Eyes on the Road

Analyzing economic data has always been a bit like driving while looking in the rearview mirror. It tells you, in vivid detail, exactly where you have just been, and almost nothing about the road ahead. Rarely has that been as true as this past week, which delivered a batch of genuinely reassuring numbers: inflation cooling sharply, consumer confidence jumping and the largest domestic banks posting record profits. The trouble is that every one of those reports was a snapshot of a calmer world; one that, by the time the data hit the tape, had already been overtaken by events unfolding in the windshield.

On the surface, markets looked somewhat soft. The S&P 500 (S&P) slipped about 1.5% for the week to roughly 7,458, the Dow Jones Industrial Average (Dow) eased about 0.9% and the Nasdaq Composite fell nearly 3%. Headline numbers masked a violent rotation within markets. Semiconductor stocks, the engine of this year’s rally, tumbled into a technical bear market. The industry’s benchmark index has fallen roughly 20% from its June peak, and last week marked its worst stretch since early 2025. Investors are beginning to question whether the enormous sums being spent on artificial intelligence (AI) will pay off soon enough and with enough profitability to justify elevated valuations. Energy, meanwhile, was the only major sector to rise. When the one green sector on the screen is energy, it is usually a sign that something has gone wrong in the Middle East.

The 60-day ceasefire between the United States and Iran, signed in mid-June, has effectively collapsed. U.S. strikes resumed in early July, and by Monday last week the conflict had spilled back into the shipping lanes: Iran claimed to have disabled two tankers near the Strait of Hormuz, the United States moved to reinstate its naval blockade of Iranian ports and Washington reimposed sanctions on Iranian oil. Crude oil, which had drifted back into the low $70s during the early stages of the ceasefire, surged more than 13% on the week to around $81 per barrel. The national average price of gasoline climbed back toward $4 a gallon, roughly a third higher than before the war began. The single most important variable for markets remains the status of the strait (through which close to a fifth of the world’s oil flows) and that variable just turned the wrong way again.

Which brings us to the rearview mirror. On Tuesday, the June Consumer Price Index (CPI) delivered the best inflation news in months. Headline prices fell 0.4% on the month, the largest single-month decline since April 2020, pulling the annual rate down to 3.5% from 4.2% in May and landing well below expectations. Core inflation, which excludes food and energy, was flat on the month, easing the annual core rate to 2.6%. The relief was almost entirely a story of energy: gasoline prices fell sharply in June as the ceasefire held, and shelter costs posted their smallest monthly increase in years. It was, unambiguously, a good report. It was also a report about June—a month that ended before the war reignited and oil turned back up.

The University of Michigan’s consumer sentiment survey, released Friday, told a similar tale of good news with some caveats. The preliminary July reading jumped nearly 10% to 54.4, a five-month high and the second consecutive double-digit monthly gain, as cheaper gasoline lifted spirits across every income and age group. Year-ahead inflation expectations eased to 4.2% from 4.6%. Encouraging until you read the fine print: the bulk of the survey’s interviews were completed before the July 7 resumption of hostilities and the subsequent bounce in gasoline prices. Even at 54.4, sentiment remains below where it stood a year ago. Consumers, like the inflation data, were describing a world that no longer quite exists.

The Federal Reserve (Fed) spent the week trying to look through the windshield rather than the rearview mirror. In his first semiannual testimony to Congress as Fed Chair, Kevin Warsh struck a consistently hawkish tone, insisting that restoring price stability remains the central bank’s overriding priority and cautioning against reading too much into a single soft inflation print. He pushed back directly on any notion of “mission accomplished” and reminded lawmakers that inflation has now run above the Fed’s 2% target for more than five years. Governor Christopher Waller, speaking earlier in the week, echoed the sentiment, arguing it would take several months of good data to convince him that inflation is truly on its way toward the Fed’s 2.0% target. Markets got the message: the odds of a rate hike at this month’s meeting collapsed after the CPI report, but futures still price in roughly a 60% chance of a hike by September. The Fed left its target range at 3.50% to 3.75% in June and meets again on July 28–29; officials entered their pre-meeting communications blackout over the weekend.

Corporate news, at least, was unambiguously strong. All five of the largest U.S. banks reported second-quarter results simultaneously on Tuesday, and all five beat expectations. Profits were robust across the board, powered by a surge in trading and investment-banking fees that included Wall Street’s cut of last month’s record SpaceX initial public offering. Several of the banks also unveiled sizable new share buybacks. Strong bank results are a familiar marker of a healthy economy, and with S&P 500 profits on track to grow more than 20% for a second straight quarter, the broader earnings picture is encouraging. Yet the week’s tech wobble is a reminder that the market’s leadership has grown narrow and expensive. A surprise AI model from a Chinese startup, claiming performance rivaling the best American systems, was enough to knock the entire semiconductor complex into a tailspin, a reminder of just how much optimism is now priced into the AI trade.

No one drives safely by staring into the rearview mirror, but no one ignores it either, it is where the trends become visible. The trend in the mirror is genuinely encouraging: inflation is cooling, consumers are steadier and corporate profits are robust. The view through the windshield is murkier: a war back on, oil climbing, a hawkish Fed and a richly valued market leaning hard on a handful of AI names. The task for investors in the weeks ahead is the same as it is for any driver, to use the mirror without mistaking it for the road.

Looking forward to this week, the second-quarter earnings season shifts into high gear, with the first of the mega-cap technology names on deck alongside a heavy slate of industrial, consumer and healthcare reports. On the economic calendar, investors will watch housing data, weekly jobless claims and the July flash purchasing managers’ indexes for an early read on how activity is holding up. With the Fed in its blackout period ahead of the July 28–29 meeting, earnings and the ongoing situation in the Middle East will drive the tape.

Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market.

5765307 Exp. 07/30/2029