What Happened Last Week
- Hotter Inflation: Last week’s inflation reports reflected higher energy prices, but were partially driven by lingering effects of the government shutdown.
- Rates Climb: Last week, long-term debt yields rose globally, weighing on equity performance.
- Trump-Xi Summit: The leaders agreed to maintain communication and indicated that Xi will visit the U.S. in the autumn.
What We’re Watching This Week
- Nvidia (NVDA) Earnings: The largest stock in the world will report earnings on Wednesday in a key test for the semiconductor-led rally.
- Consumer Activity: Earnings reports from major retailers will provide color on how consumers and corporates are handling the energy shock.
- Rate Volatility: As Middle East tensions continue, equity investors must reckon with a selloff in global rates amid inflation concerns.
Investment Management Team’s Views
Rising bond yields finally began to challenge AI-driven market leadership last week. Enthusiasm around AI continued to support U.S. equities, but the sharp rise in long-term government bond yields worldwide offset much of that strength, leaving the S&P 500 Index little changed and weighing more heavily on global markets. Higher energy prices, resilient economic data, shifting central bank expectations, and persistent fiscal deficits continue to pressure rates higher. At the same time, investors are reassessing the Fed’s policy framework under new Chair Kevin Warsh. Since the outbreak of the conflict in Iran, oil prices and bond yields have moved closely together, even as equities largely looked through the shock. Yields may now be approaching levels where both the pace and magnitude of the move become a more meaningful headwind for equities, including the previously dominant AI infrastructure trade.
This week’s focus turns squarely to NVDA and whether earnings can continue to outrun positioning. Last Friday offered one of the first signs that higher interest rates could dampen enthusiasm for technology stocks. Fundamentally, the backdrop remains strong, with S&P 500 Index earnings growing nearly 14% this year. However, investors are increasingly aware of that strength, and speculative positioning has likely pushed expectations for the world’s largest stock to elevated levels. Near-term risk appears skewed to the downside if yields continue to rise or investor attention returns to the Middle East conflict. Even so, any rotation away from technology and into more neglected parts of the market is likely to prove temporary, given the continued support from earnings fundamentals.
Beyond NVDA, the week ahead will bring an important mix of geopolitical developments, retailer earnings, and fresh reads on global growth. Markets will continue to monitor the Middle East, particularly for any impact on energy flows, potential energy price relief, and inflation expectations as crude oil prices remain elevated. Earnings from Walmart, Target, Home Depot, and Lowe’s will provide an important test of consumer resilience after several months of tighter financial conditions. Preliminary Purchasing Managers’ Index (PMI) data from the U.S. and abroad will also help gauge whether economic activity is holding up amid higher yields and energy costs that continue to work through the global economy.