Weekly Investment Perspective

U.S. stocks moved higher in last week’s holiday-shortened trading, with the Dow Jones Industrial Average gaining 1.97%, the S&P 500 rising 1.76%, and the Nasdaq Composite advancing 2.12%. The Russell 2000 declined 0.46%, though small caps had participated strongly in the broader second quarter rally. Last week also capped an exceptional quarter for equities. After a challenging first quarter, the S&P 500 gained 14.87% in the second quarter, its best quarterly advance since the rebound from the pandemic lows in 2020, and finished the first half with a year-to-date gain of roughly 10%.

The defining feature of the second quarter was the continued strength of the AI infrastructure trade. The Philadelphia Semiconductor Index rose 87.8% during the quarter, its best quarter since the index was created in 1993, as investors continued to reward companies tied to AI chips, memory, networking, data center construction, cooling, and power. The group did cool late last week, with semiconductors giving back some gains after a historic run, but the broader message from the quarter was clear: AI capital spending remains the primary engine behind equity market leadership. At the same time, geopolitical risk moved into the background as oil prices retreated and shipping activity through the Strait of Hormuz continued to recover, helping bolster investor risk appetite.

Economic data also remained important, with last week’s June payroll report offering a mixed but generally market-friendly update on the labor market. Nonfarm payrolls rose by 57,000 in June, below expectations, while April and May job growth were revised lower by a combined 74,000 jobs. The three-month average payroll gain slowed to 111,000, suggesting job growth has cooled meaningfully from earlier in the year. However, the unemployment rate fell to 4.2% from 4.3%, and wage growth remained steady, with average hourly earnings rising 3.5% from a year ago. In other words, the report did not point to a rapidly weakening labor market, but it also did not suggest the economy is overheating.

That balance matters for the Federal Reserve. The latest jobs data is unlikely to move the Fed meaningfully closer to either rate cuts or rate hikes. Job growth has moderated enough to reduce pressure for further tightening, but the unemployment rate is not rising enough to make labor-market weakness the dominant policy concern. That leaves inflation as the key driver of monetary policy. Treasury yields moved higher over the week, with the 10-year Treasury yield pushing back toward 4.5%, compared with roughly 4.3% at the end of the first quarter and 4.1% to start the year. The path has been volatile, but the broader move reflects a market that is still wrestling with above-target inflation, resilient growth, and less confidence that rate relief is imminent.

The week ahead will bring the minutes from the most recent Federal Reserve meeting, which may provide more detail on how policymakers are weighing inflation risks against a cooling but still stable labor market. Investors will also begin turning more attention to second quarter earnings as reports start to trickle in this week and next. Earnings have been a major source of support for the market, with S&P 500 earnings now tracking toward roughly 25% growth in 2026, compared with initial expectations closer to 15%. After a powerful second quarter rally, the key question is whether profit growth can continue to validate the move higher in stock prices and broaden beyond the companies most directly tied to the AI buildout.

2026 The Long View | First Merchants Bank