservative commentators had attacked Prasad over the FDA’s response to the deaths of patients taking Sarepta Therapeutics’ Elevidys, a gene therapy for Duchenne muscular dystrophy. The agency and Sarepta have flip-flopped in recent weeks over whether to allow the use of Elevidys or pause it.
• Prasad, a hematologist-oncologist from the University of California San Francisco, was a combative, controversial voice who had harshly criticized the government’s response to the Covid-19 pandemic. Biotech analysts viewed Prasad as a generally logical FDA regulator.
• Prasad was a prominent voice on changes to how the FDA approves Covid-19 shots, among other decisions. William Blair analyst Sami Corwin called the lack of continuity in CBER senior leadership “concerning,” saying it could impact the agency’s ability to meet review timelines and could lead to inconsistencies in regulation.

What’s Next: Dr. George Tidmarsh, the FDA’s drug center director, will become acting vaccine chief. It’s unclear whom Makary and HHS Secretary Robert F. Kennedy Jr. will choose for the role, or whether the person will be more lenient in their regulatory approach or more friendly to the biotech industry than Prasad.

— Josh Nathan-Kazis and Janet H. Cho

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As it turns out, Coca-Cola is far from fully replacing high-fructose corn syrup with cane sugar—but President Donald Trump’s push to change the sweetener used in Coke has thrown a spotlight on a commodity market that has been subject to strict government oversight since the 1930s.

It also highlighted how any large-scale shifts in demand could send ripples through a market that could be widely felt by consumers.

MarketWatch asked around about the possible impacts.

For more on this, read here.

— Myra P. Saefong

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—Newsletter edited by Liz Moyer, Patrick O’Donnell, Rupert Steiner