Federal Reserve decision and tech giants’ earnings: BofA focuses on rate hikes and the cost of AI expansion

Will the Federal Reserve raise rates this week?

BofA economists expect the Federal Reserve to raise rates by 25 basis points at its 28 October meeting, but have low confidence in that call; inflation in September was well above expectations, providing a reason for a hike.
Even if the Fed holds steady this week, BofA still expects one rate hike in December 2026 and another in March 2027. If year-on-year inflation remains high in the first half of 2027 despite favorable base effects, the risk of further hikes in June or even September will increase.
BofA expects the core PCE price index to rise 3.1% year on year in September, up 0.1 percentage points from the previous month; it expects third-quarter GDP to grow 3.5% on an annualized quarter-on-quarter basis, above the market consensus of 3.0%. Inflation pressures and resilient demand together support its relatively hawkish rate outlook.

Alphabet will report its third-quarter 2026 results after the market closes on 28 October. BofA expects revenue of 111.4 billion dollars and GAAP earnings per share of 3.07 dollars, above the market expectations it cites of 111 billion dollars and 2.98 dollars, respectively.
BofA expects Alphabet’s cloud revenue to grow 93%, above market expectations of 89%, citing expanded computing capacity and additional TPU sales; token costs, however, could be a headwind. Search revenue growth is expected to be 15%, in line with market expectations, while channel checks indicate that growth slowed in the third quarter.
Amazon reports earnings after the market closes on 29 October. BofA expects third-quarter AWS revenue to grow 40% year on year, above market expectations of 38%; it expects total revenue of 202 billion dollars, slightly below market expectations of 202.1 billion dollars, and operating profit of 26.4 billion dollars, above market expectations of 26.1 billion dollars.
Cloud growth could also increase investment needs: BofA believes faster growth and greater capacity needs at Amazon could raise capital spending in 2027 and lower free cash flow expectations.

Under Microsoft’s new revenue segment reporting structure, BofA expects Azure revenue of 32.3 billion dollars in the first quarter of fiscal 2027, up 44.8% year on year at constant currency and broadly in line with market expectations. The bank believes adding roughly 1 gigawatt of data-center capacity each quarter will help convert 678 billion dollars of commercial remaining performance obligations into revenue.
BofA’s chief information officer survey shows that 76.7% of respondents use or plan to use Copilot, and 88.4% may use Microsoft’s cloud AI capabilities; the results support the bank’s assessment of enterprise AI demand.
Expansion also keeps spending elevated: BofA expects Microsoft’s capital expenditure, including finance leases, to be 50.8 billion dollars in the first quarter of fiscal 2027, up 24% quarter on quarter; for the full year, it expects 220.7 billion dollars, up 51.9% year on year.

BofA’s rates team believes the reaction in short-term rates to this decision could be asymmetric: if the Federal Reserve holds rates steady, the change at the short end could be small; if it raises rates, short-term bonds could fall sharply while long-term bonds could rise.
For a decline in AI-related stocks, BofA’s derivatives team favors a hybrid hedge that works when stock prices and interest rates fall together. It cites the previous week, when the Nasdaq 100 index fell 5.5% while the yield on 10-year US Treasuries fell 16 basis points.