RECAPPING LAST WEEK
The dominant theme in global equity markets this past week was the intersection of earnings
season, monetary policy and the ongoing repricing of the semiconductor sector. With more than
one–third of the S&P 500 reporting quarterly results, for the most part corporate America continued
delivering resilient earnings growth despite a backdrop of higher interest rates and persistent
inflation. While most companies’ reported earnings exceeded consensus expectations, investors
remained highly selective, rewarding firms that paired strong results with constructive forward
guidance while showing little patience for earnings misses or signs of slowing demand. Nowhere
was that dynamic more evident than within the semiconductor industry, where elevated
expectations fueled another bout of extreme volatility. Chipmakers extended their steep decline
early in the week—in addition to ongoing concerns about hyperscalers’ ability to sustain their capex
spending, reports suggest that some Chinese firms are close to replicating highly specialized chip
manufacturing techniques. These have, up to now, been the proprietary realm of firms like ASML.
South Korea’s Kospi was particularly volatile, as heavyweight semiconductor manufacturers
Samsung and SK Hynix led first a selloff and then the subsequent rebound. Those two stocks out
of the index’s total of 833 constituent companies account for 50% of its overall weighting, and they
led Friday’s 18% rally. Markets went into the Federal Reserve’s midweek meeting more uncertain
of the outcome than at any point in the past 10 years. Afterward, markets digested the Federal
Reserve’s decision to hold rates steady, as well as Chair Kevin Warsh’s post–meeting press
conference. Warsh reiterated a firm commitment to reaching the stated goal of 2% annualized
inflation and in the Q&A stressed that future Fed decisions would primarily be guided by market
cues, devoid of the influence of Fed forecasts and dot plots. Perhaps the only group more upset
than the cottage industry of “Fed watchers”, facing a future of less commentary and fewer
projections for their content were investors on the long end of the curve, who saw rates rise to 18–
year highs amid a sharp steeping of the yield curve. Warsh stated that market rates, which had
moved uniformly higher across the yield curve since the last meeting, had the effect of tightening
financial conditions. However, considering the post–meeting steepening, Fed Fund futures are now
pricing in a 65% chance of a hike in the overnight rate at the September meeting. The move in
long–term interest rates weighed on the rate–sensitive S&P Utilities and Real Estate Sectors, while
the steeping curve supported Financials. Consumer Discretionary, up over 6%, was by far the top
performing sector but as we mentioned last week, Amazon holds an approximately 22% weighting.
Crude oil prices, although finishing lower on the week, continue to whipsaw in response to daily
developments in the Iran conflict. The dollar was lower, at first reacting to the Fed’s holding
pattern, but then on Thursday the Bank of Japan intervened, adding additional pressure by selling
an estimated over $50 Billion USD/JPY to alleviate domestic inflationary pressures driven by the
weak Yen. Precious metals and crypto remain on the sidelines.
THE WEEK AHEAD
Markets enter the first week of August focused on whether the recent resilience of the broader
market, supported by overall strong corporate earnings, can continue in the face of growing
uncertainty. Stubbornly elevated inflation and interest rates have not just risen across the curve
but have steepened recently. Some of the earnings highlights include AMD, which should provide
further insight into AI chip demand, Caterpillar for a broad read on global industrial and
infrastructure–related demand, and Eli Lilly for the boom in GLP–1s as it relates to broader
healthcare demand. The week’s most important economic release will be Friday’s U.S.
employment report. As mentioned earlier, the new Fed chair professes that he will take cues from
market signals, rather than remaining purely “data dependent”. So, reactions to the jobs report
may concern themselves less with what it will cause the Fed to do, and more with what the figures
mean for the future of the economy
(Schwab)
