Halftime Adjustments

The World Cup has reminded us that even the most dominant teams can have an off-week, and Wall Street offered its own version of that lesson as America heads into its 250th birthday celebration. After months of artificial intelligence (AI)-driven euphoria lifting semiconductors and mega-cap growth stocks to lofty valuations, the market paused to ask a harder question: Is all of this capital spending actually going to pay off? The answer, at least for now, is “we’re not sure.” That uncertainty was enough to send the Nasdaq tumbling 4.6% on the week while the Dow quietly gained 0.6% and the S&P 500 slipped 2.0% for just its second down week in the past 13, closing Friday at 7,353.

Health care, industrials and other sectors that had spent much of the year in technology’s shadow quietly outperformed, a rotation that said less about their own strength and more about investors’ growing discomfort with AI valuations. Micron offered a brief reprieve Thursday night, posting record earnings that confirmed the AI infrastructure buildout is very much alive.

Part of the pressure originated overseas. South Korea’s chip-heavy KOSPI index fell nearly double digits during the week, sending shockwaves through global semiconductor markets. SK Hynix and Samsung now make up a record 60% of the KOSPI, up from around 40% just two years ago, as demand for memory-chip makers drove the benchmark to nearly double this year and become the world’s best-performing major index. Uncertainty over Samsung Electronics’ and SK Hynix’s potential capital expenditure is likely pressuring their share prices as the two companies could be planning to spend trillions over the next decade. Regulators stepped in twice to pause trading on the Korean index following significant price movements, which serve as a reminder that the same concentration that fuels spectacular rallies can just as quickly amplify the selloff.

AI concerns spread throughout the week with news that OpenAI may delay its heavily anticipated IPO until 2027, which severely damaged investor confidence in the near-term profitability of artificial intelligence. This triggered widespread fears that massive corporate spending on AI chips and data centers could slow down. SpaceX, coming off the largest IPO ever, raising more than $85 billion at a $1.77 trillion debut valuation, has since seen its shares slump to $153 on Thursday from a high near $202 the prior week.

Friday added one more layer of complexity with the semiannual Russell index reconstitution, the twice-yearly reshuffling of one of Wall Street’s most widely tracked benchmarks. With over $6 trillion in assets tied to Russell indexes, the rebalancing forced institutional managers to execute massive portfolio adjustments in the final hours of trading, adding a mechanical layer of volatility to an already turbulent week. The timing amplified the rotation that had been building all week, as money continued flowing out of richly valued technology names and into steadier, more defensive businesses.

The week’s macro backdrop got a meaningful lift from the U.S.-Iran peace agreement signed earlier in June. Oil prices fell sharply as commercial traffic began flowing again through the Strait of Hormuz, and for a moment it looked like the biggest inflation wildcard of the past several months was finally fading. Unfortunately, the optimism didn’t last long. Iranian Foreign Minister Abbas Araghchi complicated things by claiming Iran holds exclusive rights to manage traffic through the strait. This statement alongside a flurry of tweets from President Trump are testing confidence in the fragile peace deal. The situation on the ground remains unsettled, with Iran striking two commercial vessels, a containership and a Qatari oil tanker, in recent days. The back-and-forth between Washington and Tehran has been enough to stall progress on the harder issues that still need resolving. West Texas Intermediate crude oil is trading near $70 per barrel, down almost $25 from this time last month, and over $40 since its 2026 peak. Oil prices still remain elevated above pre-conflict levels, but a sustained fall in prices represents a significant tailwind for the U.S. economy and inflation.

Thursday’s personal consumption expenditures (PCE) report gave investors another reason to stay cautious. The PCE price index, the preferred inflation gauge of the U.S. Federal Reserve (Fed), increased to 4.1%, and core PCE rose to 3.4% year-over-year after rising 0.3% for the month, well above the Fed’s 2% target. While Fed officials watch both headline and core figures, core PCE strips out food and energy prices and is generally considered a cleaner read on where inflation is actually trending. That distinction matters right now, because much of the headline pressure over the past several months has been driven by the energy shock tied to the Iran conflict. Strip that out and inflation is still uncomfortably high.

American consumers have felt the pinch of higher prices at the gas pump and the grocery store, yet they kept spending in May anyway. The way households funded that spending is worth paying attention to: savings rates declined, meaning Americans are increasingly dipping into their financial cushion to maintain their lifestyle rather than earning their way to higher spending. The relief from lower energy prices may be coming, which should provide more firepower to drive spending and rebuild savings.

New Fed Chair Kevin Warsh delivered a pointedly hawkish message at his first Federal Open Market Committee meeting the week prior, making clear that price stability is the committee’s primary concern and that the days of telegraphing rate cuts are over. What started the year as a broad expectation for at least one rate cut in 2026 has completely reversed, with investors now pricing roughly an 80% probability of a 25-basis-point rate hike by year-end, according to CME Group’s FedWatch tool. Job growth picked up in May, the unemployment rate ticked lower, and the labor market continues to defy expectations of a meaningful slowdown. A strong jobs market is good for consumers and the economy, but it also means demand is unlikely to cool on its own anytime soon, giving the committee less reason to cut rates anytime soon.

With the second-quarter 2026 earnings season just around the corner, it is worth stepping back to appreciate what has been driving S&P 500 returns over the past year. The answer, in short, is earnings, and the question now is whether that engine keeps running. The early signs are encouraging. The AI investment boom shows no signs of slowing, and Micron’s record quarter this week was a timely reminder of just how much money is flowing into the infrastructure that powers it. AI-related stocks are expected to contribute nearly 60% of S&P 500 earnings growth this quarter, with Micron and Nvidia alone accounting for more than 40% of that figure.

On the margin front, expectations have been trimmed for Q2 as elevated energy prices pushed input costs higher for many companies. The good news is that the Iran peace deal and the resulting decline in oil prices should help stabilize those pressures as the quarter progresses, but obvious risks remain. Perhaps the most closely watched theme this season, however, will be what the hyperscalers say about their 2027 capital expenditure plans.

As the World Cup heads toward knockout rounds and America gears up for its birthday celebrations, markets face their own knockout stage of sorts heading into the second half of 2026. Markets will closely monitor the upcoming diplomatic negotiations and subsequent flow of tankers through the Strait of Hormuz, as a successful resolution offers the prospect of a permanent peace agreement. The United States will release a batch of labor market data, headlined by the June jobs report, topping off results from the Job Openings and Labor Turnover Survey and ADP employment report. Note: markets will be closed Friday in advance of Independence Day.

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