The Times They Are A-Changin’

What happened to the good times? The broad market has gone nowhere for the past two and a half months. It used to be so easy: Buy the hyperscaler stocks, short the software companies and don’t worry about anything else. Don’t think twice, it’s alright. But the tune has changed. Through the first six months of the year, it was easy to sit back and enjoy the steady stream of gains in tech stocks, just watching the river flow. But over the past month there have been a number of violent undercurrents that have roiled the waters.

On the surface, the market averages have been flat, but deep down there are an unusually large number of markets with unusually high volatility. You know the artificial intelligence (AI), chip, memory and software stocks have been the poster children of volatility, but wild swings in asset classes as diverse as the Korean stock market and the U.S. bond market demand that they too now should be labeled “Handle with Care.”

Here’s a symptom of the changing times: Eight of the S&P 500 stocks ended July with year-to-date (YTD) gains of more than 100%. They ranged from a measly 121% advance for Marvell Technology (MRVL) to a romp of more than 411% for Sandisk Corp. (SNDK). Here’s the change: All eight had net losses last month. Dell Technologies fell just 6% in July, reducing its seven-month gain to 225%. The other seven were all down double-digits for the month, including MRVL down 37% and SNDK down 46.6%. Remember, those are one-month losses.

Another symptom of the disease, if not the pathogen that caused it, is the volatility in the Korean stock market. The MSCI Korea Index (MSKR) had been ripping higher for most of the past year. From June 20, 2025, to June 16, 2026, MSKR gained 258%, including a 117% gain through the first six months of this year. Two companies, Samsung Electronics and SK Hynix, dominate that index. The wild swings in those stocks introduced very high volatility in MSKR specifically, and in chip stocks in the United States. more generally. Sadly, the good times there hit a rough patch in July. From its late-June high to its low last week, that index tumbled 38%. Remember, that is a one-month loss. A U.S.-based index of memory chip stocks, DRAM, includes a heavy weighting of those same two stocks (about 32%) and includes many American manufacturers as well (Seagate Technology, Western Digital, Sandisk, Micron and others). That index lost 44% from its June high to its low last week. But that tune, or at least that verse, ends on a happy note: MSKR rebounded 22% on Friday. Perhaps the wash out and rebound in the Korean market marks a parallel exhaustion in the recent downtrend in memory stocks worldwide.

Volatility in interest rates had been on the upswing even before last week’s Federal Reserve (Fed) meeting. One very unusual aspect this time was that there was no strong consensus on what the Fed might do coming into the meeting. Invariably, in the days leading up to past meetings, the market had a strong opinion on the Fed’s likely action, with an implied probability of the expected action (hike, cut or hold) in the high-90% range. Last week showed the least consensus in years, with about a 35% expectation for a hike and 65% for a hold.

The Fed committee’s decision to hold its target rate steady also revealed a lack of consensus. Three of the 12 voting members voted to hike the rate. The more unsettling event was Chairman Warsh’s press conference that followed the policy announcement. The chairman indicated that a rate increase in the next few months might not be needed due to the increase in bond yields in July. The higher yields have already increased borrowing costs. He specifically said that the increase in yields “has provided us some comfort.” His message to the Fed’s target overnight rate seems to be, “You ain’t goin’ nowhere.” In reaction to the press conference, bonds sold off, which in turn sent stocks lower. SPX tanked 1.65% in the final hour of trading that afternoon.

The yield on 10-year Treasury notes ended last week at 4.74%. It’s getting very near its high from early 2025 and is within about 30 basis points of its high from 19 years ago. The yield on 30-year Treasury bonds is now at its highest level in 19 years, ending last week at 5.27%. Another tailwind for yields is the supply of new corporate bonds that have been issued this year. The current total is about $270 billion, already nearly double the total amount issued in 2025.

Last week, the S&P 500 Index (SPX) gained 1.05% with the Dow Jones Industrial Average (DJIA) just a tick behind, up 1.04%. SPX ended last week at 7490, roughly the same level at which the big April/May rally stalled two and a half months ago (7501). The NASDAQ Composite Index (COMP), which had losses in the previous two weeks, rebounded 1.59% last week, lifting its net five-week return back into the plus column, though with just a 0.30% gain. COMP is now about 5% below its mid-May high and about 6.7% below its all-time high set on June 1. The late-week gains helped to improve the averages’ performance numbers for July. DJIA eked out a 0.3% gain for the month. SPX couldn’t quite get back to even and ended July with a net loss of 0.1%. COMP, which a couple weeks ago had the best YTD gain of the three, lost 3.2% for the month, trimming its YTD gain to 9.17%. It now trails the YTD gains of SPX (+9.41%) and DJIA (+9.20%).

For what it’s worth, the even-weight version of the S&P 500, SPXEW, hit a new high last week. That index is now up a little more than 12% YTD. A year ago, as the mega-cap tech stocks were steaming higher and SPX became more and more concentrated in those names, SPXEW sorely underperformed. That reversed late last year as the big names stalled and SPXEW outperformed SPX for the next four months. The onset of the war in Iran triggered another reversal in that relationship. Mega-caps were back on top and SPXEW again sorely underperformed until that mid-May initial peak in the rally. Since then the even-weight index has easily outgained SPX. In what is likely a function of a week with several mega-cap stocks reacting to their earnings reports, the movements of the two indices were widely divergent. Last week SPX hit its low of the week on Wednesday and rallied through the last two sessions of the week. SPXEW, in contrast, hit its high of the week (and of all time) on Wednesday, then sold off through the final two sessions.

The consumer discretionary sector (XLY) led the U.S. equity sectors, gaining more than 6% for the week. That is more than triple the second-best sector, communication services (XLC). XLY got a big boost from Amazon.com (AMZN), which represents about 25% of the sector weight, and which gained nearly 18% last week. The good week for XLC was largely thanks to gains of about 11% in the two classes of Alphabet stock, but the sector was held back by a loss of about 6.5% in Meta Platforms (META).

AMZN and META were among a deluge of companies that reported their second-quarter earnings last week. On Thursday, following its earnings report, shares of Microsoft Corp. (MSFT) rocketed 15% higher. The result was a $450 billion increase in the market capitalization of MSFT. That is the largest one-day increase ever for a U.S. company. Apple, Inc. announced its second-quarter (Q2) results after the close last Thursday. The report raised concerns that supply chain issues and the demands of the AI datacenter building boom could restrict the company’s ability to efficiently source components for its phones and other products. The following day, the stock fell 7.4%, reducing the company’s market capitalization by nearly $360 billion, its largest one-day decline ever.

So far, it’s been a very strong reporting season. Just over 60% of the S&P 500 companies have already reported Q2 results. Of the reports to date, about 90% beat earnings-per-share (EPS) estimates and about 75% reported quarterly revenue above estimates. Q2 earnings growth for SPX could be as high as 45% over Q2 2025 levels. But that number includes “other income” that several mega-cap companies have realized from their investments in other AI-related companies. Excluding that income reduces year-over-year growth to about 26%. AI infrastructure stocks account for roughly a third of S&P 500 EPS growth in Q2. The strong results this quarter have emboldened analysts to maintain or increase their estimates for 2027. Full-year 2027 EPS estimates for the S&P 500 currently show about 16% growth.

Technically, SPX is in a narrowing sideways trading range, not exactly bullish, but neither is it bearish, at least not yet. After spending much of the week below its 50-day moving average (currently 7472), the index bounced back enough late in the week to just barely get back above that level. What SPX needs to avoid is dropping below its early June low near 7238; doing so would shift the outlook from neutral to bearish. COMP is clearly in a weaker technical condition. Over the past two months, it has traced out a pattern of lower highs and lower lows. The index spent most of July, and all of the past two weeks, below its 50-day moving average. COMP ended last week at 25,374. If the market reverts to more tech weakness, look for a strong band of support for COMP in the 23,500 to 24,000 range.

Here’s a new one: There’s now an additional threat that could further reduce global shipping. A report in this week’s Barron’s predicted that the Panama Canal may soon be forced to greatly reduce the amount of traffic that comes through the canal. “The canal authority has warned clients that the chances of a severe El Nino system had risen to 81% from 25%.” The most recent El Nino of two to three years ago allowed just half the normal traffic level through the canal “and this El Nino could be even more extreme than the last one.”

The economic reports with the greatest potential to roil the markets this week are the employment reports late in the week.

Links to previously published commentaries can be found at benjaminfedwards.com/Library/Market Commentary

5805787 EXP. 08/31/2029