Global equity markets struggled to find upward momentum on Wednesday, with Wall Street edging lower as the sell-off in chip stocks showed signs of easing. Investors are now bracing for the release of earnings reports from two of the world's largest artificial intelligence players. At the same time, US Treasuries continued to decline, as market participants priced in a potential rate hike from the Federal Reserve. As of writing, Dow Jones futures were down 0.7%, S&P 500 futures were off by 0.1%, and Nasdaq futures had slipped 0.2%. This comes after a notable rebound in the previously closely-watched chip ETF. Micron Technology and SanDisk are both trading lower in pre-market, signaling a further cooling of investor enthusiasm for chip companies. The MSCI All-Country World Index edged down 0.11%, hovering near its one-month lows.
Chip stocks have become the epicenter of market turbulence. In Europe, the pan-European Stoxx 600 index briefly rose before turning negative, down 0.2%, as the market digested a heavy flow of corporate earnings. The two major players in the European luxury sector showed diverging fortunes: Kering shares rose after its Gucci brand reported sales that exceeded market expectations, while Hermès was hit by sluggish growth in the Asian market. As the momentum of the AI trade wanes, investors are turning their attention to the upcoming earnings from Meta Platforms and Microsoft. Growing questions are emerging about whether the massive wave of investment in AI infrastructure, much of it debt-financed, can generate sufficient returns. The market is demanding more than just growth.
Chip manufacturers are also being punished as investors worry the industry's historically high profit margins are unsustainable. Elevated expectations mean that even a six-fold increase in quarterly profit from South Korean memory chip giant SK Hynix failed to satisfy investors, leading to a nearly 10% plunge in its stock price. This continues a recent downtrend that has seen the company's market value evaporate by over $700 billion in the past month. "The sell-off in chip stocks looks a bit overdone, but as long as the market questions the sustainability of the AI cycle, volatility is inevitable," said Jake Seltz, a portfolio manager at Allspring Global Investments' Empiric LT Equity team. "Market expectations are so high that just delivering a decent result is no longer enough." The Korean stock market is becoming a barometer for AI sentiment.
The Korea Composite Stock Price Index (KOSPI) has become a representative indicator of the sharp mood swings in the AI trade. The index fell nearly 6% on Wednesday, following a more than 10% crash the previous day that brought it to a three-month low. South Korea's Finance Minister, Koo Yun-cheol, issued an apology for the lack of consideration in the earlier approval of single-stock leveraged ETFs, which have been criticized for amplifying market volatility.
Apple has been the only relatively stable stock among the "Magnificent Seven" during the recent AI turmoil. "I hope Meta and Microsoft confirm that the industry's capital expenditure boom is still rational and can restore confidence in the semiconductor sector," said Fares Hendi, a fund manager at Paris-based Société de Gestion Prévoir. Conor Cooper, a Bloomberg macro market strategist, noted that Microsoft and Meta are set to report earnings after the close, followed by Samsung Electronics on Thursday. All these companies risk disappointing, as investor expectations are already sky-high. However, Cooper suggests that even if earnings fall short, recent market action implies a broader sell-off is unlikely. He believes greater market resilience may contain the AI sell-off from spreading across the entire market.
The latest escalation of conflict in the Middle East has had a limited impact on stock and bond markets. A period of relative calm was abruptly broken when Iran launched an attack on US forces overnight, followed by US and Saudi strikes on Iran-backed militias in Iraq. "This rapid back-and-forth makes it increasingly difficult for the market to distinguish real signals from noise," said Edward Acton, a GMO interest rate strategist. Analysts at ING noted that "these developments have diminished the chances of a rapid de-escalation in the Persian Gulf." They added that "the risk of a prolonged disruption to energy supply is rising as the threat of an attack on Saudi oil infrastructure increases." Brent crude rose 4.3% to $87.65 a barrel, ending a three-day, 16% decline. Strategists at BofA Securities commented, "Oil price volatility itself, not just the level of oil prices, can create inflationary pressures, as some goods prices rise with oil but are slow to fall back."
Driven by rising inflation risks from higher oil prices, US Treasury yields continued to come under pressure. The benchmark 10-year US Treasury note yield rose 1.04 basis points to 4.6103%, potentially ending a three-day losing streak. The 30-year Treasury bond yield currently sits at 5.0948%, having remained above 5% for 17 consecutive trading days. Eurozone government bond yields also climbed in early trading, with the German 10-year Bund yield up 1.6 basis points to 3.122%. In early European trade, New York gold futures were up 0.2% at $4,045.80. Analyst Soojin Kim at Mitsubishi UFJ Financial Group stated that while gold prices have fallen nearly 25% since the conflict began, they continue to find support around the $4,000/oz level due to persistent dip-buying.
The market is now awaiting the Federal Reserve's interest rate decision later today. It is widely expected that the Fed will hold rates steady this month, with a potential rate hike priced in for September. The renewed US-Iran conflict could also provide a reason for Fed officials to tighten policy sooner. The market currently sees about a 30% probability of a rate hike, but traders expect at least one more hike before the end of the year. "Our base case remains that the Fed will hold rates steady in July and throughout 2026," said Seema Shah, Chief Global Strategist at Principal Asset Management. She noted that recent improvements in inflation data and controlled inflation expectations give policymakers room to wait for more clear evidence before acting.
The "hawkish hold" is a key scenario. Several Fed officials have already expressed public concerns about inflation risks. "While the market is generally not expecting a major change from this Fed meeting, rising financing costs remain a key risk for the stock market this year," said David Waddell, Chief Investment Strategist at Coastal Bridge Advisors. He pointed out that many large tech companies are increasingly reliant on public market financing to support expansion, making a high-interest-rate environment a potential source of pressure. Analyst Erik Liem at Commerzbank said that while the market broadly expects the Fed to hold rates steady, the key question is "how the market will fill the gap in policy guidance at the press conference." The JPMorgan market intelligence team suggested that if the Fed delivers a dovish signal and maintains current rates, it would be the "best outcome" for the stock market. They estimate a 28% probability of this scenario, which could boost the S&P 500 by 0.5% to 1%. JPMorgan believes the most likely base scenario (50% probability) is a "hawkish hold," where the Fed keeps rates unchanged but emphasizes the need to remain vigilant on inflation risks. "It's very rare for market views to be so split just hours before a Fed decision," said Amélie Derambure, Senior Multi-Asset Portfolio Manager at Amundi, noting that "it means some investors will inevitably be caught off guard. If a rate hike signals the start of a new tightening cycle, it could have serious consequences for the stock market."
Biogen rose 0.7% after the biotech company posted revenue above Wall Street consensus and raised its full-year adjusted earnings per share guidance. Vertiv, an AI infrastructure stock, plummeted 13% on a mixed second-quarter report. While earnings and revenue beat analyst estimates, organic revenue growth of 17.8% year-over-year fell significantly short of the 23.6% consensus from FactSet. Generac, a generator manufacturer, jumped 5.5% after reporting better-than-expected second-quarter earnings. Excluding special items, the company earned $2.91 per share, beating the FactSet estimate of $2.01. The company reaffirmed its full-year revenue growth guidance. Procter & Gamble fell over 3% after its quarterly revenue missed analyst estimates. Fourth-quarter fiscal 2026 total revenue was $21.2 billion, slightly below the LSEG estimate of $21.38 billion, while net income fell to $3.04 billion from $3.62 billion a year earlier. GE Healthcare soared 12% after reporting second-quarter adjusted earnings of $1.13 per share, above the FactSet consensus of $1.04, and confirming its full-year 2026 profit guidance. Deutsche Bank rose over 2% following a strong second-quarter performance, with net profit of €1.9 billion, an all-time high for the period. CFO Raja Akram stated that all business segments performed well in the quarter. General Dynamics gained nearly 1% as the global aerospace and defense company surpassed Wall Street consensus on both revenue and earnings per share, with a backlog of orders reaching $136.5 billion. Ford Motor gained 6% after the automaker's second-quarter adjusted earnings beat estimates and it raised its 2026 profit outlook, though core automotive revenue fell slightly short of analyst expectations. CoStar, a real estate platform, plummeted 15% after its second-quarter revenue missed FactSet analyst estimates. The company also provided a current-quarter revenue forecast of $935 million to $945 million, below the consensus of $967.5 million. Rocky Brands, a clothing manufacturer, surged 16% as its second-quarter adjusted earnings per share more than tripled year-over-year. The Ohio-based company cited high double-digit growth across multiple brands and tariff refunds as tailwinds. PPG Industries, a paint and glass producer, fell about 1% after its second-quarter earnings per share and adjusted EBITDA fell short of Wall Street forecasts, though it maintained its full-year earnings per share guidance. KLA Corp, a wafer fabrication equipment maker, slid 7% after its latest guidance disappointed. The company forecast adjusted earnings per share of $1.16 for the next quarter, with a range of ±$0.10, while LSE had estimated $1.14. Revenue guidance was around $4 billion, with a range of ±$200 million, versus the market's expectation of $3.92 billion. Seagate Technology rose 6% after its latest guidance significantly outperformed analyst predictions. LSE data shows Seagate expects adjusted earnings per share of around $7.30 next quarter, well above the analyst estimate of $5.80, and revenue of about $4.1 billion, exceeding the consensus of $3.75 billion. Western Digital also rose 4% on the news. Manhattan Associates, a supply chain software provider, gained 11% after beating earnings and revenue estimates for the second quarter and raising its full-year profit and revenue targets. Visa fell 2% after its fiscal 2026 outlook failed to meet market expectations. The company maintained its forecast for adjusted nominal dollar earnings per share growth of around 15%, roughly in line with the FactSet consensus of 14.7%. Visa also announced plans to cut approximately 2,600 jobs, or about 7% of its workforce. Teradyne, a semiconductor test equipment maker, surged 9% after its second-quarter adjusted earnings and revenue, as well as its third-quarter revenue and profit forecasts, all came in above market expectations. NXP Semiconductors, a semiconductor design company, slipped 1.7% after its second-quarter non-GAAP gross margin of 58% met expectations. The company guided third-quarter adjusted earnings per share in a range of $3.89 to $4.32, compared to the LSE consensus of $3.98. Skyworks Solutions plunged 9% after reporting a third-quarter adjusted gross margin of 44.9%, slightly below the 45% estimate, and providing a fourth-quarter adjusted earnings per share forecast of $1.27, marginally below the LSE estimate of $1.28.
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