What Happened Last Week
- Tech-Led Selloff: Tech stocks fell sharply on Friday, with semiconductors leading the decline.
- Hot Labor Data: Yields rose as investors reckoned with the Fed’s policy path after a much firmer-than-expected payrolls report.
- Tensions Rose: Tensions flared again in the Middle East with Israel and Iran directly exchanging fire for the first time since April.
What We’re Watching This Week
- Inflation Data: A hot inflation print could exacerbate fears of Fed hikes and cause further equity indigestion, especially in more highly valued parts of the market.
- Legs for the Broadening: Further fatigue in the AI theme, or higher yields, could draw capital to other cyclical sectors left out of recent market action.
- SpaceX Offering: SpaceX’s expected IPO on Friday will be a key test of retail and institutional demand for the AI theme and may trigger further profit-taking in recent equity market leaders.
Investment Management Team’s Views
Rising interest rates collided with AI exhaustion to finally break the S&P 500 Index’s nine-week winning streak. Markets traded relatively calmly for much of the week before Friday’s stronger-than-expected payrolls report triggered a sharp rise in Treasury yields and a reassessment of the policy outlook under new Fed Chair Warsh. The labor market continued to show resilience, and labor cost pressures remained relatively contained. Even so, higher interest rates sparked a notable selloff in technology and other high-multiple growth stocks. Importantly, the weakness was highly concentrated. The Dow Jones Industrial Average and the equal-weighted S&P 500 Index ended the week with only modest losses. As a result, Friday’s selloff appeared to reflect valuation concerns and profit-taking among market leaders rather than a widespread deterioration in investor sentiment.
The market’s reaction to last Friday’s news was also colored by fatigue with the dominant theme – AI. Elevated yields, stubbornly high energy prices, and increasingly stretched positioning created a natural catalyst for investors to reduce exposure to the stocks that have led the market for much of the year. Importantly, the underlying economic backdrop remains constructive. Earnings growth remains healthy, the labor market continues to strengthen, and broader measures of inflation have yet to show signs of reaccelerating. While last week’s price action may signal a period of consolidation for some of the market’s largest winners, it does not yet appear to be a challenge to the broader case for economic and earnings growth.
The week ahead will be defined by inflation data, developments in the Middle East, and a major test of investor risk appetite. Wednesday’s Consumer Price Index (CPI) report will provide an important gauge of whether the economy can continue to grow without reigniting broader inflation pressures. A benign reading could help stabilize yields and improve sentiment after Friday’s selloff, while a hotter-than-expected result would likely keep pressure on the AI infrastructure trade. Investors will also continue to monitor negotiations with Iran, where any tangible progress could ease energy-related inflation concerns. Beyond the macro data, attention is increasingly turning to the SpaceX IPO process. As one of the most anticipated public offerings in years, demand for the deal could provide a valuable read on institutional appetite for growth assets following an extended rally and may help explain some of the recent profit-taking in crowded technology positions.