Breaking down Big Tech’s Q2 earnings

What did we learn from the Fed’s latest interest rate decision, and why were markets so unhappy?

The Fed

Last week, the U.S. Federal Reserve (Fed) decided to hold interest rates flat. This prompted a strong negative reaction from markets, with the Dow Jones falling by 1,153 points and the yield on 30-year U.S. Treasury notes reaching its highest level since 2007.¹ While the decision itself was widely expected, the meeting’s big surprise was that three Fed members dissented, instead preferring a 25-basis-point rate hike. This is a shift from the Fed’s previous meeting, when only the language in the Fed’s post-meeting statement was changed to a more neutral outlook. Our evaluation—which seems to be shared by markets—is that we could see at least one rate hike this year; in fact, prediction markets are placing the probability of at least one hike before the end of 2026 at about 75%.² This would put pressure on stocks, because if rates go up, then valuations will have to come down since future earnings will be less valuable. The other story coming out of the Fed’s meeting is that we are continuing to get a clearer view of Kevin Warsh’s disposition as Fed Chair. The market was assuming that he would be on the dovish side of the spectrum (meaning in favour of rate cuts). What we have seen from his first two meetings, however, is that he seems willing to follow the data. It is also worth remembering that even if he were a staunch dove, he is still only one vote. Looking ahead, if the U.S-Iran situation remains unresolved, oil prices remain elevated, and inflation proves sticky, we can only see the Fed moving more in the direction of rate hikes. Through that lens, markets arguably reacted as they should, especially in light of some of the concerns that have re-emerged about artificial intelligence (AI) hyperscalers’ reliance on debt.

Bottom line: At least one interest rate hike from the Fed before the end of 2026 is looking increasingly likely, which puts more pressure on valuations and earnings.

U.S.-China

Tensions between the United States and China appear to be on the rise again, with the U.S. Federal Communications Commission (FCC) announcing last week a new ban on foreign-made humanoid robots. In response, Beijing threatened retaliatory measures, stating that Washington’s move “severely damages China-U.S. economic and trade stability.”³ In our view, the wild card in this situation is the unpredictability of the current U.S. administration. Under different leadership, markets may know roughly where the boundaries of any trade negotiation are set. This administration, however, has shown itself capable of acting impulsively, so we don’t know exactly where the lines are drawn. As a result, we have to carefully consider the different ways this dispute could spiral. Given China’s reliance on Middle Eastern oil, the U.S.-Iran conflict is also an important part of this situation. Oil prices in the US$85 per barrel range⁴ are actually fairly reasonable given the uncertainty surrounding the conflict, but it does indicate to us that there is room for prices to move higher if the situation remains unresolved. We also continue to believe that markets shouldn’t count on the conflict being over before the U.S. midterm elections in November. Our expectation is that sticky inflation and a slightly softening labour market will cause U.S. consumer sentiment to decrease (Chinese consumer sentiment has already been poor for some time, and their savings rate is extremely high), which could cause some drag on spending and lead to lower earnings followed by some market declines. This would then reduce investors’ net worth (the part that has kept consumer spending resilient) and continue to add more pressure to markets. So, any discussions between the two heavyweight countries should be watched carefully.

Bottom line: The U.S.-China dispute is an important situation to monitor, and in our view, it’s a coin flip as to how it will turn out—especially given that the U.S.-Iran conflict also remains unresolved.

Technology

Six of the Magnificent 7 (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) have now reported their Q2 earnings, with only Nvidia still to come later in August. Thus far, it’s been a company-by-company story, with firms reporting strong revenues but markets having a mixed reaction due to lofty expectations and concerns around capital expenditures (capex) and the monetization of artificial intelligence (AI). Alphabet (Google) and Microsoft both had great earnings, and while Microsoft’s stock received a big lift as a result, Google—which reported a negative free cash flow for the first time ever—suffered a big decline.⁵ In our view, reports of Microsoft’s demise have been greatly exaggerated. In fact, strong results from Microsoft and other companies with existing cloud computing businesses shows us that AI is being monetized, which has been a major question for investors. Meta, meanwhile, seemed to underdeliver while also increasing its capex spend. This is, at least in part, a communications problem: Meta has had trouble telling its story, and we think it is likely that its underlying business is stronger than the reaction to its earnings would indicate. Apple initially lagged behind some of its peers because the company was viewed as being behind on the AI story, but recently it has gained traction for the same reason—namely, not spending enormously on AI. However, on the earnings call, there was some concern about Apple’s lack of momentum in China, which punished the stock. Overall, we think this earnings season is still a positive for the AI theme: while free cash flows are declining, tokenization (the process of converting date into smaller units to be process by an AI model) and cloud computing businesses are up, which is a strong sign for the monetization of AI.

Bottom line: Investors will need to be patient with the Big Tech companies as they learn how best to showcase their monetization of AI, but Q2 earnings tell us that the monetization is happening, even if volatility is likely to persist for some time.

Positioning

For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled Risk-on, radar up: a constructive setup, but still cautious outlook

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Originally Posted August 4, 2026 – Breaking down Big Tech’s Q2 earnings