Weekly Investment Perspective

U.S. equities finished the week broadly higher, though the gains masked a volatile ride driven by renewed hostilities in the Middle East. The Nasdaq Composite led with a 1.74% gain, while the S&P 500 advanced 1.23%. The Dow Jones Industrial Average declined 0.50%, and the small-cap Russell 2000 fell 0.61%. Growth stocks once again outpaced value, with information technology leading sector performance while materials and health care were among the weakest performers.

The week also highlighted just how volatile the AI trade has become after powering much of the market’s first-half advance. Semiconductor stocks swung sharply throughout the week as investors rotated in and out of many of the year’s strongest performers before technology ultimately regained its footing. Nvidia and Meta helped lead the rebound, reinforcing that enthusiasm surrounding AI infrastructure spending remains the market’s primary source of leadership despite periodic bouts of profit taking.

Geopolitical risks returned to the forefront after President Trump declared that the June ceasefire agreement with Iran was “over,” following renewed military exchanges centered around the Strait of Hormuz. The U.S. carried out additional strikes targeting Iranian air defense systems, missile facilities, and coastal radar sites, while Iran responded with attacks against U.S. military installations across several Gulf states. Although the latest flare-up has increased uncertainty and pushed oil prices higher, markets have so far remained relatively measured. Investors have now witnessed several rounds of escalation followed by renewed diplomatic engagement, limiting expectations that the conflict will broaden into a more sustained regional conflict. Even so, the Strait of Hormuz remains a critical flashpoint given that roughly one-fifth of global oil supplies transit the waterway. Higher energy prices are also beginning to weigh on demand, with the International Energy Agency now forecasting that global oil demand will decline in 2026, marking the first annual contraction outside of the pandemic and suggesting early signs of demand destruction.

Last week’s Federal Reserve minutes reinforced that policymakers remain divided on the appropriate path for interest rates as they navigate an economy that continues to grow while inflation remains above the Fed’s target. Some participants indicated policy rates could finish the year modestly below current levels if inflation continues to improve, while others argued that persistent price pressures could ultimately require tighter policy. For investors, the broader message changed little as the Fed continues to emphasize a patient, data-dependent approach under new Chair Kevin Warsh rather than signaling an imminent shift in policy. This week’s inflation data will therefore take on added importance as markets continue to debate the direction of monetary policy.

The AI investment cycle also remained a dominant market theme. South Korea’s SK Hynix, one of the world’s largest producers of advanced memory chips used in AI servers, made its U.S. trading debut last week with a strong reception as its Nasdaq-listed shares rose 13% on the first day of trading. The listing raised $26.5 billion, the largest U.S. listing ever by a foreign company, underscoring continued investor enthusiasm for companies tied to AI infrastructure. At the same time, U.S. bond markets are absorbing a surge in debt issuance tied to the AI infrastructure buildout, with large tech companies raising more than $360 billion in AI related issuance over the past twelve months alone. The pace of capital raising, and the market’s ability to absorb it, has become an increasingly important barometer of investor risk appetite as the AI infrastructure buildout enters an even more capital-intensive phase.

Looking ahead, investors will first focus on Tuesday’s June Consumer Price Index (CPI) report, the final major inflation reading before the Federal Reserve’s late-July policy meeting. Consensus expectations call for headline inflation to moderate to 3.8% year-over-year from 4.2% in May, while core inflation is expected to remain at 2.9%. Markets will also closely watch Chair Kevin Warsh’s first semiannual testimony before Congress on Tuesday and Wednesday for any additional insight into how the Fed is balancing resilient economic growth against lingering inflation pressures. Retail sales, industrial production, and consumer sentiment later in the week will provide additional clues on the health of the U.S. economy.

Second-quarter earnings season also begins in earnest this week with reports from JPMorgan Chase, Bank of America, Goldman Sachs, Citigroup, Wells Fargo, and Morgan Stanley, followed later by Johnson & Johnson, Netflix, GE Aerospace, and several other bellwether companies. Analysts currently expect S&P 500 companies to deliver roughly 24% year-over-year earnings growth, which would represent one of the strongest quarters of profit growth in several years. While geopolitical developments and inflation data may drive near term volatility, the combination of solid earnings expectations, resilient economic activity, and continued investment in AI infrastructure remains supportive of the broader market backdrop.

2026 The Long View | First Merchants Bank