Fed decision plus Microsoft and Alphabet results set up a double test for Wall Street

US markets took something of a breather overnight, with the S&P 500 up 0.6% and the Nasdaq closing 1.2% higher. Tech shares powered the bounce after two weeks of losses, bringing some relief, but there is no shortage of reasons for investors to stay nervous this week.

Scratch the surface, however, and the overnight rebound was not that convincing. Most stocks in the S&P 500 ended lower, with the gains concentrated in the big technology names — not exactly a reassuring sign for market breadth.

With the Fed meeting decision due later today and Microsoft and Alphabet reporting after the bell, there is plenty that could still go wrong.

The Fed is widely expected to hold interest rates steady, so the decision itself should not be a shock. The focus will be on Fed chair Warsh's press conference, where markets will listen hard for anything about December, especially with Treasury yields lingering near 5%.

In that context, any hint that policymakers are getting more uneasy with the inflation picture could easily hit risk sentiment again.

That would be especially pertinent for tech stocks, where higher borrowing costs and expensive valuations are already forcing investors to question how much optimism is warranted.

Microsoft's earnings will be examined for whether its AI growth can still justify the scale of its spending. Azure growth, cloud margins and particularly capital expenditure will get plenty of attention.

Alphabet will face similar scrutiny, with Google Cloud performance, AI monetisation and infrastructure spending all in the spotlight.

At this stage, investors may no longer settle for the mere message that AI demand is strong. They seem to want clearer evidence that the billions being spent are turning into durable earnings growth. That is where the real test of the AI trade sits right now.

For stocks and broader markets, the coming day(s) will be quite a tricky test. A more hawkish Fed could add new upward pressure on Treasury yields, while disappointing earnings guidance could stir worries about the AI spending boom. The latter risk could produce a slide in both yields and stocks simultaneously.

So while the calmer overnight tone is a bit encouraging, the real trial for markets this week is still to come.