Weekly Recap:

by Eric Criscuolo & MIchael Reinking, CFA

The city is only just starting to come off its high from the Knicks championship and the ensuing parade up the Canyon of Heroes, which took the Champs right past the front door of the NYSE. The celebration cleared the way for Summer to make its triumphant return to the Northern Hemisphere with the Solstice early Sunday morning. That means the MAC Desk will be moderating the heavy flow of Knicks references and ramping up Yankee, Summer movie blockbuster and pop culture references- anything we can conjure up to describe this market.  

Last week was holiday-shortened with markets closed on Friday for Juneteenth. The main market event was Kevin Warsh’s highly anticipated first policy meeting and rate decision as Fed chair. Takeaways were Hawkish, triggering Treasury yields to rise and weakness in equities right after the meeting. However, a bounce back on Thursday put the S&P up 1% for the week before the long weekend. Tech hardware and semiconductors had a lot to do with that. The ICE Semiconductor ETF rose 7% last Thursday. The DRAM memory ETF rose 10%, and 18% for the week. The Tech and Industrials sectors were the best performers, while Energy was the worst due to crude falling about 10% for the week.

Warsh has begun the process of pivoting the Fed to new strategies and operations, and finding a new identity, so to speak. This week brought into stark relief that equities are also searching for an identity and pivoting around the AI trade like Jazz Chisholm turning a double play at second base.

That AI trade that has powered markets since ChatGPT was released in November 2022 has been evolving. It started by lifting all boats. Now it feels like only specific charter cruises out of Wantagh Park Marina and sailing through the Jones Inlet are benefiting. Not entirely true but you get picture, hopefully. 

We’ve seen signs of this evolution throughout the years as investors try to find where the value accrues. Nvidia was the primo example early on as shares rose about 1150% from the end of 2022 to May 2026. However it’s returning to the range-bound levels from the summer of last year to April of this year. 

Groups like construction, machinery, energy and utilities also benefitted on the expected AI infrastructure spending, compounding on top of expectations for broader infrastructure expansion and a manufacturing renaissance. Some of those, like Caterpillar, continue to work. Component and hardware suppliers outside of the silicon and GPUs- networking cables, optics, etc- began to benefit. Then the “memory bottleneck” roared to life, taking memory and storage names like Micron and Sandisk on a breathtaking ride higher.

Conversely, waves of pressure have swept across various segments. Software felt it first. Then mega-cap tech and the hyperscalers stumbled, and now AI chip names are starting to wobble. Nivida and Broadcom are down ~10% over the past month. The concern around the AI infrastructure suppliers manifested in smaller operators like the neoclouds and HPC providers that have converted from crypto miners. Declines of 10-20% were common across that group this week, including CoreWeave down over 15%.

It would be nice if it was a clean spilt and concise narrative, but it’s not. Chip suppliers rode a roller coaster. The DRAM memory ETF rose over 15% from Wednesday of last week to Monday. It then gave it all back when it fell 14% on Tuesday. Then Micron reported absolute blowout earnings Wednesday night. The overall takeaway was that memory supply was severely constrained and would remain so into next year due to AI demand. The DRAM ETF ripped 10% on Thursday, including a 15% gain for Micron, and then gave back about three quarters of it on Friday. Meanwhile, software’s impressive comeback from April to the start of June continued to evaporate as the IGV ETF fell back towards mid-April lows (but bounced today).

The various concerns around the scale of AI spending have been noted for a while and they’ve served as catalysts for temporary drawdowns across the space.  This week, however, it feels like those concerns took a new turn. Micron’s earnings had something to do with it.  The numbers were incredible, including the explosion of Micron’s margins as the memory bottleneck fully accretes to their income statement. However, that’s also an argument for the more bearish camp: historically high memory prices will trigger backlash, engineering workarounds, pivots to low-cost, open source models and ultimately once again validate the economic adage “the cure for high prices is high prices”. 

While this could have ramifications across the AI ecosystem, broader pricing concerns then manifested themselves after Apple announced big prices increases across most of its lineup and Microsoft said it was raising Xbox prices due to component inflation.  In a world already dealing with the compounding effects of years of high inflation, another vector for it to attack consumers is not a welcome development. Behind that though, are an increasing number of stories of companies pulling back on their AI spending as budget items like token spending get completely blown out. Topping it off was news that OpenAI is looking at delaying its IPO until 2027. 

Pulling back a bit to the index level, tech weakness is responsible for the S&P 500’s 2% decline this week. However, underlying metrics are much better. The S&P equal-weight index was up 1.5%, outperforming the headline index by ~350 basis points. 

Around half of S&P 500 constituents are above their 20d moving averages, a level we’ve been consistently been around since May. 

Small cap indexes outperformed. The S&P 600 was up over ~3%. The Russell 2000 and S&P 600 are up 20% this year. Know what the S&P 500 is up? Less than 8%. The equal-weight is up 11%, over 300bps of outperformance. Three Mag Seven stocks are down over 15% this year. Only one is up more than 5%.

While tech generates so many headlines right now, there’s more to the market than trillion parameter AI model training. 7 of 11 sectors are higher this week.  Some of the moves showed hallmarks of a basic rotation into lagging areas like Healthcare. It’s easily the leading sector this week but came into it down around 5% on the year. Everything caught a bid, especially on Friday. Trillion dollar Eli Lilly rose over 6% and the beaten down Med Device group showed signs of life. The Russell reconstitution today and the approaching quarter-end next week is likely driving some of that rotation. As we move into July, we hit the strongest month for the S&P historically. It’s averaged over a 3% gain over the past 10 years, with no year in the red. 

REITs were also broadly higher, especially residential and healthcare, as were Consumer Staples and Utilities. While those last two are generally in the defensive basket, it doesn’t feel like an overly defensive posture by the market. Crude is down about 10% this week, and down about 25% from June 3. That’s helped discretionary areas like travel and leisure and airlines.

This week’s economic data didn’t point to any major shifts in the prevailing narratives - moderate economic growth, resilient consumer spending, elevated (though not out of hand) inflation and a solid labor market.

The S&P Global flash PMI’s showed business activity improving for the third consecutive month though that growth rate has decelerated from earlier this year. “The survey also showed an unbalanced economy, as sluggish demand for services contrasted with historically strong growth in demand for manufacturing goods, although the latter was again buoyed by precautionary stock building”. This dynamic was also evident in today’s Trade Balance data which showed a much bigger than expected deficit as imports were up 3.6%, hitting the highest level in 14 months. Employment within manufacturing survey fell but held up in services, potentially helped by the World Cup. There was some moderation in manufacturing input/output prices which remained elevated while services prices charged continued to tick modestly higher. 

Sticking with inflation - Headline PCE was more or less in line with consensus, rising 0.4% versus last month and 4.1% versus last year- the highest since April 2023. Core was right inline as well (0.3% / 3.4%). Goods rose 0.4%, easing from 0.7% last month. However, services accelerated to 0.5% from 0.3% part of this was driven by a big jump in financial services and insurance which is highly correlated with market returns. Transportation services also doubled to 0.8% which should moderate with the recent fall in energy costs. On an absolute basis these levels remain well above Fed target levels the increase on the services side, which tends to be more sticky, is a concern but can at least be chalked up to line items that should moderate. 

Labor market - the weekly ADP employment bounced back to 30.75k from 26.5k last week. Initial claims fell to 215k from 226k, while Continuing claims ticked up slightly. Personal Income was strong, up 0.7% after being flat in April. Personal spending also accelerated up 0.7% from 0.4%.

Treasury yields moved higher on Monday but Treasuries have had a bid throughout the rest of the week ending down 5-10bps across the curve. This is more driven by the move lower in oil prices than a reaction to the economic data or Fed commentary. Despite the Chair’s vocal opinion about communication there has been a steady stream of officials on the media circuit this week which has highlighted some of he varied opinions on the Committee though there was nothing particularly noteworthy. Earlier this week the USD index broke out of its year long range. It has pulled back modestly at the end of the week. This is something to keep an eye on as it has had significant implications on commodities and emerging markets. 

Global Equities - were mostly lower this week with tech heavy indices underperforming. 

The newly reconstituted Russell indexes will greet us on Monday and another holiday shortened week. We'll also see the end of Q2 an 1H 2026. Markets will be closed on Friday July 3 in observance of July 4th. The monthly payroll numbers will headline the economic data. ISM Manufacturing PMI, JOLTS job openings and Factory Orders will also be on the calendar. The Sintra conference will bring together central bankers including Fed chair Warsh. Earnings will include Nike, Constellation Brands, FactSet and General Mills. Enjoy the start of your summer!    

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