Weekly Recap:

by MIchael Reinking, CFA & Eric Criscuolo

This week brought the end of June, Q2 and 1H26 . It also brought a USMNT victory in a World Cup knockout match for only the second time in history, as well as a couple scaling the spire of the Empire State Building for the greatest engagement photo of all time. As we prepare to celebrate this great nation's 250th B-Day the collective consciousness has already shifted to barbecues and fireworks and in an attempt to conserve power with the record heat wave sweeping across the northeast today's Recap will be abbreviated.

First we'll rewind the clock with a quick review of Q2. There were double digit gains across most major US indices, but keep in mind markets were at YTD lows right at the end of the first quarter. Traders were mispositioned for a de-escalation in Iran and a phenomenal earnings season added to the scramble. To start the quarter pretty much everything rallied but as we moved into May tech took over the leadership position as yields started to move higher despite oil prices topping out. In the middle of the month the tech trade also began to evolve with investors following the money - punishing the hyperscaler AI Capex spending which was devouring their cash flow and moving into the beneficiaries semi and memory stocks. That continued throughout the month of June as you can see with the nearly 20% outperformance of the ICE Semi Index relative to the NYSE FANG+ during the month. In June the breadth improved with small and midcaps outperforming as healthcare, industrials and financials were the best performing sectors.

This week as we've straddled the end of the first half and the beginning of the second there has been some wild rotational activity. This is not uncommon around this time of year but is likely being magnified by stretched positioning dynamics. A rotation out of the high-flying momentum trade, especially chip/memory, and into lagging areas like software, hyperscalers, healthcare, financials and even crypto got off the mat.

That reversion trade may have been lined up anyway however, there has been some news flow helping to send the fast money to the exits. Yesterday, Bloomberg reported that Meta may sell excess compute capacity to external customers. This would be a similar move to what SpaceX recently announced. Meta, which has been one of the most aggressive companies during this investment cycle rallied sharply on its announcement but has given some of that back. In addition, this morning Bloomberg also reported that SoftBank would start selling compute capacity to US companies starting next fiscal year adding to increasingly crowded space and concerns about overcapacity. Neoclouds/nuevo HPC entrants sold off sharply along with AI hardware/chip names.

As we head to print the S&P 500 is up just over 1% for the week while small/midcap indices are giving back some of last week's outperformance. Defensive/yield oriented sectors which also  outperformed last week are giving some of that back.  

Iran has clearly become a secondary issue for markets over the last few months with the sharp move lower in oil prices. There was a pickup in kinetic activity over the weekend but concerns were quickly eased after President Trump announced a meeting in Doha just ahead of the open on Monday. There were no direct negotiations with Iran. However, after discussions with mediators officials continue to point to progress. Maybe coincidentally (as tech has led to the downside) US markets topped out this morning around the same time Bloomberg reported that according to sources some European powers are accepting the notion that ships moving through the Strait will need to pay fees. Oil prices have moved off the lows since the news but are still slightly lower on the day and down >1% for the week, holding below the 200d ma.

The other big story this week was the labor market data culminating with this morning's BLS Employment report, which showed some cooling in the labor market after a string of very strong job reports. Nonfarm payrolls increased 57k, below the street estimate of 110k. There were negative revisions to the previous two months totaling 74k, leaving the trailing 3 month average a healthy ~111k/mo. The mix of job gains were not positive with education/healthcare services accounting for the entire increase (69k). Somewhat surprising was the 61k decline in leisure and hospitality as there was some expectation this would be strong given the World Cup impact. The fact that the data center buildout is not translating into job gains that show up in the data is also raising some eyebrows. The unemployment rate ticked down to 4.2%, a tenth below the estimate as the participation rate dropped to 61.5% from 61.8% (this is not positive). The Household Survey was weak showing a loss of 507k jobs. Earnings were inline with estimates up 0.3% m/m and 3.5% y/y while the hourly workweek was flat at 34.3. In more labor data, initial claims ticked down from last week to 215k while continuing claims held steady around 1.81ml. Overall the report was disappointing, but this could just be some balancing out of data after a couple of surprisingly strong readings.

The data does take a little pressure off the Fed as it does not suggest that the economy is overheating. However, it probably doesn't change their thinking all that much as inflation data will be the primary driver of policy in the near term unless the labor market deteriorates very significantly. That being said markets are adjusting rate hike expectations a bit lower. Yields were a touch higher overnight but there was a swift reaction particularly at the front end of the curve following the data. The 2yr is down ~5bps but the long end is holding around unchanged. This week yields are higher with a steepening, reversing last week's move. The move higher in the long end is a global phenomenon. In Japan 10/30yr yields were >15bps this week. In Europe, earlier this week there were reports that the ECB was considering doubling reserve requirements. The USD index was trading ~$101 ahead of the data and has fallen to ~$100.50, testing the rising 20d ma. The Yen has been under pressure throughout the week with speculation that intervention could come tomorrow with the US markets closed.  

Global Equities - mixed week with tech heavy markets in Asia under pressure while Europe was the beneficiary given less overall exposure.

The calendar is light next week- the calm before the earning storm makes landfall the following week. The ISM Services report will headline the economic data. The FOMC minutes should be interesting since it will cover Warsh's first meeting as Fed chair. Wash is also expected to announce the heads of the various Task Forces he's standing up to review the broad scope of Fed operations. Is there a task force for creating the task forces? The NATO summit could produce some geopolitical headlines. Earnings will include EPAC, LEVI, PEP, PGR, H and DAL. Enjoy the holiday weekend!    

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