Central banks on mute, tech earnings loud and clear
What happened to interest rates?
There were no surprises at the Bank of Canada’s (BoC) meeting this week, with its policy rate staying at 2.25%. The decision itself was never the point; it was always about the tone. And the tone was quite neutral: uncertainty is high, forecasting is messy, and the next move could go either way. The BoC wants maximum flexibility and minimum commitment. The growth story is still “slow but not broken”. After a strong third quarter in 2025, Canada’s gross domestic product looks like it flattened out toward the year-end. Trade friction with the U.S. is still affecting exports, sometimes through actual restrictions, but often through business hesitation and tariff noise. Domestic demand is holding up enough to keep the economy from stalling. So, while there’s no recession in sight, there’s no likelihood of a boom either. Both headline and core inflation are at around the 2% level, and the BoC expects it to stay close to that target. We’re no longer in the inflation trench warfare phase. Even if inflation drifts higher, the bar for another period of interest rate increases is high. It’s the labour market that’s keeping the BoC alert. Unemployment is still elevated, and hiring intentions look weak. From an investment standpoint, nothing about this recent interest rate meeting changed the playbook. Markets will react more to growth data and trade headlines than to Canadian rate decisions, and the U.S. dollar and the Federal Reserve still matter more to global pricing than anything said in Ottawa.
What’s happening to the U.S. software sector?
The software sector in the U.S. is now firmly in bear market territory (when stocks drop by at least 20% from recent highs). This sector was leading gains not that long ago. And this is not about one quarter’s performance, but about the durability of the business model. The market is asking: if AI automates workflows and reduces the need for traditional software licenses, what happens to long-term revenue assumptions? Once that doubt shows up, “solid” results stop being a catalyst for growth in the markets. They become a reminder that the past is not the problem; the future is.
What’s happening with AI investments?
It was the peak of earnings season this week. AI investments are showing up in revenue and guidance, with the market willing to fund its growth. However, if the story is mostly about spending and promises, investors are much less patient. This week was a stress test for the AI trade, and the market handed out very different grades. Meta jumped about 8% after its earnings report. Its revenue grew by 24% year-over-year, guidance was strong, and the company laid out plans to spend roughly $115-135 billion on AI this year, nearly double that of last year. Investors looked at that and said the spending is feeding the model. Microsoft went the other way, down more than 11%. Growth for Microsoft’s cloud computing platform, Azure, slowed a little, while capital expenditure and finance leases surged by 66% to $37.5 billion in the quarter, above expectations. Demand is there, but in the near term, the story is about heavier costs and margin pressure. AI exposure alone is not enough anymore. The market is rewarding visible revenue growth and punishing cases where the spending curve is running ahead of the earnings curve.
Looking ahead, next week will bring fresh manufacturing and jobs data. U.S. growth still looks strong on the surface; we’ll see if the data backs that up.
Listen to the latest podcast from the IG Investment Strategy Team for further insights.
