Key Takeaways
- Stocks pulled back as semiconductor and AI-related shares faced renewed selling pressure.
- Higher oil prices and Treasury yields added to the market's headwinds, particularly for growth and rate-sensitive stocks.
- Market leadership broadened on Friday, with health care, materials, financials, and small-cap stocks showing relative strength.
- Economic data remained relatively healthy, although housing activity showed increasing sensitivity to higher borrowing costs.
- NVIDIA earnings and the PCE inflation report will be this week's key catalysts, providing important signals for both AI stocks and Fed policy.
Market Summary
U.S. stocks finished lower as a sharp pullback across semiconductor and other momentum-oriented stocks combined with rising oil prices and elevated Treasury yields.
Semiconductor stocks were the primary source of weakness. The PHLX Semiconductor Index fell 5.5%, with selling particularly pronounced across memory, optical, and other AI-related companies.
The volatility suggests investors are becoming more selective after the strong gains in AI-related stocks, particularly as valuations and expectations remain elevated.
At the same time, the market continued to show signs of healthy rotation. Friday's rebound included meaningful participation from health care, materials, financials, consumer stocks, and smaller companies.
The strength outside technology is encouraging because it indicates investors are not simply abandoning equities; rather, they are reallocating capital as valuations, interest rates, and economic conditions evolve.
The week’s volatility is best viewed in the context of a broader market that remains sensitive to interest rates, energy prices, and elevated expectations around AI. Short-term volatility can be significant when leadership is concentrated, but broader participation across sectors can ultimately create a healthier foundation for the market.
The Economy
Economic data remained relatively constructive, although higher interest rates are clearly beginning to affect interest-rate-sensitive areas of the economy.
July housing starts fell sharply, while pending home sales also declined more than expected. The weakness was concentrated in single-family construction, where higher financing costs are making purchases and development more difficult.
Manufacturing activity remained healthy. The Philadelphia Fed Index came in well above expectations, while industrial production continued to expand.
Weekly jobless claims also remained at historically low levels, providing little evidence of a meaningful deterioration in the labor market.
The overall picture is one of an economy that remains resilient but is increasingly sensitive to borrowing costs.
The Fed & Fixed Income
Interest rates were an important source of market pressure throughout the week.
The 10-year Treasury yield finished at 4.74%, up four basis points, while the 2-year yield rose six basis points to 4.23%. The 30-year Treasury yield also remained elevated, reaching 5.31% early in the week.
The Treasury Department's decision to increase the size of its purchases of longer-dated Treasury securities provided temporary relief on Wednesday. Lower yields that day helped homebuilders, retailers, and other rate-sensitive companies rebound, but the effect proved short-lived as yields moved higher again later in the week.
The Fed’s meeting minutes also reinforced that additional tightening remains possible if inflation fails to moderate sufficiently. So, upcoming inflation data particularly important.
Company News & Earnings
Technology and AI remained the primary focus, although the week's trading highlighted the increasingly wide range of outcomes within the sector.
Sandisk was one of the strongest semiconductor-related names early in the week, extending its recent rally after comments from Commerce Secretary Howard Lutnick suggested the administration does not want Apple purchasing Chinese memory chips.
Applied Materials also rebounded strongly following a better-than-expected earnings report and improved guidance.
The semiconductor group subsequently reversed sharply. The reaction illustrates how high expectations can overwhelm otherwise strong company results when investors become concerned about valuation or the pace of future growth.
Health care provided an important counterweight. Moderna surged nearly 177% after reporting positive results for an experimental cancer vaccine, while Merck gained more than 12% on the news. Moderna subsequently gave back part of that gain, demonstrating the significant volatility that can accompany biotechnology developments.
Retail earnings were mixed. Home Depot reported a solid quarter but maintained its full-year outlook amid continued weakness in housing and larger discretionary projects.
Walmart, by contrast, fell more than 9% after providing a disappointing third-quarter outlook. The differing reactions reinforce the importance investors are placing on forward guidance rather than simply reported earnings.
Deere and Nordson were notable industrial outperformers following their earnings reports, while Marvell came under pressure after investors took profits following its recent surge tied to an expanded custom-silicon agreement with Alphabet.
Geopolitics
Geopolitical developments were still in focus as the U.S.-Iran ceasefire expired and tensions increased. WTI crude climbed approximately 5.4% for the week, reaching $88.15 per barrel on Thursday after additional economic measures against Iran were threatened.
Higher oil prices benefited the energy sector, which gained 2.5%, but created challenges elsewhere. Transportation companies, airlines, consumer discretionary stocks, and other energy-sensitive businesses came under pressure as investors considered the potential impact of higher fuel costs.
The key issue for markets is whether the increase in oil prices proves temporary or becomes persistent enough to influence inflation. A sustained rise in energy prices could complicate the Fed's efforts to bring inflation back toward its target.
Week Ahead
The upcoming week contains two particularly important catalysts: NVIDIA's earnings report and the July PCE Price Index.
NVIDIA's results will be closely watched after the recent volatility across semiconductor and AI-related stocks. Investors will be looking beyond the headline earnings number toward data-center demand, AI infrastructure spending, margins, and management's outlook. The results could have implications well beyond NVIDIA given the company's influence across the broader semiconductor and AI ecosystem.
The PCE Price Index, the Federal Reserve's preferred inflation measure, will provide another important signal for interest-rate expectations. Investors will be looking for evidence that inflation continues to moderate despite higher energy prices.
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.