Key Takeaways
- The S&P 500 reached new record highs, while stronger performance from small- and mid-cap stocks pointed to improving market breadth.
- Inflation data came in better than expected, reducing expectations for another Fed rate hike in September.
- Technology leadership became more selective, with software and AI infrastructure outperforming while several mega-cap names lagged.
- Oil prices remained a key source of volatility, rising roughly 5% as Middle East tensions persisted.
- The economy showed signs of moderation, with weaker retail sales and consumer sentiment offsetting a still-healthy labor market.
Market Summary
U.S. stocks finished the week modestly higher, but the relatively small moves in the major indices masked a meaningful amount of activity beneath the surface.
More encouragingly, the Russell 2000 and S&P MidCap 400 each gained 1.1% and also reached record levels, signaling that the rally is continuing to broaden beyond the largest companies.
Technology had a mixed week with semis gaining just 0.5% after several sharp swings, while software stocks performed better. At the same time, several mega-cap technology companies pulled back, weighing on communication services and consumer discretionary.
This rotation suggests investors remain committed to growth and technology but are becoming increasingly selective about individual companies and valuations.
The biggest positive development was on the inflation front. July CPI (headline inflation) matched expectations, while PPI (inflation from the producers perspective) came in slightly below forecasts. The reports reduced concerns that the Fed would need to raise rates again in September and helped support rate-sensitive areas of the market.
The most constructive aspect of the week was breadth. Small- and mid-cap stocks reaching record highs while mega-cap growth stocks consolidated suggests capital is moving into a wider range of companies rather than only concentrating in the market's largest technology names.
The Economy
Like the tech sector, the economic picture was mixed for the week. Inflation continued to moderate, but several indicators suggested that economic activity is beginning to slow.
July retail sales declined 0.6%, significantly weaker than expected, while the University of Michigan's preliminary consumer sentiment index also fell. Only 8% of surveyed consumers expect their income growth to exceed inflation over the coming year, which could eventually weigh on discretionary spending.
At the same time, the labor market remains remarkably resilient. Weekly initial jobless claims rose modestly to 209,000, but the four-week moving average remained below 200,000 – a historically low level consistent with limited layoffs.
The overall picture is one of moderating economic activity rather than an outright contraction. Consumer demand is cooling, but the labor market remains healthy enough to provide an important foundation for continued economic expansion.
The Fed & Fixed Income
Inflation data provided the week's most important signal for monetary policy.
On a year-over-year basis, headline inflation eased to 3.4% and core inflation declined to 2.5%. PPI provided another positive signal, with headline producer prices unchanged and core PPI increasing just 0.2%, both slightly below expectations.
Following the reports, the probability of a 25-basis-point Fed rate hike in September fell to 34.6%, compared with 55% one week earlier.
Treasury yields reflected the shifting expectations, although the move was not uniform. The two-year Treasury yield declined four basis points for the week to 4.17%, while the 10-year yield increased four basis points to 4.70%.
The divergence suggests investors see less risk of near-term Fed tightening while still demanding relatively high yields on longer-term bonds.
This continues to be a constructive environment with yields remaining attractive, while moderating inflation could eventually provide room for lower short-term rates.
Company News & Earnings
Technology remained a major source of both opportunity and volatility, with investors increasingly differentiating between companies benefiting directly from AI investment and those facing higher expectations.
NVIDIA came under pressure early in the week following reports that it is working with major asset managers to help finance more than $500 billion in AI infrastructure. The initiative highlights the enormous scale of capital required to build AI infrastructure, but it also illustrates the growing ecosystem surrounding AI investment.
Semiconductor and memory stocks were also active. Sandisk surged following its investor day, while Western Digital and SK hynix also rallied.
SK hynix recovered toward its July IPO opening price after suffering a significant post-IPO decline, reflecting renewed investor interest in the memory companies that supply critical components for AI systems.
Workday surged nearly 18% following reports that Silver Lake is considering an acquisition, while Netflix rallied after Bill Ackman's Pershing Square disclosed a new stake.
The broader earnings season continues to show that investors are rewarding companies with clear earnings growth and identifiable catalysts, while companies with weaker guidance or elevated valuations remain vulnerable to sharp pullbacks.
Geopolitics
Geopolitical developments remained an important driver of oil prices.
WTI crude gained roughly 5% during the week, reaching $82.40 per barrel on Friday as uncertainty surrounding the U.S.-Iran conflict and the Strait of Hormuz persisted.
The rise in oil prices helped make energy the week's strongest-performing sector, gaining 7.3%. Higher energy prices, however, remain a potential complication for the inflation outlook.
A sustained increase in crude prices could slow the progress being made on inflation and make it more difficult for the Fed to ease policy.
For long-term investors, the key issue is whether higher oil prices prove temporary or become persistent enough to affect consumer spending, inflation, and corporate margins.
Week Ahead
The coming week will provide additional insight into whether the economy is cooling gradually or losing momentum. Investors will be watching housing data, durable goods orders, and employment-related indicators, while corporate earnings will continue to provide company-specific catalysts.
With CPI and PPI now behind us, the market's attention will increasingly shift toward the labor market and consumer spending.
The combination of moderating inflation and a resilient labor market would provide the Fed with flexibility to remain patient, while evidence of a sharper slowdown could strengthen expectations for eventual rate cuts.
The current environment remains relatively balanced: inflation is moving in the right direction, economic growth is slowing but remains positive, and market participation is broadening.
The primary risks remain elevated oil prices, higher long-term Treasury yields, and the possibility that expectations surrounding near-term AI-related growth have become too aggressive.
As always, please reach out to us for any questions and thank you for your trust.
Michael Neill, CFA
This communication is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any securities. Any references to specific securities are not recommendations and should not be relied upon as investment advice.