Weekly Recap:

by MIchael Reinking, CFA & Eric Criscuolo

Heading into the 250th birthday of the United States last week, it was a mixed one for US equity markets, highlighted by violent rotations as we straddled the end of Q2 and the beginning of the second half of the year. Investors booked some profits in tech leadership and other momentum areas of the market amidst concerns about overcapacity, and reallocated some capital into other areas that had underperformed like software, financials and healthcare. The jobs report was disappointing coming after a string of strong readings but only helped yields pull back marginally after moving higher throughout the week. That move higher in yields weighed modestly on small/midcap indices which ended the week slightly lower.

A summer lull was expected this week in between key economic data and ahead of the on-ramp to the Q2 Earnings Expressway next week. That is what we got, at least in terms of economic data and corporate news flow, but geopolitics and AI-related headlines filled the void. Those two factors drove some choppy trading. The S&P 500 (see chart) traded in a reasonably tight range consolidating just over its 50d moving average ending the week modestly higher and less than 1% from another ATH, again. The gains were by  technology with the NYSE 100 index closing the week up ~2.5%. However, most other major US indices ended the week with slight losses. 

Geopolitics came back into the fray, not completely out of the blue, with the NATO Summit taking place in Turkey. The US responded to ships being fired upon in the Strait leading a frustrated President Trump to declare the end of the ceasefire during an appearance on Wednesday. The Iran news caused some volatility as traders broke out the typical macro conflict playbook, but the overall moves were muted and short lived as investors continue to discount a significant escalation of kinetic activity ahead of midterms. As President George Bush once said, “Fool me once, shame on you. Fool me…..You Can’t get fooled again!”

ICE Brent, which had been consolidating in the lows 70’s for the last couple weeks moved up to ~$80 but pulled back into the mid-70’s with reports that negotiations are occurring again,  though President Trump said while those talks happen “the United States has stated to them, in no uncertain terms, that the Cease Fire is OVER!”.  While at the Summit President Trump also discussed Greenland, potentially pulling troops from Europe and loudly voiced his disappointment with Spain. Russia and Ukraine was also a hot topic as the conflict continues and the latter gets more aggressive with drone attacks.   

The sector level activity was mixed this week and at the extremes it was a mirror image of last week with tech-heavy sectors outperforming and healthcare and other defensive/yield-oriented sectors pulling back. For obvious reasons energy was one of the best performing sectors. Materials fell ~2% with weakness in TiO₂ companies (housing related), construction materials and packaging stocks. Steel and ag chemical companies ended with gains.

Consumer Discretionary ended the week higher helped by gains in auto-related and the mega-caps while housing/travel related stocks were under pressure. That housing/travel related weakness also showed up within industrials, building products and airlines moving lower. This morning Delta Air Lines reported a strong quarter absorbing “the highest quarterly fuel expense” in its history. Management highlighted strong demand with momentum continuing into 2H. Within the broader sector aerospace and defense stocks underperformed while the AI/energy infrastructure companies didn’t really bounce back with the tech trade. There were modest gains in logistics, rail and pockets of machinery.

After a strong run and despite continued M&A activity biotech is pulling back, weighing on healthcare. There are a couple of heavyweights reporting next week (ABT/JNJ/UNH). Speaking of earnings financials will dominate the first couple of weeks, kicking off on Tuesday (BAC/C/GS/JPM/WFC). Over the last month the sector has outperformed, reversing YTD losses. The numbers should be solid with an overall healthy economic backdrop and strong trading/capital markets activity. Management teams were on the road at conferences recently and didn't suggest any real change in credit trends so there shouldn’t be many big surprises.

Saving the biggest and best (performing) for last: The tech roundup. It’s been a rocky couple of weeks for the tech trade with the capex spending beneficiaries going parabolic into the middle of June. As that move occurred and volatility increased, that in and of itself forces some position reduction, along with some quarter-end rotational activity and an increase in supply with multiple IPOs and capital market activity. However, at the same time there were growing concerns around token maxing, the use of cheaper open-source models and the durability of capex spending.

Those concerns seemed to come to a head last week around Meta, which has been one of the most aggressive spenders in this investment cycle. A Bloomberg report suggested the company would follow a similar path as SpaceX by selling excess compute. Softbank was also reportedly entering that market next year. Earlier this week there were reports about Meta’s model advancement, refuting some claims that the company was backing away from its AI efforts. In addition, a leaked document suggested the company would double its AI compute capacity to 14GW in 2027. The company then announced $10B data center in Canada and that it would begin production of its new in-house AI chip (Iris) in September with its partners Broadcom and TSMC. These headlines along with Micron raising its planned US investment to over $250B through 2035, up from $200B, helped to stabilize the complex. For Meta the cherry on top came today after very positive reviews of its recently launched Muse Spark 1.1 sent the stock up >5%.

On the AI disruption side of the trade, Bloomberg reported that Starbucks had been using AI to develop its own in-house software systems which could potentially be rolled out by the end of the year. This initially sent software lower but much of the group bounced back. It will be interesting to see if there are more examples like this discussed during the upcoming earnings season. The IGV software ETF ended the week with modest losses. Notably over the last couple of days were cybersecurity stocks, which have been surging recently, starting to show signs of fatigue. 

It has become pretty well known that the first half of July is historically the best performing two-week period for equity markets. 

That period is coming to an end, but the other nuance has been the fact that momentum tends to underperform during the month of July which are clearly seeing signs of that again this year. 

We are now coming out of what is historically the worst two-quarter period for markets within the 4yr Presidential  cycle. Q2 was a reminder that you can’t blindly follow seasonal patterns as it was the best second quarter in midterm election years in history going back to the 1950’s by nearly 2X. Q3 is mixed before we head into what has historically been the best 3 quarter period for markets and the pristine record of the S&P 500 never being lower after midterm elections (though it is still a reasonably small sample size 19).  

It was a very tame week as far as macro data goes. June ISM Services were inline with expectations, moving slightly lower from May. New Order activity slowed but remained growing, employment picked up and price increases eased but remain high.

One and three-year inflation expectations rose 0.2% each, to 3.7% and 3.3%, respectively in the NY Fed’s Survey of Consumer Expectations. Those were the highest levels since 2023 and 2022, respectively. This was an interesting result as expected gas price increases over the next year fell from +5% to +1%. College education expense also fell, maybe due to everyone going to AIU soon. 

The FOMC minutes weren’t exactly a John Grisham page-turner. There was broad support to change the statement language, and while the most near-term outlook tilted hawkish, commentary took a more dovish angle for the medium to longer term horizons. Overall, the minutes highlighted a divided FOMC and buried the lead. The following paragraph regarding individual assessments of base case scenarios came at the very end of the document, and dovetailed with the SEP and Dot Plot (which may be on its way out depending on some upcoming recommendations) from the last meeting.  

“many participants indicated that the appropriate level of the federal funds rate would be within or slightly below the current target range at the end of this year. Many other participants, however, assessed that the appropriate level of the federal funds rate would be above the current target range at the end of this year.”

NY Fed President John Williams spoke at the Future of Market Liquidity and Functioning Workshop. Among the topics he hit upon:

Ladies and Gentlemen, may I present to you your Federal Reserve Task Forces. One of the key takeaways when looking at the composition of Kevin Warsh's highly anticipated Task Forces is that the Productivity and Jobs Task Force is led by three prominent AI proponents: Venture Capitalist Marc Andreesen (whose firm a16z has invested $10B in AI this year alone), Charles Jones (who recently joined the Anthropic Institute) and Asah Sharma (Xbox division head, which just slashed 3000 jobs). Leaders of other task forces also generally align with less forward guidance, smaller balance sheet and criticism of QE. Raghuram Rajan, for example, has espoused the idea that central banks have expanded past their mandates while enabling unsustainable fiscal deficits. One of his more recent pieces is “For Central Banks, Less is More”

Global Equities - Mostly lower; Hong Kong rebounds

Europe - Major European indices fell ~2% this week. Equities were broadly lower across sectors though Energy saw gains from oil’s relative strength when Iran hostilities re-ignited.  Financials and Communications also outperformed. Semiconductor-related names underperformed: ASML -4%, Infineon -6%, Aixtron -10%. Defense contractor Rheinmetall also fell 10%. Volkswagen may cut the number of models offered in half while also contemplating large workforce reductions. Political developments across the continent also began to emerge, with the Andy Burnham set to become the latest UK PM and Marine Le Pen having her 2027 eligibility reinstated in France. The Sentix sentiment survey for Europe rose sharply, improving for the third straight month, including notable improvement in Germany. Germany’s DAX hit an ATH on Monday before selling off in the middle of the week, though it continues to see support at the 50d ma. Factory Orders and Industrial Production surprised to the upside.

Asia - Asian markets were mixed. In China, Shanghai fell 1% while the Hang Seng rose 3.5%- its best performance since October. Rotational activity into the lagging, large Internet/tech names was apparent. The Hang Seng Tech index, dominated by those stocks, saw strong gains: Alibaba (+17%) and Tencent (+6%). AI and chip names were volatile. SMIC gained 10% on Thursday but fell 5% on Friday. Zhipu (Knowledge Atlas Tech) rose ~25% Wed-Thrs before falling -20% on Friday. Chinese companies developing their own AI chips was a recurring news item this week, including Zhip and DeepSeek. Meanwhile the government is discussing restricting overseas access to models from Baidu and Alibaba. An IPO for memory chip maker CXMT may be coming shortly as well.

Japan’s Nikkei ended the week down ~2% but bounced on Thursday and Friday. Softbank jumped 10%. Finance Minister Katayama discussed the administration’s desire to increase household and pension investments in Japan’s domestic market. Memory maker Kioxia fell 8%, adding to 10% and 15% declines the prior two weeks. However those losses follow a 5 week period of 144% gains.

South Korea fell 8% and slipped into a Bear Market (-20% from recent high). The South Korea finance ministry and central bank said they would closely monitor risk factors and market volatility while leveraged/single stock ETFs come under greater scrutiny.  SK Hynix listed its ADRs in the US on Friday, raising $26.5B. Samsung reported exceptionally strong preliminary earnings, with operating profits rising 19x versus a year-ago. Still the stock sold off after the report. That could be a harbinger for results/price action as earnings season kicks off in full force next week.

Other markets - India was slihglyt lower, continuing to be among the biggest undperformers this year. South American markets were mostly higher. Mexico fell while Canada rose modestly.

Global yields rose across the curve though Japan was more modest and mixed. In the US, the curve continues to re-steepen and unwind the hawkish post-FOMC move at the front-end. Most of the move happened Tues/Wed on the Iran hostilities/oil move. 

The ICE MOVE index remains at low levels in well-contained range around 68.

The US Dollar Index was slightly higher this week, though it has pulled back from its recent high ~101.5, consolidating just below 101. The yen strengthened modestly after clearing ¥162.5 earlier in the week. Comments by Financial Minister Katayama about increasing household/pension fund investments into domestic markets and reiterating central bank independence and discipline led the yen to strengthen on Friday. The South Korean won has finally begun to strengthen again against the Dollar. It’s weakness was notable given the explosion of Korean tech exports.

Next week is going to be very busy. Inflation data will be very closely watched with CPI released on Tuesday morning just before we start two days of the task force drinking game with Fed Chair Warsh testifying before Congress. Retail sales will be released on Thursday and it is the “official” start of earnings season with financials leading us out of the gates, a smattering of healthcare and industrial companies mixed in throughout the week and two important overseas tech companies- Taiwan Semi and ASML. Enjoy the weekend!

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