Weekly Recap:

by Eric Criscuolo & MIchael Reinking, CFA

Last week lined up to be a quiet one ahead of key inflation data this week. It gave us time to steel ourselves for the approaching onslaught of earnings. Muted economic data and corporate news flow played out as expected but geopolitics and AI-related headlines decided to fill the news vacuum. The S&P 500 traded in a reasonably tight range, with a modest gain and consolidating just over its 50d moving average. By Friday it stood less than 1% from another ATH, again. Tech led the gains with the NYSE 100 index closing the week up ~2.5%, with semis up a similar amount. Keep that in mind. The other major US indices ended the week with slight losses. 

The Iran détente began to unravel last week when President Trump declared the end of the ceasefire. This week he reinstated the blockade and named the US "The Guardians of the Hormuz Strait", or GOTHS- Germanic tribe from the Roman era or punk-related social scene, take your pick. The US struck Iranian targets throughout the week, with Iran responding and vice-versa. While the market has been able to shrug off the conflict so far (in broad, general terms), a substantial re-escalation, which has been discussed in the press this week, would be a whole new ballgame, as they say. Oil rose sharply this week on the news, but while yields in Europe rose as well, US yields actually retreated a few bp on cooler inflation data. That set-up would seem to have been beneficial for equities, but there were larger forces at play.

Those stocks were on all-time heaters so a pullback isn’t terribly surprising, but it’s still notable. The rotations that have become a defining characteristic of this market continued to spin this week. Within tech, as the semis stumbled, the big hyperscalers were seeing renewed strength. That was up until late in the session on Thursday, when reports that Alphabet was delaying the latest version of its Gemini AI model sent shares, which were trading around unchanged, sharply lower and weighed on peers as well.

Besides the force of market gravity pulling things down after an incredibly sharp run higher, there’s several other forces acting on stocks right now:

There was some dip buying in tech as Friday wore on, with many names off their lows. Next week should provide a huge opportunity to confirm or negate that action with some major tech stocks reporting.

A clear rotation away from the significant outperformers is readily apparent. The chart below, unabashedly reproduced after seeing Bespoke Investment Group's version, shows the intense concentration of selling in July in the best performing stocks (through June 30) and buying the laggards.

The rotational activity has come alongside significant dispersion across equities as well as low correlation between stocks. That dynamic has showed up in the equal-weight index managing to significantly outperform the market-weight index this week, while the S&P 500 has kept near ATH and the VIX at subdued levels.

While the S&P fell 1.5% this week, the equal-weight kept its loss at 0.4%. That included an almost 1% decline for the EW on Friday. The S&P closed below its 50d ma, after a failed move to reclaim it at 7500 in the afternoon.

The Russell 2000 fell a little more but still outperformed, and the S&P Small Cap index actually ended the week in the green. Both small cap indexes have easily outperformed the large caps this year. The Dow Transports led the way this week, up over 2% and has trounced the S&P 500 by more than 20% so far this year. Railways have been a big part of that up ~30% this year.

YTD laggards like Healthcare and Financials, along with Staples, were among the best performing sectors this week. Energy led the way on oil's move. Speaking of financials, the sector resumed its position as the leadoff hitter for earnings this week. The banks reported strong results, with commentary more or less universally categorizing the US economy as healthy and the consumer as resilient. Stock moves were relatively modest, however. REITS were the second best sector this week, led by the Healthcare group and retail. Data centers were lower but the real weakness in that business group came from the neoclouds and AI colocation names like CoreWeave, down over 15%. There were some high profile negative pre-announcements across sectors this week (IBM, HCA, PNR), something to keep an eye on, but overall the earnings results have been quite strong. 88% of companies have beat EPS estimates early on and 85% have beat revenue, according to FactSet.   

Inflation data this week was the main event and the prints came in cool. Headline CPI was -0.4% m.m / +3.5% y.y, moderating from +0.5% / +4.2% last month, respectively, driven by an expected decline in oil prices. Core was flat m/m and fell from 2.9% y.y to 2.6%, also lower than exepectations. There was disinflation across apparel, medical care commodities/services and transportation services while shelter also moderated highlighting that the cooler print was not all energy. The data immediately reversed the hiking bias that was priced in Monday after Fed Governor Waller said he would support a rate hike in July if CPI was hot.

PPI followed with its own cooler print. Headline PPI fell -0.3% (vs. +0.1% cons) while core was up 0.2% (vs. 0.4% cons). Declines were driven by final demand for goods, down 1.4%, while services were up 0.2%. Final Demand Trade Services (margins), which has been volatile, drove 60% of the increases in Services. And most of that increase was driven by fuel retailing.   

Fed Chair Warsh testified before the House and Senate and he reaffirmed the commitment to delivering price stability but there was not too much else notable or market moving. It took well over an hour for any Representative to ask about the morning's CPI data because of the unfortunately not surprising grandstanding. When finally asked, he said, “there might be some who look at this morning's data and say, 'Well, mission accomplished, everything is swell.' That is not my view.” NY Fed President Williams also spoke this week, reiterating his belief we’re past the peak inflation. The FOMC goes into blackout this weekend, something Warsh is probably happy about.

The Empire Manufacturing Survey was better than expected and improved from the prior month. New Orders rose sharply (and continue on their upward trend) while Prices Paid and Received both fell.

Both headline Retail Sales and control group were inline with expectations but the growth slowed from last month. Jobless claims continued to stay low while Pending Home sales fell 5% according to the latest NAR report and missed estimates.

Global Equities - Tech Wreck in Effect from Japan to Phuket

Europe - The lower Tech weighting across the European indexes provided some cover from the tech selloff this week. The STOXX EURO 600 was flat for the week. Energy, Utilities, Telecom and Consumer names were areas of strength this week. Final CPI for the region confirmed the downtick in the initial reading, lowering the pressure on the ECB to hike rates next week. Germany's DAX fell 1%, ending the week testing its 50d ma after falling below it on Thursday. The UK gained ~1%. GDP showed a modest increase in May against a negative reading in April. Andy Burnham is set to become the UK's latest PM on Monday.

Asia - Oof. The region came under significant pressure this week. Shanghai, Japan and South Korea all declined 6-9%.Hong Kong (+1.6%) was a notable area of strength amidst the broader weakness, closing higher for the third straight week, up 8% during that time. A five-day winning streak was snapped on Friday after it failed to hold the 50d ma. Finance, Energy and Consumer names overcame weakness in tech names like battery maker CATL (-6%) and semis maker SMIC (-20%).

There was a lot of AI news coming out of the country this week that we noted above in the discussion on Tech.

South Korea obviously saw significant weakness and it could have been more but the market was closed on Friday. India outperformed this week and ended solidly higher on Friday. A laggard this year, the BSE SENSEX index has reclaimed its 100d ma and formed a base of support at the 50d.

The cool inflation prints helped keep a lid on Treasury yields this week in light of the sharp snap back in oil prices. The 2y rose 4bp while the longer end was flat to slightly lower. Yields across Europe meanwhile were up 10bp or more from 2-10y. The US Dollar Index fell modestly with the yield differential.

Earnings will accelerate and broaden out from this week's initial wave of Financials. Major reports will include Alphabet, IBM, ServiceNow, SAP and Tesla among many others. The swoon in tech will place added importance on results, if that's physically possible. The US macro calendar is relatively light with flash PMIs the key release. In Europe, the ECB rate decision will headline the calendar. Enjoy your weekend.

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