Financial markets faced a series of crucial tests last week. The results? Not as clear as investors might hope.
Earnings reports from the country’s largest tech companies sent their stocks flying in different directions, propelling Apple’s shares to their worst day since the tariff turmoil and Microsoft’s MSFT to the largest one-day market-cap gain for any U.S. company, ever. A press conference from the new chairman of the Federal Reserve left analysts issuing notes with titles like “Doved and Confused” and “Erm… What?”
The question now is whether broadening equity gains and a renewed zeal for the artificial- intelligence trade can power the rally’s next leg, even as chip-stock swings and a bond-market selloff drag on major U.S. stock indexes. The Nasdaq fell 3.2% during the month of July, while the Dow edged higher and the S&P 500 was little changed.
That modest move in those broader indexes has masked sharper moves beneath the surface, as investors re-evaluate their tech bets and grapple with the looming threat of rising interest rates.
It’s all “kind of chaotic,” said Victoria Fernandez, chief market strategist and portfolio manager at Crossmark Global Investments. “Even though the top layer says things are fine, underneath there’s a lot of churning and uncertainty.”
That tumult was especially pronounced last week, as traders took a more discerning look at the market’s biggest AI players—with drastically dissimilar results. After Amazon reported accelerating sales in its cloud computing business, the stock surged 15% in Friday trading. Meanwhile, shares of Apple slumped 7.4% after the iPhone maker’s forecast for its September quarter fell short of Wall Street’s expectations.
Traders issued a similar verdict exactly one day prior, sending shares of Meta Platforms 8% lower following the Facebook parent’s projections that its free cash flow would turn negative in the second half of the year. On the other hand, Microsoft’s stock jumped 16%. That boosted the company’s market capitalization by some $450 billion, marking the biggest one-day leap in market value for any U.S. company on record.
After months of growing concern aimed at the hundreds of billions that tech companies are spending—and borrowing—to finance the AI infrastructure build-out, shareholders are starting to demand some evidence of returns on that investment, Fernandez said.
“Investors are tired of saying ‘We’re going to give you the benefit of the doubt,’” she said. “They’re losing their patience. They want proof.” Those firms that fall short are seeing their stocks punished, she noted.
The update that the so-called “hyperscalers” were still spending big on the AI build-out benefited hard-hit shares of chip makers, memory suppliers and other “picks and shovels” plays during the week. The PHLX Semiconductor Index eked out a gain on Friday, though the benchmark is still down some 21% for July.
Another dizzying market move came in the wake of Fed chairman Kevin Warsh’s second postmeeting press conference on Wednesday, which sparked furious selling in stocks and bonds. After policymakers at the central bank opted to hold interest rates steady, Warsh seemed to imply that a near-term rate increase might not be needed.
Instead, the chairman implied, higher bond yields have already done some of the Fed’s work for them.
Bond traders reacted by firing a kind of warning shot. The yield on the 30-year U.S. Treasury bond climbed to its highest levels in 19 years, a sign that Wall Street is unconvinced the new Fed leader is committed to wrangling inflation.
That bond selloff picked up new momentum on Friday, with the 10-year Treasury yield advancing to a new 18-month high. Yields climbed across maturities, as investors dialed up bets on a near-term rate increase.
Warsh is considering reducing the frequency of policy meetings at the Fed, which would mark a substantial shift in operations and reduce the number of occasions on which the bank’s meetings are the main focus of markets.
A sustained climb in bond yields would lift the cost of capital for businesses and consumers, slow the economy and likely drag on stocks. To make matters worse, tensions in the Middle East are still threatening to lift oil prices, amping up inflationary threats.
Investors will get a clearer reading on the health of the U.S. economy in the week ahead, with a much-awaited jobs report Friday and earnings reports due from consumer-facing firms such as McDonald’s and Walt Disney.
Even as yields climb and AI skepticism lingers, the bull market has a sturdy tailwind. The S&P 500’s overall earnings growth rate—blending projections with the results that are already in—is some 47%. That is the highest level in more than five years, and analysts are still lifting their estimates for next quarter.
Analysts at Goldman Sachs on Friday noted that drawdowns are common after the kind of meteoric gains that hit memory stocks earlier in the year. And while AI spending has surged at Amazon, Alphabet, Meta and Microsoft, analysts now expect revenue for that group to grow at an annualized rate of 18% over the next two years.
“There’s a lot of health in the market under the surface, but I think it’s all lost in this AI narrative,” said Joseph Zappia, co-chief investment officer at LVW Advisors.
“We’re in an economic expansion. The question is how long it will go, and at what point it has gone too far,” he said. “I’m not seeing many indications that we’re there.”
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