For those of you who would prefer to listen:
The Market hates uncertainty. There sure is a lot of it right now. Among the greatest sources of uncertainty are found in wars and inflation. Presently, those 2 are intertwined. There’s also great uncertainty about the election in November and what the results will lead to. Perhaps the greatest uncertainty falls in the fate of AI and the impact it will have on our way of life. There’s tremendous uncertainty. The Market doesn’t like it. Uncertainty leads to volatility. There’s been a lot of that too.
This notion of uncertainty is real. It’s part of our daily lives. Uncertainty has the same zip code as opportunity. It’s just hard to recognize and even more difficult to seize. It’s about risk and reward. It’s a balancing act. Realistically, though, when is there ever complete certainty? Ben Franklin made the claim that the only things that are certain are death and taxes. That Ben was a smart guy. His words still apply today. Another thing that’s certain: You can count on these Friday pieces trying to make sense of these ongoing things.
The AI trade has dominated this Bull run since 2022. Leadership has been concentrated in Tech. For most of it, participation has not been broad. Concentration leads to crowding in the Stock Market. Both Institutional and Individual investors chased the moves. Concentration led to crowding. The skyward move in Tech, particularly in semiconductor stocks, reached bubble-like conditions. It drew comparisons to the Dot-com days. One of our independent sources said it well: “Bubbles are a confluence of Bullish events that provide the environment for unique price action, but what was marveled at as a perpetual motion machine always turns out to be an ordinary device with a well-concealed power source”. That’s why bubbles form, and bubbles pop. It was a crowded boat. Everyone was on the same side. That can’t last long. Stability requires balance. The boat finally flipped. It caused a midweek crash.
News started circling about a hedge fund blowing up. There have been massive margin positions, which can create ridiculous gains in a raging Bull. It’s a gambling mentality. That can definitely exist, but it’s not recommended here. Leverage can be so dangerous in investing. Simply put: It works until it doesn’t. When the direction changes, it changes fast and hard. It’s being reported that the hedge fund was forced to sell its publicly traded stocks, the majority of which were amongst the most speculative in the AI-trade. The forced selling Wednesday exacerbated the declines, sending the S&P down 100 points and the Dow down over 1,000. The Tech-heavy NAS fared the worst with a 2% decliner, marking a 10% correction from the June highs. Semiconductor stocks were down 20%.
One could argue that the epicenter of the declines came from South Korea. Its Stock Market crashed 16% in 2 days. It was a tough July for the Asian index. You think our Market is concentrated? Just 2 Tech stocks, Samsung and SK Hynix, account for half of South Korea’s Stock Market. It had fallen 38% from its June all-time highs. It jumped back 18% on Friday. Now that’s volatility! Despite the bounce, it remains down 28% for the month. That’s some turbulence that few investors can stomach.
Back to our Market: What’s interesting and important, despite Wednesday’s washout, nearly 200 of the S&P stocks, essentially 40% of the index, were up on the day. They were primarily Consumer Staples, Health Care, Utilities and Energy. These are generally considered defensive sectors and also have a much smaller weight compared to Tech. Thursday brought a complete reversal. Tech stocks soared while very little else did. Thursday’s rally marked the worst breadth on record for a day when the S&P 500 gained 1.5%. There were 107 decliners on the day. It also marked the first time that the S&P gained 1.5%+ while the equal-weight S&P 500 ended in the red. The grind below the surface has been palpable. Corrections can come in the form of time as well as price while the overall index grinds sideways around 7400. That translates to about 51K for you Dow watchers.
The Fed met again this week, and the Market was looking for some more certainty. It didn’t find it. The central bank kept interest rates on hold, despite some calls for a hike to help stem the tide of inflation. But the fact that 3 members dissented, the largest Fed dissent in over a decade, and a confusing press conference from the new Fed head contributed to the Stock Market decline, which accelerated into Wednesday’s close. The Bond Market is making it clear what it thinks. Yields on the back-end of the curve keep going higher. The 10-Year yield, now at 4.74%, is at multi-decade highs. The Market is now assigning a 65% probability of a rate hike in September. Higher rates are generally bad for stock prices. A lot can and will happen between then and now. A hike is far from certain.
One thing that does bring some certainty is Earnings Season. This was the busiest week for Q2 report cards from Corporate America. Over one-third of S&P 500 companies reported. The remaining Tech Titans were the focus. The 4 companies account for 17% of the S&P. They definitely moved the Market. What was interesting this time, the moves were in a split way.
Microsoft was the first of the 4 to report. The company was limping into the release. Software stocks have been punished, in many cases deemed the losers in the AI revolution. Microsoft struck back. Revenue grew 18% to a record $90 Billion. Azure, its cloud business, grew 41%. AI spending drove it. The Market liked it. Heading into earnings, Microsoft’s stock was down 17%, a major drag on the S&P 500, accounting for over 4% of the index alone. That changed in a hurry. The Stock surged 15% Thursday. Microsoft increased in value by nearly $450 Billion. That was the biggest gain in Market cap in history for an American company. It put a supercharge under the Stock Market.
Meta was less fortunate. The company, formerly known as Facebook, disappointed investors. It missed earnings estimates and lowered its outlook for the coming quarter. Meta also increased its capital expenditures for the year to as much as $145 Billion. The company is heavily investing in AI. But the results are far from clear. The Market doesn’t like that. The stock fell 8% on the news, marking 11 straight daily decliners. Accounting for 2% of the S&P, Meta put a dent in the Market rally.
The following day brought similar results from Apple. It was Tim Cook’s last earnings call as CEO. He formally hands the baton off to John Ternus in September. Apple reported a solid quarter. Revenues grew 16%, driven by iPhone sales which increased 22%. Mac sales grew 29%. Apple lowered its guidance for the rest of the year, mostly due to supply constraints. The iPhone still accounts for half the company’s total revenue. Demand for Apple products remains quite strong. One point of contention is Apple’s AI strategy. It’s still unclear. The company has not been spending a lot on AI. That has helped the stock this year. But it’s uncertainty around AI appears to be starting to weigh on investor appetite.
Apple has 1.5 Billion customers who own 2.5 Billion devices. Apple customers have proven to be loyal spenders. It’s a population that companies covet. But everyone is getting squeezed in this environment. Tim Cook referred to the skyrocketing memory chip costs as a “100-year flood”. The Titan from Cupertino is used to receiving priority for its supplies. The AI rush has been crowding them out a bit. That’s new. Apple’s stock fell 7% on the news. It was up 24% on the year heading into earnings. That was the opposite setup from Microsoft. Their stocks have gone in opposite directions in 2026. That trend continued. Apple has been the Tech leader for the year while Microsoft was the laggard. That reversed this week.
Amazon was the clear winner of the week. The company reported a blowout quarter. Revenues grew 20% in Q2, the fastest since 2021. Amazon Web Services, its cloud business, accelerated at a stellar 37% rate. That’s largely Amazon’s AI play. The company also increased its infrastructure spending to $220 Billion this year and likely more next year. The Market celebrated this factor, unlike others. The reason is simple: Amazon is already seeing a return on its aggressive investments. Earnings growth has actually accelerated.
The visibility is clear to CEO Andy Jassy. He seems quite certain. In fact, Jassy called the growing demand out to 2028 “striking”. Amazon keeps investing to meet that demand and management is confident they will get a tidy return on the massive spend. AWS accounts for just 20% of Amazon revenue but 57% of its profit. You can see why it’s the stock driver. It is still early days in this AI revolution. Amazon has already begun transitioning from trials to outcomes. The Market likes it. Amazon’s stock jumped 15% on the news.
The one negative for Amazon was its retail business. The company lowered its outlook for H2. Amazon reiterated what we already know. High prices are squeezing consumers’ ability to spend. The company recently surpassed Walmart as the largest American company by sales. Amazon’s retail business grew a healthy 15% in Q2 on the back of its Prime Day, which took place in June. That likely explains the lowered guidance as the event usually takes place in July. The Market clearly didn’t think it matters. But a strained consumer certainly does. Consumer spending accounts for roughly 70% of annual GDP. Asset ownership has been the key distinction driving consumer behavior. America’s Economy still has that shape like a “K”.
The Digital Revolution helped automate business systems and tasks. The AI Revolution is automating human judgment. Whether that’s a good thing remains to be seen. Most likely it’s mixed. There are clear benefits. What’s not clear are the ultimate costs. The most important being human livelihood. Earnings Season has shown that the AI superhighway is operating at full speed. Unfortunately, there isn’t much in the way of traffic lights nor speed bumps. There are no global police in place for oversight.
The on-again, off-again ceasefire in the Middle East has created much Market volatility. It’s measured in stock prices. It’s also been measured in Oil prices. The price of Oil jumped 20% in July. We sure feel it at the pump. The conflict with Iran was the clear driver there. But demand for energy has been a constant. It keeps growing with AI. Supplies are struggling to keep up.
Big Oil also reported earnings this week. Chevron reported the strongest quarterly profit this decade. It had record production in the Permian. Refinery runs in America were the highest ever. Exxon reported its largest revenue and earnings quarter since Russia invaded Ukraine. Exxon had some refinery maintenance going on, which had a negative impact on results. Still, Exxon pumped out more diesel from its refineries than ever before in the quarter, as the world struggled with a severe shortage of diesel due to the wars in Iran and Ukraine. Both leaders of America’s largest Energy companies believe the fuel deficit will persist. Exxon CEO Darren Woods said: “It’s going to take a while for the industry to kind of climb its way out of that hole.”
Global systems remain under stress. The Hormuz Strait is choked. The Red Sea is being contested. China’s demand for Oil has slipped during this crisis, choosing to tap its reserves rather than pay up for high-priced Oil. It’s one of the reasons WTI didn’t stay above $100 very long. But the fundamentals have yet to be resolved. Expect $4 gas across the country and $5 in California for the remainder of Summer, if not longer. That’s sure to play a role come November.
Expect this volatility to continue. Despite these wide swings, the S&P is less than 2% away from its all-time highs. Keep those belts buckled. We’re stabilizing the boat.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
