The Setup & Where to Focus

Stocks crept higher in a data-heavy week filled with drama in DC. 

• The S&P 500 rose 0.6%, good enough for a new record high weekly close, despite a minor dip on Friday. The Nasdaq Composite outperformed, rallying 1.5%, pulling further away from its early-year peak. 

• Gains were supported by largely better-than-expected economic data and an encouraging start to the Q2 earnings season. And while President Trump kicked around the notion of actively seeking to fire Fed Chair Jerome Powell, stocks took it all as mere jawboning.

The Cboe Volatility Index (VIX) finished last Friday at 16.4, which is very close to the same tame level from the close of the previous two trading weeks. 

• It’s classic summertime price action on Wall Street, even with potential turmoil at the Fed. A risk-on aura was seen in the cryptocurrency space, too, just as the landmark GENIUS Act was inked into law by President Trump on Friday afternoon. 

• This week, it’s all about second-quarter earnings reports from a wide range of companies, including Alphabet (GOOGL) and Tesla (TSLA), and more drama is sure to unfold between the White House and the Fed.

Digging into the sector performances last week, Information Technology (XLK) led the pack.

• The biggest piece of the S&P 500, which now trades at an even 30.0x on a price-to-earnings basis, jumped 2.1%, hitting an all-time high on Thursday. NVIDIA (NVDA) continued its upward march, although nearly all of its weekly gain occurred overnight, from Monday into Tuesday. 

• News that the world’s most valuable publicly traded company would once again be able to sell semiconductor chips into China caused the shares to jump 4% last Tuesday. NVDA is now worth $4.2 trillion, which is $400 billion more than Microsoft (MSFT) and $1 trillion above Apple’s (AAPL) market cap. But Jensen Huang’s company wasn’t the only action in tech. Oracle (ORCL) and Palantir (PLTR) soared 6.5% and 8.0%, respectively, as the momentum trade reached new heights. 

Utilities (XLU) was next best among the 11 S&P 500 groups. 

• Its relative strength was particularly impressive given the rise in interest rates. Often, debt-heavy power generation companies struggle when Treasury yields climb, but that hasn’t been the case recently. Perhaps we can thank the AI narrative. 

• The corporate story of the week in the Utility niche was AES (AES) being in the crosshairs of a private equity buyer seeking its AI-related assets. Separately, some utilities, such as PPL (PPL), may benefit from a possible $90 billion industry investment announced at last week's Pennsylvania Energy and Innovation Summit hosted by President Trump. 

• With big government dollars backing development in power centers and transmission infrastructure, it makes sense that the usually sleepy Utilities sector remains on traders’ screens.

Energy (XLE) has been the worst-performing sector over the past five sessions. 

• After a healthy beginning to the second half, shares of oil and gas companies sputtered, mainly due to a 2% pullback in oil (USO). Domestic WTI crude oil has shown technical resistance at the $70 per barrel mark, and while oil rig counts declined for a 12th consecutive week, the supply-demand balance still seems to favor the bears. 

• Recall that a handful of OPEC+ countries agreed to increase production by more than expected earlier this month. More bearish news came last week when the EU considered new sanctions on Russian energy exports, its 18th set of energy barriers imposed on Putin’s nation. 

• Back home, good news came on the regulatory front, as Chevron (CVX) won a legal dispute over ExxonMobil (XOM) over its proposed (now completed) acquisition of Hess (HESS). If crude oil and natural gas prices remain stable, more M&A could be on tap in the quarters ahead.

Finally, Financials (XLF) performed in-line with the S&P 500. 

• Earnings reports from JP Morgan (JPM), Wells Fargo (WFC), Bank of America (BAC), and Citigroup (C) were all better than forecast. Citi was the big winner, stock price-wise, though. Its turnaround story continues to endure. From a macro perspective, solid profits and outlooks from the big US banks pointed to a resilient US economy. 

• Collectively, along with Goldman Sachs (GS), Morgan Stanley, and Charles Schwab (SCHW), strong investment banking and trading revenues, as well as consumer spending data, bucked the narrative of a material slowdown among households and businesses. 

• Then on Friday, positive macro vibes were felt following American Express’s (AXP) Q2 report, which also revealed strength in the higher-end consumer cohort. In all, with 12% of S&P 500 companies having reported earnings, the bottom-line beat rate is a high 83%, well above the five-year average of 75%.

As for US mid- and small-cap stocks, last week was a mixed bag, but basically flat on net. 

• The SPDR S&P MIDCAP 400 ETF (MDY) inched higher by three basis points, while the iShares Russell 2000 ETF (IWM) added 0.3%. Peek just under the surface, though, and there was a revealing trend. 

• Both mid-cap growth and small-cap growth outperformed their value-style peers. It’s an indication of a risk-on mindset among investors. Story stocks, particularly those related to AI and crypto, rose big, including many non-profitable companies and so-called “high beta” shares. 

• Bullish action in second-tier digital currencies likely helped. Mid-cap growth is particularly exposed to the AI-trade, too. This week, we expect the SPDR S&P Regional Banking ETF (KRE) to be in play as a slew of small banks serve up second-quarter results.

Turning to overseas stocks, the Vanguard FTSE All-World ex-US ETF (VEU) crept higher by 0.2%, underperforming the Vanguard Total Stock Market ETF (VTI) by 0.5 percentage points. 

• The US Dollar Index (DXY) rallied for a second straight week, which pressured foreign equities. Still, China (FXI) soared 4.3%, making it one of the best returns among 45 country ETFs we track. 

• Lingering tariff-related weakness hurt Brazil (EWZ), which fell 2.5%, pressuring the once-hot Latin America space. 

• Europe (VGK) was also soft, likely hurt by the president’s push for a 15-20% duty on all goods coming from the EU. August 1 remains the effective date for reciprocal tariffs, but the POTUS has expressed a willingness to work out new terms with key trading partners. 

• In a research note published last week, Goldman Sachs said it expects a 19% US effective tariff rate by 2027, but getting there (from an initial level of 3%) may play out slower than what was first thought in April.

In the bond market, the benchmark 10-year Treasury note yield rose a single basis point for the week, but it was really a tale of two halves. 

• Interest rates backed up from Monday through the middle of Wednesday, as economic data and earnings reports suggested a somewhat firmer economic backdrop. 

• Then late Wednesday morning, the bond market was sent into a tizzy—for about 45 minutes—when word got out that President Trump sought to fire Fed Chair Powell. In front of the Oval Office press corps, Trump then backed off, saying it was “highly unlikely” he’d seek to oust Powell. 

• During that brief saga, short-term interest rates fell, while the long end of the curve rose. It all largely reversed by the afternoon, but it was a clear sign of how markets might respond if Powell were removed. 

• Trump may have been playing chess with this one—he potentially floated the idea of firing the Fed chief just to see how financial markets would act, much like how he handled the tariff situation in April.

Of course, fundamental data was also key to price action in the bond market, and it was green across the board for the most part. 

• June CPI, PPI, and Retail Sales all came in better than expected. The data were parsed for impacts from tariffs, and it was clear that higher levies have trickled down to consumer prices. Core goods, which had been in deflation for much of 2024, is back in black, rising 0.7% from a year ago. 

• On a monthly basis, its 0.2% June rise was the hottest since February, and we’ll probably see further price hikes in that category as the summer wears on. Still, overall CPI was below what economists had expected, and with a 0% PPI print, inflation remains in check, all while consumers continue to spend. 

• Last month’s Retail Sales report issued Thursday morning beat estimates, signaling a re-acceleration of household spending from May’s tepid pace. 

• Finally, on Friday, there was improvement in the University of Michigan Consumer Sentiment survey, but yields drifted down into the weekend.

Wrapping up with commodities, oil lost some ground, as mentioned earlier, while gold (GLD) shed a few bucks. Despite a largely successful Crypto Week on Capitol Hill, bitcoin gave back 1%. 

• Significant gains were had in ether and many altcoins, though. Ether (ETHA) rallied 18%, a fourth consecutive weekly advance, while tokens like XRP, binance coin, solana, and even dogecoin all soared.

Weekly Calendar Look Ahead

It's a light data deck over the next handful of trading days. Next Wednesday’s Fed meeting will be market-moving, but not from the standpoint of the interest rate decision. Instead, we’ll likely see dissents in the vote tally, as Fed Governor Chris Waller has been outspoken in support of a cut. Chair Powell and most of the other FOMC voting members will opt to be on hold. That’s next week, though. This week’s highlights include a speech from Chair Powell, July flash PMIs from S&P Global, Existing and New Home Sales, and preliminary June Durable Goods data. Let’s get to it.

Monday’s notable macro data point will come from The Conference Board’s Leading Economic Index (LEI). 

• The broad gauge of the US economy’s health declined in May, and its six-month drop currently suggests a recession, although the LEI has been a notoriously poor predictor of actual economic outcomes in recent years. We don’t put much stock in it. Treasury auctions occur later in the morning, while notable companies serving up quarterly reports are Verizon (VZ) and Domino’s (DPZ) after the bell.

Tuesday’s action might come in the premarket. 

• That’s when Powell gives opening remarks at a Fed-hosted event. It’s unlikely that he’ll respond to insults lobbed at him by the president, but he may give color to recent economic developments. Our team will also be curious to hear what Miki Bowman, a voting Fed member and emerging dove, has to say in the afternoon.

Wednesday includes some potentially interesting nuggets on the macro. 

• MBA Mortgage Applications hit early in the morning, with June Existing Home Sales printing at 10 a.m. ET. We expect rather dismal housing figures this week, given soft real estate data recently, including a weak NAHB Housing Sentiment gauge. GOOGL and TSLA report Q2 earnings after the close, along with IBM (IBM) and Chipotle (CMG), so investors will get a nice look at a variety of industries. 

• Crypto could also be in play—President Trump is scheduled to give a speech on AI. 

• Lastly, the Atlanta Fed releases its business inflation expectations update at 10 a.m., before a 20-year Treasury auction in the afternoon.

Thursday’s slate is full, starting with an interest rate decision from the European Central Bank (ECB). Next are the Chicago Fed National Activity Index and jobless claims data before the bell. 

• Initial Claims has fallen for five consecutive weeks, the longest downward streak since Q3 2022, suggesting that not many folks are being laid off. 

• Another set of timely data come at 9:45 a.m. with the release of July Manufacturing and Services PMIs from S&P Global. We expect modestly expansionary numbers above 50, and the reports’ subcomponents must be sifted through. 

• June New Home Sales are likely to be sluggish; that arrives at 10 a.m.

Friday is light, with just Durable Goods released before the bell. Economists expect a 10% decline in orders, though the series is often volatile due to the timing of aircraft purchases.

Fiscal Policy Framework

The Trump vs. Powell fight (albeit one-sided) should be an exercise in scenario analysis for macro investors. 

First, it’s unlikely that Trump would want Powell gone before the August 1 tariff effective date, as that could materially disrupt trade matters. Next, there’s a reasonable chance that two months from now, we’ll know the next nominee for Fed chair, so we expect the perceived candidates to be somewhat vocal about their policy ideas, which could rattle stocks and bonds at times. Third, and perhaps most importantly, Trump may actually want Powell to be in charge at the Fed, purely for scapegoat reasons. 

Think of it like this: If the economy slips into recession in the quarters ahead, Trump has someone to blame. The president may be slinging insults and undermining Powell to draw attention...if well-laid economic plans don’t turn out well. It’s fun to speculate, but it’s also critical to assess probable outcomes. 

In the here and now, the GENIUS Act, which regulates and essentially validates stablecoins, was signed into law by Trump last Friday. It was a seemingly rare piece of legislation that garnered support from both Republicans and Democrats. The House also approved the CLARITY Act, which outlines a further regulatory framework for cryptocurrency.

As Congress prepares to go on recess, the risk of a government shutdown grows. September 30 is a key date. A dozen spending bills are required to pass to avert a federal closure, and that could spur volatility toward the tail end of the third quarter.

Risks & Opportunities

• Mid-July of a post-election year has typically been a lousy time to be aggressively positioned in stocks, and we’ve seen corrections occur in recent years starting around this time.

• Momentum (SPMO) continues rising high, though, and there are few signs that the trade is letting up.

• Tactically, high-yield bond spreads are compressed right now, indicating that the fundamental foundation is strong.

• Breadth has also improved, with IWM remaining above its 200-day moving average, and both US and ex-US stocks at/near all-time highs.

• The VIX near 16 and dollar steadying near 98 suggest some calm in the macro, which may support a melt-up in stocks as the summer progresses.

• Japan’s elections over the weekend could spur bond market volatility globally this week

Quick Hits

• Crypto inflows have been strong thus far this quarter, supporting the rallies in bitcoin, ether, and altcoins. The total cryptocurrency market cap eclipsed $4 trillion for the first time.

• BofA’s Global Fund Manager Survey reported the largest increase in risk appetite on record (back to 2001) as trade-war fears continue to wane.

• Citi reports that retail equity buying activity has ratcheted up to the highest level since at least 2018.

• Goldman Sachs’ non-profitable tech index is up 66% since its April low...another sign of intense investor speculation.

• Last Thursday’s Treasury International Capital (TIC) System data confirmed that foreigners were strong buyers of US stocks and Treasury notes and bills, further dismissing the “end of American exceptionalism” narrative.

• The S&P 500 notched its ninth all-time high close of the year last Thursday

• The 30yr Treasury yield is very close to 18-year highs. But the 30-year mortgage rate is more than a percentage point below its Oct 2023 peak, thanks to cycle lows in Treasury-rate volatility.

• Long-term inflation expectations are anchored, but also ticked up last week.