RECAPPING LAST WEEK
The dominant theme in U.S. equity markets last week was the sharp repricing of hyperscalers,
prompted by investors showing little tolerance for rising capital expenditures tied to AI
infrastructure. The semiconductor sector, which has been one of the primary beneficiaries of those
capital outlays, regained its footing after bearing the brunt of the market’s punishment in the
preceding week. The sharp rotation that we’ve been highlighting amongst sectors now is most
dramatic within the tech sector itself. Earlier in the year featured AI stocks vs traditional software
while now the focus is on chipmakers and their customers with a seemingly unsatiable appetite, the
hyperscalers. World benchmark Brent crude oil pushed through $100 per barrel on Thursday before
backing off a little on Friday as hostilities between the U.S. and Iran threatened not only to continue,
but potentially to escalate. Refining margins, as measured through crack spreads, remained
elevated, which led the Energy sector to rally over 3% on the week. That made it the best performer,
while the Consumer Discretionary sector was the worst, falling over 5%. While this seems like a clear
cause–and–effect scenario, remember that Consumer Discretionary has a fair amount of “big tech” in
it, given its two largest components are Amazon and Tesla. The worrisome rise in energy prices
spilled over to other sectors, and led Treasury yields to rise across the curve and the dollar caught a
bid, most notably against the Yen. The widening interest rate differentials between the U.S and
Japan overrode short–term traders fears of BOJ intervention and fueled carry trades. You’ll recall
that the release of June’s benign inflation data the preceding week comforted the markets, with Fed
Fund futures pricing reducing the chance of a July rate hike to 10%. Last week’s turmoil removed
that comfort, with Fed Fund futures once again suggesting a 1 in 3 chance that the Open Market
Committee could hike rates at the July 29th meeting. Friday also saw President Trump replace his
expiring global 10% tariffs with a new program, that charges either a 12.5% or 10% rate depending
on the target country/trading block’s policies regarding the import of goods produced by forced
labor. This policy leverages a section of U.S. code that the administration believes will better
withstand judicial challenges. Precious metals and crypto each caught a little bid early in the week
only to give back most (metals) or all (crypto) of these gains by the end of the week, as global
instability and higher U.S. interest rates supporting the dollar acted as countervailing forces.
THE WEEK AHEAD
Investors enter one of the most consequential weeks of the summer with two dominant catalysts
competing for attention: the heart of second–quarter earnings season and the Fed’s July policy
meeting. Next week’s results will help determine whether the market’s recent rotation away from AI
leaders is temporary or if it marks the beginning of broader market leadership. More than 1/3 of the
S&P 500 is scheduled to report, marking the busiest week of the earnings calendar. Megacap tech
highlights include Microsoft and Meta on Wednesday followed by Apple and Amazon on Thursday.
Alphabet and Tesla demonstrated that strong earnings alone are no longer sufficient to satisfy
investors, as markets remain focused on AI infrastructure and capital expenditure plans. Outside of
tech, investors will also digest results from a wide swath of the market, providing a broad read on
consumer spending, industrial activity, healthcare demand and energy in a quarter in which elevated
energy prices only eased in the final two weeks of June. If the Fed holds rates steady at
Wednesday’s meeting, an outcome which the market currently is pricing at 65%, Fed watchers will
scrutinize both the committee’s statement and Chair Kevin Warsh’s press conference for any
indications of how renewed strength in energy prices and the demand pressures from the AI buildout
have affected the likelihood for tightening at the September meeting, a prospect already priced at
80%. Finally, the potential for increased hostilities between Iran and the U.S. will remain the most
closely watched geopolitical event.
(Schwab)
