Hello, I'm Michael Reinking, Sr. Market Strategist at the New York Stock Exchange, and this is Market Storylines. Every week, well almost every week, we’re here to keep you up to date on the key trends and events driving global markets. Welcome back hopefully you survived the heatwave and were able to enjoy the long holiday weekend! It has been a couple of weeks since we were last with you straddling the end of Q2 and the start of Q3 and we’ve got a lot to cover so let’s dive in.

Since Eric was last on we officially put Q2 and the first half of the year in the books. Let’s just rewind the clock for a second. As Q1 drew to a close the S&P 500 was near YTD lows however, there were some green shoots in the final days of the quarter. Markets started to bounce as it appeared the administration was looking for an offramp in Iran. As a ceasefire came to fruition investors were mispositioned leading to a scramble to put capital back to work. One of the strongest earnings seasons in recent memory, and in the case of technology my career, threw some fuel on the fire. The rally continued pretty much unabated throughout the quarter sending major indices to new all-time highs closing out the quarter with double digit gains.

Initially the rally took everything higher but as the quarter progressed there was quite a bit of ebb and flow beneath the surface in terms of leadership. That being said there was one constant throughout most of the quarter, the leadership of AI capex beneficiaries particularly semi-conductor and memory stocks which pretty much went parabolic until the middle of June. To put that in perspective in Q2 the Ice Semiconductor index was up nearly 100%. Volatility increased on the way up and that along with some growing concerns around token maxing, the use of cheaper open-source models and the durability of capex spending as there was an increasing amount of capital being raised caused some profit taking. And that has led to some very violent rotational activity over the last two weeks as traders have trimmed momentum winners and been looking to re-position portfolios for the second half of the year.

The last couple of weeks have been dominated by AI-related headlines which have added to the volatility, I’ll try to summarize how those have kind of come full circle in a minute. Last Thursday, ahead of the long holiday weekend the June jobs report was released and after a couple of months of very strong numbers this report was pretty disappointing. Nonfarm payrolls increased 57k, below the street estimate of 110k. There were negative revisions to the previous two months leaving the trailing 3-month average at a very healthy ~111k/mo. The more volatile household survey told a different story with 507k jobs lost and a big drop in the labor participation rate which fell to 61.5% from 61.8% helping the unemployment rate drop to 4.2% but obviously for the wrong reason. The mix of job gains were not positive with education/healthcare services accounted for the entire increase. Somewhat surprising was the 61k decline in leisure and hospitality. There was some expectation this segment would be strong given the World Cup impact, which for the record outside of the US exit this week has been very entertaining, row. The fact that the data center buildout is not translating into job gains in the data is also raising some eyebrows. Overall, the report was disappointing, but this could just be some balancing out of data after a couple of surprisingly strong readings. The claims data over the last couple of weeks doesn’t not suggest any real change in current labor market conditions keeping us firmly in this - low hire low fire environment.

There was expected to be a bit of a summer lull this week ahead next week, which is full of catalysts but as the Rolling Stones said you can’t always get what you want. Geopolitics came back into the fray with the US and Iran exchanging fire and President Trump saying the ceasefire was over as far as he was concerned on the sidelines of the NATO summit in Turkey on Wednesday where he also discussed Greenland, potentially pulling troops from Europe and his disappointment with Spain. Russia and Ukraine was also a hot topic as the conflict continues. The Iran news caused some volatility yesterday as traders broke out the typical conflict playbook, but the overall moves were muted as investors continue to discount a significant escalation of kinetic activity ahead of midterms and as President George Bush once said, fool me once, shame on you. Fool me…..You Can’t get fooled again!” ICE Brent which had been consolidating in the lows 70’s for the last couple weeks moved up to ~80 but has pulled back into the mid-70’s today as there are reports that mediators are trying to get both sides back to the negotiating table. Treasury yields barely reacted yesterday and are pulling back today which is helping the broadening trade in equity markets again.

That being said, tech is leading to the upside again. As I mentioned earlier its been a rocky couple of weeks for the tech trade. Last week concerns about overcapacity were back in the forefront after Bloomberg reported that Meta, one of the most aggressive spenders in this investment cycle, was going to follow a similar path as SpaceEx by selling excess compute which sent shockwaves through the complex. There were some follow on press reports over the last two days highlighting model advancement and the continued increase in spending not suggesting the company was pulling back on its AI efforts. This morning the company also announced a partnership with Broadcom to produce its in house AI chip, Iris. Just to confuse things just before I came on CEO Mark Zuckerberg once again acknowledged that exploring a cloud business makes sense. The other big headline today was Micron raising its planned US investment to over $250B through 2035, up from $200B. This combo of news has sent the semis, equipment and memory stocks sharply higher. One thing to be on the lookout for, on Friday SK Hynix is looking to raise over $25B so we’ll have to see how that supply is digested.

There was also an interesting story this morning on the AI disruption side of the trade. Bloomberg reported that Starbucks had been using AI to develop its own in house software systems which could potentially be rolled out by the end of the year. This weighed on the software sector early in today’s session though much of the group has bounced back. It will be interesting to see if there are more examples like this discussed during the upcoming earnings season. For the week major US indices are trading on either side of unchanged while the NYSE 100 index is up ~2%.

Next week is going to be very busy. Inflation data will be very closely watched with CPI released on Tuesday morning just before we start two days of the task force drinking game with Fed Chair Warsh testifying before Congress. Retail sales will be released on Thursday and it is the “official” start of earnings season with financials leading us out of the gates and a smattering of healthcare and industrial companies mixed in throughout the week.

Well that’s going to do it for this week. Remember you can watch Market Storylines on TV.NYSE.com or on the NYSE YouTube Channel or listen on the Inside the ICE House Podcast feed. Thanks for joining me. I’m Michael Reinking. We’ll see ya next week.