As the calendar year approaches its midpoint, the stock market experienced renewed volatility, particularly in the artificial intelligence (AI) and technology sectors last week. This trend added to existing concerns regarding inflation, Federal Reserve interest rate decisions, oil market uncertainties, and heightened valuations.
The reaction from markets reflected this tech-focused sell-off. Notably, the so-called “Magnificent 7,” which comprises Microsoft, Apple, NVIDIA, Tesla, Alphabet, Meta Platforms, and Amazon, underperformed during this downturn. The overall average stock price rose just 1.6%, indicating that the sell-off primarily affected tech and AI-related firms. Despite the pullback, the iShares Future AI and Tech ETF remains significantly increased, showing a year-to-date gain of over 50%, even after a 10.4% drop from its peak.
The semiconductor industry also faced scrutiny, despite Micron Technology reporting robust earnings and an improved outlook. Micron’s shares fell only marginally, maintaining a staggering 296% year-to-date increase. In contrast, the software sector—which had been declining due to concerns over the impact of AI—fared better during last week’s downturn.
Other assets that are traditionally viewed as non-correlated to stocks struggled as well. In an unexpected turn, gold, silver, and Bitcoin saw declines greater than the stock market, falling 3.4%, 10.5%, and 5% respectively. Year-to-date, all three have faced challenges, with gold down 5.6%, silver tumbling 17.3%, and Bitcoin plummeting approximately 31.8%.
Looking ahead to the second half of the year, analysts have flagged several factors to consider. On the positive side, expected robust earnings growth alongside a resilient U.S. economy may provide momentum for the stock market. The technology sector anticipates year-over-year earnings growth of approximately 63.2% for the second quarter, with a full-year estimate of 47.5%. While stock prices may not immediately reflect these earnings, they are generally regarded as the driving force for long-term price increases.
The U.S. economy itself has demonstrated unexpected resilience in light of rising oil prices linked to ongoing geopolitical tensions, particularly with Iran. Predictions indicate a GDP growth of about 2.5% for the second quarter, aided by declining oil prices that have lessened the economic headwind created by energy costs. Furthermore, the odds of a U.S. recession have dropped significantly to 10%, suggesting an improving outlook for economic growth.
However, challenges still loom in the form of elevated inflation levels and the potential for Federal Reserve interest rate hikes. While energy prices have fallen, the residual effects have left consumer inflation at approximately 4%, which has prompted speculation about the Fed’s focus on combating inflation rather than fostering growth.
Several key unknowns also remain, particularly regarding the status of the U.S.-Iran conflict and the trajectory of AI adoption. Although oil prices have dipped below $70 per barrel from previous highs, speculations surrounding a potential nuclear deal with Iran fluctuate. Predictions show mixed odds regarding a new agreement, which could either ease tensions or prolong uncertainty.
Additionally, the AI spending cycle’s continuation is crucial for future growth, as significant investments are needed to build the appropriate infrastructure. With stock valuations standing at 21.4 times estimated 2026 earnings and 18.5 times 2027 estimates, there are concerns that higher valuations could impede further gains. Nevertheless, if earnings growth continues to stay above average, it may justify existing valuations, particularly in tech and AI sectors.
In the coming week, the holiday-shortened trading period will include key economic releases, the most prominent being June’s job data. With nonfarm payrolls projected to grow by 118,000 and the unemployment rate expected to hold steady at 4.3%, market participants will be watching closely. Although no major technology companies will report earnings this week, Nike and Constellation Brands are scheduled for after-market announcements, leading up to an eagerly anticipated earnings season that will focus heavily on technology and AI firms for insights on future growth prospects.
