RECAPPING LAST WEEK
Concerns over the durability of the artificial intelligence rally and renewed geopolitical tensions in
the Middle East dominated global equity markets this week. Selloffs in memory chip companies
early in the week were tied to Samsung’s preliminary earnings report, in spite of the fact that the
company forecasted a nearly 20–fold year–over–year increase in profits. Shares sold off 10% over
worries that hyperscalers’ demand could fall. Late in the week, SK Hynix—another South Korean
memory chip maker—countered this narrative, raising $26.5B in a 7x oversubscribed offering that
marked the largest ever offering of shares by a foreign company in the U.S. This provided support
to the thesis that investors still have an appetite to fund the enormous capital needs of the AI
infrastructure buildout. Renewed hostilities in the Middle East prompted by the IRGC firing upon
three ships transiting the Strait of Hormuz led President Trump to declare the cease fire over. The
next two nights saw intense attacks against Iranian coastal installations intended to degrade their
ability to further disrupt shipping. Before these events, crude oil prices had eased all the way back
to pre–war levels. They spiked on the news but eased somewhat after Trump claimed that Iran was
still interested in making a deal. Understandably, this all led to a great degree of sector churn as
defensive names and energy benefited early in the week before risk appetites resumed later. S&P
500 sector wise, Energy, Technology, and Communication Services were the strongest performers,
while Materials, Healthcare, and Consumer Staples were the weakest. The rise in energy prices
and release of the FOMC minutes, which expressed concern that a combination of energy prices
and massive AI buildout expenditures could keep inflation elevated, affected Treasuries as well.
Yields on the long end of the curve pushed through 4.5% on the 10 year and back above 5% for the
30 year. In other macro sectors, precious metals were flat, the dollar eased slightly and the late
week resumption of risk appetites firmed crypto a bit.
THE WEEK AHEAD
Markets will turn their attention to the 2nd quarter earnings season kickoff, with reports from the
major money center and investment banks. Investors will focus not only on the fundamental line
items like interest margins and loan growth, but also on commentary concerning the health of the
consumer amidst the broader economic backdrop. Midweek sees earnings announcements from
AI/Tech supply chain bellwethers Taiwan Semiconductor and ASML, as well as Netflix’s
announcement, which offers insights at the intersection of tech and consumer discretionary. The
release of CPI on Tuesday will offer fresh inflation data, but the big news is expected to come from
Fed Chair Warsh’s first semi–annual Humphrey–Hawkins testimony to the House Banking
Committee, where he’ll deliver the Fed’s Monetary Policy Report and field questions. Wednesday
offers additional inflation data with the release of PPI. The other notable events on the economic
calendar are retail sales and pending home sales data on Thursday, with more housing data
coming on Friday with the new home sales reading. The renewed uncertainty in the Mideast will
surely keep energy markets on edge and could catalyze either risk–on moves into tech or a risk off
move to defensive sectors like healthcare and consumer staples
(Schwab)
