Trending
The stock market took a breather this week as investors rotated away from some of the market’s strongest performers from earlier this year. The S&P 500 fell more than 1%, while the Nasdaq Composite and large-cap technology stocks faced the most pressure. The Dow Jones Industrial Average and Russell 2000 both declined less sharply, highlighting a shift in favored sectors.
Weeks that end in red don’t necessarily market-wide ring alarm bells if money is rotating between sectors. If you’re heavily overweight in technology or high beta stocks, then your alarm bells should have been ringing already. This doesn’t appear to be a wholesale retreat from risk assets, but rather a retooling of sector allocations.
The deeper story is illustrative of changing sentiment and growing doubts about broader AI-adjacent businesses. Technology and communication services lagged, particularly semiconductor, memory, and AI infrastructure stocks. Meanwhile, health care, consumer staples, real estate, and energy held up better. Investors are looking for a little certainty right now, and demand within those sectors is more predictable and can’t be easily gamed. Oil prices remained elevated as tensions between the U.S. and Iran added another layer of uncertainty to markets.
The share price have been divergence from earnings per share has been building since early June. The parts of the market that rallied the hardest earlier this year have now experienced some of the sharpest pullbacks. The semiconductor index, for example, is down about 20% from its June highs, but remains up roughly 64% for the year. This small rush for the door looks like investors taking some chips off the table even as earnings expectations continue to push higher.
Where the air is crisp
The next major test for the market is earnings season, and expectations are sky high. Second-quarter S&P 500 earnings growth expectations have climbed from roughly 14% year-over-year to about 25%, with technology and energy driving much of the upward revision. It isn’t unusual to see a drop off from Q1 to Q2, a result we got as recently as 2025. First-quarter 2026 earnings growth was 28.8%, which is a tough benchmark to beat.
So far, more than 87% of S&P 500 companies reporting through Thursday exceeded analysts’ estimates. As encouraging as that is, the market is asking companies to clear an incredibly high bar. The AI trade, in particular, now needs more than impressive spending forecasts and ambitious technology roadmaps. Investors want to know whether the enormous capital investment is producing equally impressive revenue growth and returns. We’ll see.
AI capital spending is expected to grow about 75% this year, reaching between $700 billion and $800 billion. Forecasts call for that growth to slow considerably in 2027 and 2028. Chinese models are rapidly closing the performance gap on the U.S. frontier models and doing it more cheaply. If performance or spending commitments suffer sooner than expected or more than projected, investors will move quickly to reprice future growth.
The stakes are high, and investors will be watching closely whether major technology companies reaffirm their spending plans and whether revenue growth can justify the investment.
Macro news tilts positive
Inflation data provided the week’s biggest relief for bond investors, with both measures coming in below expectations. CPI fell 0.4% month-over-month, well below expectations, while core CPI was unchanged month-over-month. Headline inflation slowed to 3.5% year over year, and core inflation eased to 2.6%. PPI also came in below expectations, declining 0.3% compared to May.
The fresh data pushed the market-implied probability of a July rate hike down from roughly 40% before the inflation reports to about 13% by Friday evening. Treasury yields generally moved lower as investors reassessed the risk of additional tightening. Volatility will remain, and isn’t checking out any time soon, given the relatively resilient economic data and ongoing geopolitical uncertainty.
Recent results from major banks offered a positive signal for the consumer. JPMorgan Chase, Citi, and Goldman Sachs all pointed to resilient loan growth, credit quality, or spending. Retail sales rose 0.2% in June, while sales excluding gas stations increased 0.7%. Even on an inflation-adjusted basis, retail sales remained positive. The labor market also remained steady, with initial jobless claims falling to their lowest level since early May.
My view is that the Federal Reserve will keep interest rates unchanged for the rest of 2026. Inflation remains persistent, and although June offered good news, one month isn’t a consistent trend. Even if we believe inflation is contained, it is not conquered. Even excluding the recent rise in oil prices, the services economy is still metering out price increases.
What this means for investors and what’s next
The coming week will bring more earnings reports and additional clues about whether the AI investment boom can continue to support technology valuations. Each successive quarter of strong earnings growth will only heighten expectations.
The Federal Reserve’s July 29 meeting will be another must-watch to glean insight into how policymakers are weighing inflation, employment, energy prices, and geopolitical risks.
For investors, the main message from this week’s rotation is that we’re still in a bull market for diversification when the broader market remains healthy. The market leaders may continue to change, but strong earnings, resilient consumers, and a Fed that is willing to stay patient provide a reasonably constructive backdrop.
The sustainability of AI spending is the most important risk to monitor, given how vital AI infrastructure has been to GDP and overall market sentiment. However, geopolitical uncertainty has the greatest potential to surprise if there is an out-of-left-field disruption that will be hard to see coming.
Earnings reports I’ll be watching
Tuesday, July 21:
-
Charles Schwab (SCHW)
-
Northrop Grumman (NOC)
-
DR Horton (DHI)
Wednesday, July 22:
-
Alphabet (GOOG & GOOGL)
-
Tesla (TSLA)
Thursday, July 23
-
Intel (INTC)
-
RTC Corp (RTX)
-
Blackstone (BX)
-
Lockheed Martin (LMT)
Friday, July 24
-
Exxon Mobil (XOM)
-
American Express (AXP)
Related: Inflation Just Delivered Good News. Markets May Be Celebrating Too Soon.