The Dow Jones Industrial Average (Dow) fell 0.9 percent, the Standard & Poor’s 500 Index (S&P 500) lost 1.55 percent, and the Nasdaq Composite Index (Nasdaq) finished off 2.9 percent for the week ending July 17. Sector breadth was mixed with six of the S&P sector groups closing lower and five closing higher. The energy (+5.0 percent) was the best performer while technology (-3.8 percent) was the weakest.

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The S&P 500 finished the week lower as investors questioned whether the pace of artificial-intelligence spending can justify current valuations. Also weighing on investor sentiment was a 15.5 percent jump in oil prices due to the conflict with Iran and worries over the direction of monetary policy. On a positive note, a softer-than-expected reading on consumer inflation changed market expectations of a Fed rate increase, with September odds falling to about a coin toss.

Fed Speak: During his twice annual testimony to Congress, Fed Chair Warsh said policymakers at the central bank have no tolerance for high inflation, reiterating a vow to tame price growth that has been elevated for five years. Warsh downplayed the softer-than-forecast Consumer Price Index (CPI) data, saying he didn’t want to read too much into any one data point. Separately, Chicago Fed President Goolsbee says Tuesday’s CPI report was “surprisingly benign,” though policymakers will need more than one month of data to assess if inflation is trending back to the central bank’s 2 percent goal. Meanwhile, Fed Governor Waller said policymakers may need to raise rates in the near term if underlying inflation continues to signal broad price pressures. Waller, however, emphasized the economy was in good shape, with the labor market appearing stable and consumer demand resilient. Lastly, Dallas Fed President Logan said the June inflation figures showed progress toward cooler price increases but weren’t enough to reassure her that inflation is on a path back to the Fed’s 2 percent goal.

Q2 Earnings – So Far, So Good: Through Friday July 17, 47 companies in the S&P 500 have released second quarter results, with over 95 percent beating expectations. While it is still very early in the reporting season, aggregate earnings for this group are up over 52 percent from a year ago, solidly ahead of the 23.8 percent projected growth rate at the end of June. On the sector level, financials and technology have posted the biggest upside surprises and also the strongest growth rates. According to Bloomberg, ten of the eleven S&P sector groups are expected to report year-over-year growth, with six of these forecast to deliver double-digit gains. On the flip side, earnings in the Health Care sector are forecast to decline year-over-year. Full-year expectations call for S&P 500 earnings to grow by 25.6 percent this year, followed by 17.3 percent in 2027.

Economic Roundup: US consumer prices declined in June for the first time in six years, with headline CPI falling 0.4 percent from May, dragged down by the biggest drop in gasoline prices since 2022. Excluding food and energy, the ‘core’ index was unchanged from the prior month. US retail sales rose modestly in June as a drop in gas station receipts masked strong gains elsewhere. Retail sales rose 0.2 percent, matching consensus expectations, but slowing from May’s 1.0 percent growth. Excluding gasoline stations, sales increased 0.7 percent, with seven of the 13 retail categories posting gains. Separately, the Philadelphia Fed Business Outlook survey rose to its highest level in nearly five years, a day after the New York Fed’s Empire survey also resumed its march higher. Together, the reports suggest the national ISM Manufacturing PMI, due out August 1, may indicate continued expansion in July. Meanwhile, confidence among US homebuilders dropped for a second month to the lowest level of the year, dragged down by elevated borrowing costs and higher material and land prices.

Outlook: While the outlook through the end of the year still remains favorable, we wouldn’t be surprised to see market turbulence through the remainder of the summer. In the near term, worries over the AI buildout, tech stock valuations, and headline risk around Iran are likely to result in choppy trading activity. Even so, based on what we feel is a still favorable macroeconomic environment, we believe the market offers a solid risk/reward profile for longer-term investors, especially on pullbacks. Our focus remains on the building blocks of equity investments—earnings, the economy, and interest rates—all of which we believe will remain supportive in the quarters ahead.

The Week Ahead: Second quarter earnings season will move to the front burner with 83 members of the S&P 500 scheduled to release results. Among this group will be five members of the Dow Jones Industrial Average, including Alphabet and American Express. Other earnings reports of interest include Tesla, Intel, and GE Vernova. It will be relatively quiet on the data front with the focus on Friday’s manufacturing and services PMI reports from S&P Global. It also will be a quiet week for Fed speaking engagements, with members subject to the blackout period ahead of next week’s (July 28-29) Federal Open Market Committee meeting. Outside of the US, investors are expected to keep a close eye on the outcome to Thursday’s European Central Bank meeting.

— By Michael Schwager, Chief Market Strategist, Managing Director

The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since Oct. 1, 1928.

Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The Nasdaq Composite Index is a broad-based capitalization-weighted index of stocks in all three Nasdaq tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of Feb. 5, 1971.

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