Weekly Recap:

by MIchael Reinking, CFA & Eric Criscuolo

Last week was defined by an unwind in momentum tech stocks, a solid start to earnings season and an escalation in hostilities between the US and Iran. The latter sent oil prices sharply higher. However, better than expected inflation data helped to keep Treasury yields in check. The S&P 500 ended the week down ~1.5%, with the bulk of those losses coming on Friday, with the index closing just under its 50d ma a key technical level it has held above since reclaiming it in April. Semi and memory stocks came under intense pressure with both groups down >10% for the week. Earnings season saw the banks kick things off with strong reports overall, which helped Financials place among the best performing sectors, alongside Energy, Real Estate and Consumer Staples.

Last week’s tech wreck gave way to a dominant performance by Spain in the World Cup final over the weekend. Unfortunately, hostilities continued to escalate in the Middle East. Oil prices moved higher on Sunday evening and the situation took another turn for the worse after Yemen’s Iran backed Houthis declared a sea navigation ban on Saudi Arabia, which had rerouted much of its oil exports to the Red Sea. Throughout the week the administration has downplayed diplomatic efforts and vowed retaliation after ships have taken fire in both chokepoints. Yesterday, the September ICE Brent contract broke above $100/barrel for the first time since May up ~15% for the week and nearly 40% in July. However, reports that China is pushing Pakistan and Iran to renew talks helped prices pull back today.

Throughout the first half of the week equity markets had largely shrugged off the move in oil and increasing geopolitical risks even as Treasury yields approached their YTD highs. Tech bounced modestly, helping the S&P 500 reclaim its 50d ma and earnings continued to come in pretty strong. Major US indices were hovering around unchanged levels ahead of some key earnings reports on Wednesday evening.

However, on Thursday the confluence of earnings updates, oil trading above $100, Treasury yields hitting new YTD highs along with increasing volatility across asset classes seemed to be the straw that broke the camel’s back, or at least some short-term technical levels, triggering a bit of a risk off move.  We don’t want to over dramatize the selloff, coming into today’s session most major indices were down just under 1% for the week and the well-timed Iran headline today has helped markets bounce back ending the week on either side of unchanged. That being said, as we’ve been highlighting, despite the calm at the index level the single stock volatility has been quite elevated, and earnings are adding to that dynamic. 

We’ll start with tech because well of course we will……Helping tech stabilize early in the week were a couple of new data center/neocloud deal announcements (HUT/IREN). Followed by an Anthropic/AMD partnership whereby the former will purchase up to 2GW of AMD Instinct MI450 chips starting in second half of ’27. In turn AMD will invest $5B in Anthropic and will provide a financial backstop for data center leases. The AMD response was muted as this once again sparked the circular financing conversations.

OpenAI was also in the news announcing plans to build a new data center in Georgia and according to the WSJ increased its projected spending to $750B through 2030 up from $600B earlier this year. OpenAI was also in the headlines after it said two of its AI models escaped a test environment and hacked Hugging Face, an open-source AI platform, raising new security concerns.

Ahead of earnings there were reports that Alphabet was working on a more efficient AI chip call Frozen v2 (this nugget of information was really just another way for the MAC Desk to highlight our graphic design and AI skills). The company was the first hyperscaler to report earnings and the numbers were pretty strong. Cloud was the standout with revenues up >80% on a y/y basis. However, the stock sold off sharply as investors clearly focused on the $15B increase in the Capex budget to a range of $195 - $205B this year. To put that number in perspective that is larger than the market capitalization of ~90% of companies in the S&P 500. The company’s FCF was also negative for the first time since it went public in 2004, falling nearly $6B. 

Tesla also traded sharply lower after its earnings, where Elon Musk noted the company would be spending over $25B on capex for the next couple of years though this is not just compute it includes ramping production for Robotaxi and Optimus. Many analysts are projecting FCF to be negative $10B this year. Once again highlighting one of the major investor concerns - how are companies going to pay for all the Capex as free cash flow gets devoured and the cost of capital is getting more expensive with credit spreads widening and equities under pressure.

That seemed to weaken the impulse to buy the spending beneficiary stocks relative to what we witnessed during Q2. There were a couple of reports within the semiconductor sector which were generally pretty positive but as we’ve highlighted the expectations were so high coming into the reporting season that the stocks mostly had a sell the news response (see TXN/INTC).  

Software has been another angle of the AI trade - after IBM’s pre-announcement last week there have been a couple of other companies highlighting that AI spending has impacted results as companies re-allocate budgets. The sector has continued to be under pressure this week but strong results from Service Now and SAP over the last couple of days have helped to stem some of the selling.

Outside of tech, the earnings reports have generally been pretty positive. According to FactSet, about a quarter of the way through the reporting season 86% of companies are beating EPS estimates and 80% are beating revenues - both well ahead of historical averages.  Some high level sector commentary below:

All in all, considering the overarching macro backdrop the equity weakness is modest, but it does feel like we are on shaky footing with volatility starting to pick up across asset classes and with some technical damage being done.

Let’s quickly discuss the key levels to watch heading into a very busy week of earnings and an FOMC rate decision. The S&P 500 broke back below its 50dma at the open yesterday and made a new low for the month of July.  The index stabilized today but failed just below the 50d ma today on its rally attempt, filling most of the gap. On the upside reclaiming last Friday’s low and the 50dma, which is around 7,470, would be the first steps in repairing the technical backdrop. To the downside look for signs of support between the June low which was around 7,240 and the 100dma about 1% below that level. If things really start to get dynamic the 200d moving average is around 7k, a retest of the previous highs and would also represent a ~50% retracement of the rally off the March lows. 

It was a slow week for economic data. Manufacturing flash PMIs (53.8) were about inline with last month but missed consensus. While only ticking lower and still near its highest levels over the past 4 years, the pace of manufacturing activity gains is showing signs of slowing. 

Services outperformed both last month and expectations. Input price increases cooled in Manufacturing but rose in Services, and both remain highly elevated. 

Weekly ADP employment showed private payrolls rose 16.5K/week over the prior four weeks, a little below last week’s 19.25K. Weekly initial jobless claims were 187K, the lowest since this historic year, when Apollo 11 landed on the moon, the (original) Woodstock music festival took place, Sesame Street premiered and the Mets and Jets were champions.

“What is 1969 Alex?”

“Correct. and that takes us to Final Jeopardy…”

Global Equities - Europe, China, Japan finish higher. South Korean losing streak continues

Asia - Japan and China were higher this week while South Korea and India fell 2-3%. It was the 5th straight weekly decline for Korea's Kospi. Hopefully Lebron has several such losing streaks with his new team, the 76ers.

Japan was closed on Monday, saw a strong gain on Tuesday that was substantially erased on Friday in response to the US Tech weakness the day before. The Nikkei failed to reclaim its 50d ma after falling below it last week. Tech stocks went on a wild ride. Case in point- Kioxia rose 17% and 5% on Tues and Wed, before falling 4% and 9% Thrs and Friday. PM Takaichi continued to press for new measures that would encourage households and institutions to increase investment in domestic financial assets. Japan’s Manufacturing PMI (rose at the fastest pace since February 2014. Indonesia’s central bank surprised markets by leaving rates unchanged.

In China the “National Team” was purportedly active in the market this week, buying ETFs to support prices ahead of memory maker CXMT’s first day of trading on Monday. AI model developer Z.AI (GLM model) fell ~30% last Friday and 20% on Monday, before jumping 37% on Tuesday.  MiniMax saw similar price action. Alibaba (-2%) released its latest Qwen AI model and Moonshot AI (Kimi K3 model) has taken its first steps towards an IPO in Hong Kong, potentially as soon as within the next six months. There were multiple press reports on the US administration’s consideration of blocking the use of open-source Chinese AI models, as the models see accusations of distilling, a type of IP theft. However several prominent US CEOs came out in support of the open-weight models including Satya Nadella and Jensen Huang.   

Europe - European markets ended higher. The ECB kept their policy rate unchanged as expected, with inflation trending lower and the stronger PMIs on Friday helping to validate that decision, at least in the near-term. Energy was unsurprisingly the leading sector, and banks also performed well. Consumer discretionary/luxury sold off (LVMH -7%). In the UK the BOE will hold their policy decision next week and Andy Burnham took his place as the latest PM. German PPI slowed to 1.8% in June, from 2.2% in May. The ZEW Economic sentiment Index improved from the prior report and beat estimates, similar to the broader European reading. After gapping down from its ATH in early July, the DAX has been trading on either side of its 50d ma.

Global yields rose across the curve this week alongside crude. In the US the 2y rose 15bp while the 10 and 30y rose 13bp and 9bp, respectively. The 2/10 spread has come in from ~70bp at the end of January to about 35bp currently, though has been backing up again. The 2y yield rose six straight days before coming in on Friday. Market pricing for a Fed rate hike next week are at 36%, back to where they were a month ago after falling to 13% last week on the cool inflation data. 

Inflation breakevens, based on the TIPS market, have been largely contained despite the Iran conflict- above 2% for sure but haven’t broken out either.  

The ICE MOVE index looked to maybe be breaking out of its low-level range, reaching 80 for the first time since mid-May, but pulled back today.

The Dollar gained on all the major crosses this week, pushing the US Dollar Index up almost 1%. The Dollar gained over 1% on the ultra-have CHF, and hit a 40-year high against the yen, which is trading just below ¥164. Government officials are pushing for increased household/pension fund investments into domestic markets, which could eventual drive yen demand/reduce foreign currency demand and create a tailwind for the currency. In addition, BOJ insiders are open to raising rates faster pace than consensus expectations, according to reports, which could also help support the yen. The BO is widely expected to leave rates unchanged next week with an additional hike expected in December.

Central banks will take the spotlight next week with rate decisions from the US, UK and Japan. US PCE and GDP data will also be a headliner, but comes out the day after the Fed decision. Earnings will continue to flood the tape and include mega cap tech names Apple, Meta, Microsoft, Amazon, along with UPS, Coca-Cola, Visa, Mastercard and Exxon, among many others. Enjoy your weekend.    

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