European stocks fell on Tuesday as disappointing results from HSBC dragged down banking shares, while investors reduced risk ahead of a packed week of earnings from major US technology companies and interest-rate decisions from the Federal Reserve, European Central Bank and Bank of Japan.
The pan-European STOXX 600 slipped 0.2%, while Britain’s FTSE 100 fell 1%, largely reflecting the sharp decline in HSBC shares. The STOXX 600 banking index dropped 1.3%, with Europe’s largest lender losing around 7% after third-quarter revenue fell short of expectations, despite a 32% increase in pretax profit to $9.6 billion.
HSBC’s results highlighted the growing difficulty banks face in sustaining strong earnings as deposit competition pushes up funding costs and slower wealth-management growth constrains fee income. The reaction also illustrated how investors have become less willing to reward headline profit growth when companies fail to deliver stronger revenue or improve their outlook.
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The broader market remained focused on the possibility of corporate earnings withstanding the economic consequences of the conflict in Iran, including higher energy costs, renewed inflation pressures and the possibility that interest rates will remain elevated for longer.
“Banks have been the winners of the latest quarter before this one, reporting record results because of high volatility and because of AI financing,” said Ipek Ozkardeskaya, a senior market analyst at Swissquote Bank.
“But right now, they are coming under pressure because we do see the interest rate rise, short-term yields rising more than long-term; that’s basically eating into the income revenue,” she added.
Ozkardeskaya said she nevertheless expected banks to remain well positioned to outperform sectors more directly exposed to rising living costs.
Attention is shifting to the United States, where more than a third of S&P 500 companies are expected to report quarterly results this week. Earnings from Microsoft, Amazon and Alphabet will be in the spotlight as investors assess whether the technology industry’s enormous investments in artificial intelligence are generating sufficient returns.
That has raised a question beyond how much companies are spending on AI to whether that spending can translate into durable revenue growth, improved productivity and higher profits. Major technology companies have committed billions of dollars to data centers, advanced chips and other computing infrastructure, making their capital expenditure plans a critical indicator of the industry’s direction.
Mohit Kumar, an economist at Jefferies, said the firm remained optimistic about companies supplying the infrastructure behind AI development.
“We remain medium-term bullish on the ‘picks and shovels’ trade. We see capex cycle remaining strong and the earnings remaining robust,” Kumar said.
“However, we do admit that, as with any cycle, there would be winners and losers in the AI trade and a number of companies will not remain profitable and even go bust.”
That backdrop has increasingly come into consideration as concerns mount about the financial sustainability of the AI infrastructure boom. Continued spending by the largest technology companies could support demand for semiconductor manufacturers, data-center operators and equipment suppliers. But if customers begin to question the returns on their investments, even businesses benefiting from strong AI demand could face pressure.
Therefore, the upcoming results are expected to influence sentiment beyond the technology sector. Investors are looking for evidence that AI investments can support future earnings rather than simply inflate capital expenditure and financing requirements. Any indication that spending is slowing, or that monetization is lagging behind expectations, could challenge the valuations of companies associated with the AI trade.
The results also arrive at a sensitive moment for the industry’s financing environment. Anthropic, the developer of the Claude AI models, disclosed a steep loss alongside rapid revenue growth in its US initial public offering filing on Monday. The company is expected to list before the end of November, making its debut another test of investor appetite for high-growth AI businesses with substantial spending requirements.
Anthropic’s planned offering and Meta Platforms’ $95 billion equity fundraising are likely to be influenced by the reception investors give the latest Big Tech results. Strong earnings and credible returns on AI investment could support demand for new equity offerings, while weaker guidance could make investors more selective about valuations and capital commitments.
Anthropic’s disclosure also helped lift Asian equities. MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.1%, while Nasdaq futures were little changed following strong gains in the previous session.
Central Banks Hold The Key to Rate Expectations
Monetary policy is another major source of uncertainty, with the Federal Reserve, ECB and Bank of Japan all scheduled to announce decisions later this week. Economists broadly expect the three central banks to leave interest rates unchanged, shifting attention to policymakers’ comments about inflation and the path of future borrowing costs.
Fed policymakers have indicated that they are not preparing to raise short-term borrowing costs again on Wednesday. However, persistent inflation concerns have prompted investors to question how long a pause might last. Traders were pricing in a 25-basis-point rate increase in December, according to CME Group’s FedWatch Tool.
The prospect of higher rates complicates the outlook for both banks and technology companies. Banks can benefit from higher lending rates in some circumstances, but rising deposit costs and an unfavorable shift in the yield curve can erode margins. Technology companies, meanwhile, face higher financing costs and potentially lower valuations when investors demand greater returns to compensate for risk.
The euro slipped 0.1% to around $1.115, close to the low it reached in May two weeks earlier. The yield on the US 10-year Treasury note was steady at 4.986%, remaining below the 5% threshold it breached in September as investors sought the relative safety of government bonds during market turbulence over AI concerns.
The rate outlook is also tied to developments in the Middle East. Ongoing talks with Tehran could influence energy prices and inflation expectations, while continued attacks by Yemen’s Houthis on Saudi Arabia have added to concerns about regional supply disruptions.
Brent crude rose 0.6% to $116.82 a barrel, while spot gold fell 0.6% to $3,992.70 an ounce.
Higher oil prices threaten to complicate central banks’ efforts to contain inflation by increasing transportation, manufacturing and household energy costs. If the resulting price pressures persist, policymakers may have less room to ease monetary conditions, even if economic growth weakens.
For equity investors, the combination of corporate earnings, AI spending and central-bank guidance creates a difficult balancing act. Strong results could support valuations, but resilient profits alone may not be enough if companies face rising costs, tighter financial conditions and uncertain returns on investment.
Tuesday’s decline in European shares reflects that tension. Investors are not abandoning the outlook for banks or AI-related businesses, but they are demanding stronger evidence that earnings can hold up as financing conditions tighten and geopolitical risks continue to influence markets.