Weekly Investment Perspective

Markets ended the week with two familiar themes back in focus: the durability of the AI investment boom and the path of interest rates. Geopolitics took more of a backseat as oil prices fell back toward levels seen before the Iran War, which should be a constructive development for consumers and inflation. For the week, the Dow Jones Industrial Average and Russell 2000 posted gains of 0.6% and 1.0%, respectively, while the S&P 500 declined -2.0% and the Nasdaq Composite fell -4.6% as large technology stocks and AI-linked companies came under pressure. The pullback appeared to be driven more by positioning, profit-taking, and concerns about how much of the market rally has been concentrated in a narrow group of stocks rather than due to a change in underlying fundamentals. Encouragingly, equity market performance broadened out last week, with healthcare, utilities, consumer staples, financials, machinery, railways, and trucking holding up well.

One of the most notable developments has been the sharp drop in oil prices following easing geopolitical tensions. WTI crude fell nearly 9% last week, bringing prices back near pre-Iran War levels at around $70 per barrel. If the peace proves durable, lower energy prices should be a constructive factor for both consumers and inflation expectations. Gas prices are still elevated but trending downward, effectively putting more money back into consumers’ pockets and helping relieve some of the pressure that built when energy prices spiked during the conflict.

That shift in energy prices tied directly into last week’s inflation and interest-rate backdrop. The Fed’s preferred inflation measure, core PCE, rose 0.3% in May and 3.4% year-over-year, largely in line with expectations. Headline PCE was firmer at 0.4% month-over-month and just over 4% year-over-year, but the latest decline in oil and gasoline prices suggests the energy contribution may be peaking. Interest rates moved lower during the week, with the 10-year Treasury yield dipping below 4.40% at one point, as bond investors took some comfort from stable inflation reading, falling oil prices, and signs that economic growth remains steady but not overheating.

The economic data released last week reinforced a “steady but slowing” narrative, though the consumer remains an important area to watch. Consumer spending remains resilient, rising 0.7% in May, and personal income also rose 0.7%, both better than expected. Still, underlying trends show some moderation. Savings rates are low and real income growth has been uneven, suggesting households are becoming more dependent on wage stability and falling inflation to sustain spending. Overall, the economy appears to be transitioning from strong growth to a more sustainable pace.

Business investment remains strong, particularly in technology and AI infrastructure, supporting economic growth despite higher interest rates. Renewed enthusiasm around AI spending was back in focus after very strong results and guidance from Micron, one of the world’s largest memory chip makers. Micron’s results reinforced confidence that demand for memory chips used in AI data centers remains strong, while the company also pointed to tight supply conditions that could persist beyond 2027. At the same time, Apple’s significant Mac and iPad price increases underscored how rising memory and storage costs are becoming a pain point beyond the data center. This is an important reminder that even as falling energy prices ease one source of inflation pressure, shortages tied to the AI infrastructure boom may create a separate source of upside goods inflation near-term.

The holiday-shortened week ahead will be highlighted by the June employment report, which is expected to show slower but still positive job growth of roughly 100,000, with unemployment holding near 4.3%. Investors will also watch the ISM manufacturing index, job openings, and consumer confidence for further signs of economic momentum. Together, these reports will help shape expectations for Federal Reserve policy as officials weigh falling energy prices, still-elevated inflation, resilient consumption, and strong AI-driven capital investment. That balancing act will be a significant area of focus in the second half of the year alongside AI, especially as markets digest the transition to new Fed leadership and what it may mean for the path of interest rates.

As we head into the holiday weekend, we wish you and your family a safe and happy Fourth of July!

2026 The Long View | First Merchants Bank