Markets had a choppy week, with the major U.S. stock indexes giving back some recent gains as investors weighed strong earnings against renewed pressure in the technology sector, higher oil prices, and continuing geopolitical uncertainty. The S&P 500 finished the week lower, slipping from the prior Friday’s close as weakness in technology and communication services offset strength in more defensive areas. The Nasdaq Composite also ended lower for the week, hurt most by a sharp pullback in semiconductor and artificial intelligence-related stocks after a very strong first half of the year. The Dow Jones Industrial Average was relatively steadier, but it too finished lower, reflecting a cautious tone across blue-chip stocks.
Inflation remained the week’s principal economic story. June’s Consumer Price Index showed headline inflation of 3.5% from a year earlier, down from 4.2% in May, while core inflation—excluding food and energy—eased to 2.6% from 2.8%. The monthly decline was helped substantially by lower gasoline prices, which is welcome news both at the pump and in the inflation data. Producer prices also declined 0.3% in June, slightly more than economists expected, suggesting that pricing pressure may be easing further up the supply chain. Markets generally welcomed the reports because lower inflation gives the Federal Reserve more flexibility over time. Still, investors should resist assuming that one month settles the interest rate debate. Analysts are still looking for at least one rate hike this year.
Second-quarter earnings season began in earnest with an unusually busy week for the banking industry. JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, and Goldman Sachs all reported results on the same day. Strong capital markets and trading activity helped support several of the reports, and Citigroup said it generated its best quarterly revenue in a decade; its net income rose to $5.8 billion from $4.0 billion a year earlier. The banks’ results offered a reassuring indication that consumers and businesses are still using the financial system actively, while markets for underwriting, trading, and dealmaking remain open. Bank earnings are worth watching not simply as stock-market events, but as practical temperature checks on lending, spending, and corporate confidence. In this case, the temperature looked reasonably healthy.
The main culprit behind this week’s market jitters was a noticeable shift in how investors view the technology sector, specifically the major semiconductor and microchip companies. In recent months, the largest tech firms have poured billions of dollars into building out artificial intelligence infrastructure. This week, a wave of skepticism swept through Wall Street as analysts openly questioned whether the massive spending on AI hardware will translate into immediate corporate profits. This “valuation reset” triggered a significant sell-off in chipmakers, which dragged down the broader tech sector.
Finally, this week offered an unusual reminder that speculative trading isn’t for the faint of heart. The deepening global sell-off in AI and semiconductor stocks triggered a staggering micro-economic event in South Korea. Fueled by extreme retail investor speculation in leveraged exchange-traded funds (ETFs) tracking chipmakers, a sudden market drop forced cascading margin calls that affected more than 3% of the country’s entire adult population in a single week. Investors had piled into these products this year using massive amounts of borrowed money. Between 320,000 and 360,000 retail accounts were entirely liquidated by brokerages in South Korea. The total losses from the leveraged trading collapse surpassed $1.4 billion, and retail brokerage cash balances have plummeted by $20.1 billion as capital evaporated overnight. Leveraged trading is only “fun” when markets are going up. Now you know.
Bruce J. Mason, MBA
Licensed Investment Advisor Representative
Senior Vice President | Harvest Financial Advisors, LLC | 513.779.3030 | 800.361.0329