Weekly Investment Perspective

U.S. equities pulled back last week as a sharp late-week selloff in technology and semiconductor stocks overshadowed a broadly constructive stretch of economic data. For the week, the tech-heavy Nasdaq tumbled 4.7% while the S&P 500 fell 2.6% and the Dow Jones Industrial Average slipped just 0.3%. The headline index declines masked a more balanced picture underneath the surface as the equal-weight S&P 500 was down just 0.5%, with defensive sectors, financials, healthcare, energy, and industrials outperforming while investors rotated away from the red-hot AI and semiconductor winners that led the market higher over the prior several weeks.

The technology pullback was sharp, but it looked more like a breather after an extraordinary run than a fundamental break in the AI investment theme. Broadcom was one of the catalysts after its earnings report and guidance fell short of an exceptionally elevated bar. The company’s long-term AI opportunity remains significant, but the stock had already been pricing in a lot of good news, leaving little margin for anything short of a flawless update. The selloff also came amid headlines around Anthropic discussing the potential merits of slowing AI development and rising attention on the amount of equity supply needed to fund the AI buildout. With the semiconductor index recently trading far above its long-term trend line and the S&P 500 having rallied sharply over the prior two months, the market was vulnerable to a positioning reset.

Importantly, last week’s economic data was much more constructive than the market reaction would suggest. May nonfarm payrolls increased by 172k, well above expectations of 100k, and the prior two months were revised higher. Over the past three months, job growth has averaged 188k, the strongest pace in more than two years and a meaningful acceleration from the subdued trend seen over the past year. The gains also broadened across industries, including an improvement in manufacturing hiring, while construction payrolls continued to benefit from nonresidential activity tied in part to the data center building boom. Stronger-than-expected ISM manufacturing and services reports added to the sense that the economy remains resilient despite geopolitical uncertainty and weak household sentiment.

Still, the labor market is not as uniformly strong as the payroll headline suggests. The unemployment rate remained low at 4.3%, but nearly 2 million workers have now been unemployed for six months or longer, representing 25.7% of the unemployed population and the highest share since the pandemic. Wage growth is also cooling. Average hourly earnings increased 3.4% from a year ago in May, down from 4.0% a year earlier. Over the past three months, wages have grown at just a 2.8% annualized pace, falling further behind inflation, with May CPI expected to come in at 4.2% year-over-year in this week’s release. The contraction in real wages suggests workers have limited bargaining power despite the low unemployment rate. That is an important nuance for both the economic outlook and the Federal Reserve.

Interest rates moved higher last week as the stronger jobs report reinforced the market’s shift away from the rate-cut optimism that defined the start of the year. Markets now fully price in one Fed rate hike by year-end, rather than the multiple cuts that were expected coming into 2026. The energy shock from the prolonged U.S.-Iran conflict has kept inflation pressure elevated and complicated the Fed’s job, while the inflection higher in labor market data gives policymakers little urgency to ease. However, the wage data argue against the idea that labor costs are becoming a new source of inflation pressure. The Fed will likely remain patient as it weighs resilient job creation and energy-driven inflation against the more bifurcated reality underneath the labor market surface.

Looking ahead, inflation data will be in focus this week alongside the constant flow of headlines on the Middle East conflict that saw a flare up in strikes between Iran and Israel over the weekend. Markets still appear to lean toward a negotiated settlement rather than a broader escalation, but the longer the conflict drags on, the greater the risk that energy-driven inflation keeps the Fed on hold or forces a more hawkish response.

This week will also feature one of the most highly anticipated IPOs in market history, with SpaceX expected to go public Friday in an offering of roughly $75 billion, targeting a valuation north of $1.75 trillion. Reports suggest investor demand of approximately $150 billion, implying the deal is about two times oversubscribed. That demand is impressive given the size of the offering and reflects enthusiasm for dominant private-market growth companies coming public. At the same time, the extraordinary valuation warrants caution relative to current fundamentals. The offering’s reception and early trading performance will be an important test of risk appetite, as well as the market’s ability to digest a coming wave of equity issuance tied to the AI investment boom.

2026 The Long View | First Merchants Bank