Oil spiked higher this week, regaining $90 a barrel as the dollar rose and U.S. Treasury bonds sold off. It is not hard to guess what the stock market did as a result. 

 

Down.

 

I'm sure you are just as tired as I am watching this Kabuki show unfold in the Middle East. Not only is the Straits of Hormuz shut in, but now Iran's proxy, the Houthis, have opened a second front along the Red Sea. They have already attacked two Saudi oil tankers and have vowed to close that oil avenue off from any further shipment of oil from Saudi Arabia.

 

Brent crude is up more than 40 percent in three weeks. Readers only need to fill up at the pump this week to realize the cost of this ongoing travesty. The Ten-year U.S. Treasury bond is now yielding 4.67 percent. Traders are dumping U.S. Treasuries as well as stocks in anticipation that by August the inflation data will be rebounding substantially. That would put an interest rate hike back on the table by September by the Federal Reserve Bank.

 

It is a tangled web this administration has woven. There were reports on Friday that Pakistan, with support from China, was seeking to revive negotiations between the two adversaries. That dropped oil prices by 5 percent to around $88 a barrel. Hope springs eternal I guess when  dealing with this war.

 

Oh, in case I forget, the president has just slapped a whole host of new tariffs (10-12 percent) on world trade, manufacturing a new excuse (forced labor in 80 countries) as justification. This adds yet another layer of price increases consumers will be receiving in the months ahead since we now know you and I are paying most of these tariff costs.

 

All the goals of this administration's economic policies, touted by U.S. Treasury Secretary Scott Bessent — reduce budget deficits, boost growth and increase energy production — have remained pipe dreams. Instead, interest rates are reaching new highs, spending and deficits are off the charts, and oil, rather than declining, is skyrocketing.

 

The AI trade has faltered as well. The recurring worry that the large mega-cap tech companies are spending too much money plagues the markets. The fate of this area hinges on the outlook for 2027 capital expenditures growth from the hyperscalers like Google, Meta, Amazon, and Microsoft. Currently, Wall Street analysts are expecting capex to grow by 28 percent next year. That's up from 23 percent two weeks ago and before Google's second quarter earnings announcement on Wednesday night.

 

Google once again raised its estimate of how much more it is planning to spend on AI this year, from $190 billion to a range of $195 billion to $205 billion. The stock cratered on the news despite a blockbuster revenue growth of $119.8 billion, up 24 percent from a year earlier. And what Google is doing, its competitors will do too. By the end of the earnings period, we could see that number increase to 37 percent.

 

Given that all these companies have whittled down their cash due to this monumental spending, investors expect that the only way to increase spending further will be for these companies to sell more stock and raise debt, thereby diluting existing holders. Even if they succeed, there is still no guarantee anytime soon that these companies will see the kind of payoff that is necessary to the bottom line given the amount of money involved.

 

Tesla was another dud. Auto sales are falling, and capex in all his tomorrow ventures, including AI, is exploding higher. Combined with the 50 percent decline in the price of SpaceX, Elon Musk is keeping a low profile lately.

 

Regular readers know that I entered the July-August period rather cautiously. I believe we are in a normal mid-summer consolidation in a mid-term election year. It appears as if Donald Trump is working overtime to ensure Democrats win that contest. That adds even more uncertainty to an equation already burdened by the possibility of a "massive attack" in Iran and therefore further spikes in energy prices. So far, second-quarter earnings have been on target for the most part. Next week, Microsoft, Meta, Apple and Amazon report on Wednesday and Thursday. Their announcements will largely dictate which way technology goes in the short term.

 

I see two possible outcomes for the markets over the remainder of the summer. Both would bring with them high volatility. The first is that we chop around here. Since technology is leading this pullback, I see it trading in a range of a little above and below 680 as reflected in the main Technology ETF (QQQ).

 

The S&P 500 Index, supported by the rotation I have discussed previously (that is out of tech and into sectors like healthcare, utilities, industrials, etc.), could remain at this 7,400 level. Once again, you could still see 50-point swings weekly or even daily in the index.

 

If, on the other hand, Trump allows his emotions to play out with few in the White House willing to talk him down, a sudden escalation in the war might occur. Oil prices spike much higher as a result. In that case, the first stop on the S&P would be 7,300 (testing a double bottom). If that fails to hold, we are looking at 7,200 (cycle lows). Technology would have an even bigger decline.

 

Misery loves company, or so they say. There was plenty of that this week as declining technology stocks dragged down the indexes.

 

While the stock market had been stuck in a rut most of the month, the tone changed this week. Markets felt the pain as the leading AI -fueled semiconductor index was walloped. However, appearances can be deceiving. There were some pockets of safety that did well as rotation strategies replaced momentum plays among traders.

 

Quarterly earnings have begun. The estimates call for a 23-24 percent gain in earnings this season. That follows a 26 percent+ record last quarter. Bank stocks were the first to report, and most did not disappoint. Goldman Sachs' profit, for example, was up 78 percent from the prior year while JP Morgan soared 41 percent. It may come as no surprise that investment banking fees had a lot to do with those results.

 

The large-cap banking index made new highs for the year even as AI technology and the semiconductors index suffered additional selling. Boring old utilities, consumer staples, and health care outperformed as most of the AI darlings languished.

 

SpaceX, the Musk deal-of-the-century IPO that I warned readers not to chase, is now down to $124/share, well below the $135/share IPO price. Last week's broker-hyped offering, the "must have" Korean-based ADR, SK Hynix, has also been a dud (minus-37 percent).

 

Not all technology has done poorly. After being ignored or sold down for weeks, the Magnificent Seven stocks have added $1.5 trillion in market value in July, while semiconductor stocks, excluding Nvidia, have erased nearly $1.7 trillion in market value. Software companies, another casualty of AI predominance, have come back from the dead. Forty-four out of 51 software stocks in the Yahoo Finance industry basket are up for July with a median gain of 6 percent.

 

Given the high valuations of most stocks, it seems investors are quick to punish and just as quick to reward. Those companies that disappoint, failing to live up to investors' expectations, are quickly taken to the woodshed. IBM announced weak preliminary results, and the stock fell 25 percent, the largest decline since at least 1968. Netflix also disappointed and opened down 10 percent on Friday.

 

The next two weeks should be interesting as more companies report. I warned readers in weeks past that, this time around, quarterly earnings will see investors take a much more selective approach to companies based on their results and guidance. Evidence so far indicates I am not far off the mark.

 

This week, we also had the results for both the Consumer Price and Producer Price Indexes for last month. As I predicted, both numbers fell well below street expectations. I also expect next month's numbers to be weak as well (unless Trump's Forever War pushes oil prices higher still). Markets pushed higher for a day in celebration, but it didn't last long.

 

Kevin Warsh, in his first appearance as Federal Reserve Chairman before the House Financial Services Committee, threw cold water on the monthly inflation numbers. He pointed out that one or two data points do not make a trend.

 

Warsh said, "The longer prices have been above the inflation target, it's usually a bit harder to dislodge them and get them lower. Our job, my commitment to you, is to take sticky prices and to unstick them." That may be music to the ears of Main Street (and me) but do nothing for the financial market's hopes of easier monetary policy this year.

 

The bullish tone of the markets preceding and just after the Fourth of July has come and gone. As readers know, I have approached July and August with caution. Since the holiday, investor sentiment and fund flows have waned, while the technology sector has come under more pressure.

 

This week, we saw further evidence of that as the Nasdaq declined more than 3 percent, the S&P 500 dropped 1.43 percent, and the Russell small-cap index, the best of the bunch, maintained its bullish posture. It declined by less than half a percent.

 

It is no surprise to see the areas that went up the most experience the most severe declines. It is how markets work. Profit-taking in semiconductors was in full force this week. While I do expect bounces along the way, I think over the next few weeks we will see further downside.

 

The above risks can be a lethal brew for investors. And yet, markets barely budged by the end of the week. Quarterly earnings expectations are buoying the averages, with 23 percent earnings growth expected to vindicate the bulls.

 

Markets have moved beyond Trump's War despite this week's conflict. They are focusing instead on the upcoming inflation data, the start of quarterly earnings next week, and another Fed meeting. In the meantime, technology still struggles.

 

Volatile moves have sent the Nasdaq and the semiconductor index plummeting only to see them spike higher on a day-by-day basis. Traders call it a calm session if these stocks close with less than a 1 percent move each day. Last month's mega IPO is a case in point.

 

Readers recall all the hype over the SpaceX IPO. Priced at $135 a share, opened at $150 and skyrocketed to $212. Friday it traded at $147-$148. Not pretty, if you chased it. Today, we have another one.

 

This time, it's the listing of a South Korean memory chip leader, SK Hynix (SKHYV). It is the largest American Depository Receipt (ADR) offering ever ($26.5 billion) and one of the largest equity offerings in history. It is the global leader in High-Bandwidth Memory (HBM). Why is their product so important? Because without HBM, there would be no AI.

 

At $149 per ADR, it will be equal to 1/10th of a South Korean share. With a market value of more than $1 trillion, it is the second-most valuable company in South Korea. The media claims the offering is seven times oversubscribed (versus SpaceX's five times). And like SpaceX before them, chasers ‘gotta get some.'

 

No, never mind that the memory stock has garnered a sevenfold increase in its stock price over the past year. If it performs the way Elon Musk's SpaceX ("to the moon and beyond") did, we could see another price spike before traders cash in. At around midday, the ADR was up $17 percent from its listing price. And while the financial media focuses on this offering, it wasn't the only event of the week.

 

The president and his forever war kept investors on their toes. He now says the ceasefire that never was is over, but the talks will continue. How bombing more Iranian military targets is going to do anything to change the status quo is beyond me. As this week's NATO conference has shown, despite Trump's bravado, most nations still need to flatter, or at least humor him, if they want to remain under the U.S. military umbrella. Strategically, they need to maintain that relationship, at least in the short term.

 

Fortunately, the markets have moved on. The rotational trends in the markets have helped keep the main averages steady most of the time, despite Trump's social media posts and comments. The oil price has risen slightly (over $71.80 a barrel) from $67, but the technical trend still points to further downside.

 

Bond yields have risen to the top of their range with the U.S. 10-year Treasury bond hitting a high of 4.57 percent this week. As you might imagine, Trump's military strikes and the subsequent short-term rise in oil prices immediately had traders rushing for the exits in some areas and chasing stocks on what had been the ‘war trade'.

 

Here's how it works. The narrative is quite simple, really: missiles fly, oil prices spike, inflation expectations rise, and so the story changes to the Fed having to raise rates. That's it in a nutshell. The opposite occurs whenever the narrative shifts toward peace, the opening of the Straits of Hormuz, etc.

 

Next week will be critical for the bulls. We get another Consumer Price Index reading. The Street is expecting cooler inflation numbers for June. I agree. I expect weaker numbers in July as well. That should be good for the markets.

 

Stock prices have already been bid up in anticipation of good earnings. If management's ‘beat' and talk up future guidance on sales and earnings, then all is well with the world. The rally continues as the indexes grind higher. We all know what happens if companies fail to live up to expectations. We may see investors become a little more selective. The AI trade may shift from buying "everything AI-related" to buying stocks worth holding, rather than those that are not.

 

The benchmark S&P 500 Index had its best quarter since 2020. It did so with help from the Magnificent 7 and the technology sector, but other areas also participated. That was a good thing.

 

For the last few years, the handful of stocks that make up the MAG 7 have done most of the heavy lifting in keeping markets positive. In the last six months, the story has changed. A lot more stocks participated in the gains, and some believe that this broadening out of upside participation will continue in the second half of the year.

 

Here are some of the numbers: Dow +13 percent, Nasdaq +21.4 percent, S&P 500 +14.9 percent, Russell 2000 +21 percent, and the equal-weight S&P +11 percent. The Mag 7 gained 18 percent. And while technology was the clear winner, helped by strong gains in the AI-fueled semiconductor index, industrials, consumer discretionary, financials, healthcare, and communications also posted significant gains.

 

This performance becomes even more significant considering what investors have had to face since January. Topping the list of worries was the Trump War and subsequent explosion in oil prices. Inflation accelerated, expectations of Fed interest rate cuts reversed, and rate hikes became a possibility. Rounding out the list was the new Fed chief, who took over and sounded more hawkish than most expected.

 

Supply chain disruptions caused by the closure of the Straits of Hormuz sent oil, fertilizer, natural gas, and other essential products higher. The worst performers were among last year's best. Gold, silver, and most other precious metals and basic materials lagged the markets. Bitcoin, Ethereum, and just about all other cryptocurrencies also ended in the red, by substantial amounts. If a market ever had to scale a wall of worry, this was it!

 

As readers know, artificial intelligence plays fueled much of the technology sector's gains. However, stellar earnings results across the board in equities consistently beat analysts' expectations. The quarter has ended and with it the last few days of window-dressing by institutions. Every quarter, money managers want to show their clients that they hold the latest winners while few of the losers.

 

At the same time, the beginning of July (before and after the Fourth) is normally positive for the markets. This year, with the nation's celebration of its 250th birthday, the bulls may want to push prices a bit higher. So be it.

 

The economy is still growing, and employment, while plateauing, is holding up. Now that oil prices are declining, inflation should begin to decelerate over the next few months. The non-farm payroll data helped the markets along on Thursday, the last trading day of the week. The U.S. labor market added just 57,000 jobs in June while the unemployment rate dipped to 4.2 percent. That was well below estimates. If you consider that, on average, payroll data inflates job gains by about 60,000 jobs per month, the real number after revisions may have been a job loss.

 

Why that would be good for financial markets lies in the Fed's equations for full employment and reduced inflation. Kevin Warsh, the new Fed head, said Wednesday ,while speaking on a European economic panel, that the inflation data was a little better than expected recently. That is largely due to the swift decline in oil prices.

 

Now, we have a weaker jobs number. The calculus of investor expectations on whether the Warsh-led central bank will raise interest rates suddenly looks less likely. That's all the markets needed to see on a slow day where most of the Street has already taken off for the beach, mountains, or backyard BBQs.

 

The S&P 500 Index is holding up despite a wobble in tech. That is because of the rotation trade. Healthcare, financials, industrials, consumer staples, even real estate and utilities are getting a bid. I noticed that some of the bloom is coming off the technology sector. AI memory stocks are getting clobbered. The semiconductor trade is faltering as well. Technology overall is in its ninth or tenth day of volatility, with more lower highs than higher highs. That is a worrisome sign.

 

As for the three-day holiday celebrating America's 250th birthday, enjoy it where you can. Hopefully, a pond, lake, or ocean is close by. Otherwise, be grateful for air conditioning!

 

Traders took profits in the red-hot technology sector. That money has been flowing into areas like healthcare, housing, and industrials. That's a good thing since it keeps the downside somewhat in check.

 

Professional money managers always stress that a proper portfolio should be well-diversified, so that no one individual sector can overwhelm your long-term performance. Under that strategic investment case, as one sector gets extended (like technology has), money flows out of high-priced stocks and migrates into other areas that are cheaper but still have good prospects.

 

Most readers know that the MAG 7 stocks have an enormous weighting in the S&P 500 Index. This has been going on for a long time, and the result has been that many U.S. funds have some exposure to this handful of stocks. It's called concentration risk. Right now, for various reasons, these stocks are out of favor.

 

There are two ways this can work itself out. A bout of profit-taking can take the equity indexes down all at once, causing a sharp decline, or the money leaving tech can find its way into other sectors and stocks. That's called rotation.

 

In addition, within the technology sector, the AI trade has not only led the area higher but, in many cases, has pushed valuations to stratospheric levels. When an entire sector is dependent on the earnings announcement of a handful of stocks, or this week just one, Micron Technology, the risk is somewhere in the stratosphere.

 

In this case, Micron, an AI memory play, topped earnings expectations for the quarter, sending the stock price up more than 15 percent. For the bulls, Micron seemed to dispel worries that the AI infrastructure investment case was faltering. The company told investors that revenues were expected to climb by 346 percent year over year and earnings after adjustments were $25.11 per share, versus the Street's expectations of $20.60.

 

That gave investors a reason to stampede the averages higher, with the Nasdaq posting a more than 2 percent gain on Thursday's opening. It didn't last long. Traders took the opportunity to sell down even more of the highflyers. To me, when markets sell off on good news, you should pay attention.

 

In any case, markets managed to hang in there. They did so because the flow of money out of tech rolled into healthcare, banks, industrials, and other sectors. Markets were also supported by the continued decline in the oil price. Oil fell below $70 a barrel. At one point, as investors decided to turn the page on Trump's War. It seems clear that Trump's War will have significant downsides for the U.S. and the world at large.

 

Despite Trump's denials, both Oman and Iran plan to charge as much as $40 billion per year to travel through the Straits of Hormuz. That will hurt Europe more than the U.S., since it imports a lot of Middle Eastern oil through the Straits. Thanks to Trump's short-sighted war, Iran has realized they have a far greater weapon in their hands than simply nuclear reactors — control of the Straits. They now control, at their whim, a global economic lever that can hold the nations of the world hostage.

 

As for the U.S., when you cut through the BS, it seems clear that the Trump administration is willing to pay billions of dollars to the Iranians, free up billions more in frozen Iranian assets, and that's just to get them to agree to a ceasefire. There has been no regime change other than to solidify the position of the anti-American Revolutionary Guard and install a hardline cleric of the same family as supreme leader. As for their nuclear ambitions, so far, nothing concrete has been agreed upon. Yes, the tiny Iranian navy, and even smaller air force and missile defense, have been decimated, but at what cost? Failure would be a generous term to describe this war.

 

On a macroeconomic level, however, the damage has been done, according to the latest Personal Consumer Expenditures (PCE) data for May. The PCE hit a three-year high, rising 4.1 percent up versus the 3.8 percent increase in April. Given that the PCE is the Fed's preferred inflation index, investors know that the data dashes any hope for a rate cut. It also keeps the possibility of a rate hike very much in the forefront.

 

I believe the prospect of immediate interest rate hikes is remote at best, as I expect inflation to slow over the next several months. The May data did not capture the ceasefire, the reopening of the Straits, nor the subsequent drop in oil prices. The recent decline in oil prices from $112/bbl. to $69 /bbl. just adds further confidence to my slower inflation forecast.

 

As such, the prospect of a slowing but still growing economy seems quite good. I do not expect interest rates to go higher in the near term either, which appears to offer a pretty good scenario for stocks going forward. That does not mean up, up, and away.

 

The period before mid-term elections is usually volatile, and this one appears no different. Equity valuations near record highs, profit-taking in tech, the summer doldrums, and an unhappy populace are not conducive to another near-term equity run-up.

 

Over the last two weeks, I have been warning readers that a period of consolidation was in the cards. The July-August period seemed an ideal time for this to occur. I guess some traders are getting ahead of the pack by selling this week.