Outlook Despite last week's cooling headline numbers, inflation remains above the Fed’s 2.0% target. In last week's semi-annual address to Congress, Kevin Warsh reiterated his hawkish views, stating: "The longer inflation stays above target, the stickier it tends to become. My commitment to you is to take sticky prices and to unstick them."1 In the short run, markets tend to react cautiously to central bank statements that imply the Fed is tapping the brakes at a time when signs of cooling are in play. This was the case last week and may impact stock prices in the coming days or weeks. Our view is that these potentially hawkish statements from the Fed are not that extreme and are happening at a time when the economy and earnings are on sound footing. Ultimately, a fed funds rate modestly higher than inflation is quite normal historically and consistent with a growing economy.
. . . U.S. equities pulled back modestly last week as signs of easing inflation and encouraging earnings results competed with concerns about AI-related valuations and escalating tensions in the Middle East. Despite generally favorable economic data, weakness in large technology stocks weighed on broader market performance. Inflation Data Came in Better-Than-Expected The most significant economic development of the week was the June Consumer Price Index (CPI) report. Headline CPI fell 0.4% month-over-month, the largest monthly decline since 2020, while annual inflation eased to 3.5%. Core inflation, which excludes the more volatile food and energy categories, also moderated to 2.6% year-over-year.2 Producer prices (PPI) also softened, providing another encouraging sign that inflation pressures may be easing.3 While investors welcomed the data, some caution remains warranted. Much of the improvement was driven by lower energy prices during June, and oil prices moved sharply higher later in the month and into July. If energy costs remain elevated, they could create renewed inflationary pressure in the months ahead. Consumer Spending Remained Resilient Retail sales data continued to suggest the U.S. consumer remains relatively healthy. While headline sales growth was modest in June, the underlying components that feed directly into GDP remained positive, suggesting household spending continues to support economic growth.4 Taken together, easing inflation and steady consumer spending helped reinforce the view that the economy remains on solid footing despite ongoing uncertainty surrounding interest rates and monetary policy. Corporate Earnings Season Begins with Big Banks Second-quarter earnings season began on a strong note, as major financial institutions including JPMorgan Chase, Bank of America, Goldman Sachs, and Citigroup generally reported stronger-than-expected results. The results highlighted continued strength in consumer spending, business activity, and capital markets, providing another indication that economic conditions remain broadly healthy. While it is still early in the earnings season, the initial reports offered an encouraging start and helped support confidence in the underlying economy. Technology Faced Pressure Despite favorable economic data, technology and AI-related stocks faced pressure as investors reassessed whether recent gains had pushed valuations too far ahead of fundamentals. Investors are beginning to shift their focus from AI enthusiasm to AI execution, asking whether the significant investments being made across the industry will generate meaningful earnings growth and attractive returns. As technology companies report earnings in the coming weeks, markets will be looking for evidence that AI-related spending is translating into stronger revenues, earnings, and long-term growth opportunities. Rising Oil Prices and Geopolitical Risk Added Uncertainty Geopolitical developments in the Middle East pushed oil prices sharply higher during the week. Escalating tensions involving Iran contributed to a surge in crude prices, raising concerns that recent progress on inflation could be threatened if energy costs remain elevated. As a result, energy stocks benefited from the move in oil prices, while investors reassessed the potential impact of higher commodity prices on inflation and future Federal Reserve policy decisions. Federal Reserve Outlook Federal Reserve officials acknowledged the improving inflation trend but continued to emphasize their commitment to restoring price stability. Markets generally interpreted the week's comments as supportive of maintaining current policy rates rather than signaling an imminent rate increase. Looking ahead, inflation reports and labor market data will remain key inputs for future Federal Reserve policy decisions. For now, expectations remain centered on a cautious, data-dependent approach. Overall As we move deeper into earnings season, attention will increasingly shift toward reports from major technology companies and whether AI-related spending continues to support growth expectations. Markets will also be watching oil prices, inflation trends, and upcoming economic reports for signs that inflation can continue to cool without disrupting economic growth. In our view, last week's market weakness had more to do with profit-taking and a reassessment of technology valuations than with any meaningful deterioration in the broader economy. Encouraging inflation data, steady consumer spending, and positive early earnings results provided support for the market, while higher oil prices and geopolitical developments served as important reminders that risks remain. | 
