Weekly Investment Perspective

U.S. equities finished last week under pressure as a sharp reversal in technology stocks outweighed encouraging inflation data and generally supportive early earnings reports. The S&P 500 declined 1.6%, the Nasdaq Composite fell 2.9%, and the Dow Jones Industrial Average lost 0.9%. Treasury yields moved modestly lower as investors reacted to cooler inflation readings and renewed geopolitical uncertainty, while oil prices rose sharply as conflict in the Middle East escalated.

The biggest market story was a continuation of a sell-off in many of the tech stocks that had led the powerful second-quarter rally. Semiconductor, memory-chip, and other AI infrastructure stocks came under renewed pressure as crowded positioning and elevated valuations prompted further profit-taking. The pullback was exacerbated late in the week by headlines around Moonshot AI’s Kimi K3, a lower-cost Chinese open-source model that reportedly performed competitively with leading offerings from Anthropic and OpenAI. That raised concerns that cheaper alternatives could pressure the economics of U.S. frontier-model developers and eventually temper the extraordinary infrastructure spending supporting them.

Those concerns are understandable, but the broader implications are more balanced than the headlines suggest. Cheaper and more accessible AI models could make the technology easier for businesses to adopt, expanding the number of companies using AI and increasing demand across cloud computing, software, memory, networking, and other infrastructure over time. The development may challenge the economics of the most expensive model-building efforts, but it does not necessarily undermine the broader AI investment cycle. Earnings will now provide the next important test, beginning with Alphabet on Wednesday and followed by several other large technology companies next week.

Early quarterly results from the financial sector offered a constructive preview of the broader earnings backdrop. Large banks generally reported healthy consumer activity, lower-than-expected credit losses, strong trading revenue, and solid investment-banking fees. While conditions vary across households and businesses, these reports suggest that consumers remain broadly resilient and that corporate and capital-market activity continues to improve.

Economic data also provided a welcome counterbalance to last week’s market volatility. June inflation came in meaningfully cooler than expected, with headline CPI slowing to 3.5% year-over-year versus expectations for 4.0% and core CPI easing to 2.6% from 2.8%, below the 2.8% consensus forecast. The broad-based improvement reduced concerns that the Federal Reserve would need to resume raising interest rates in the near term, prompting markets to push expectations for the next potential rate hike further into the future. Retail sales also exceeded expectations, reinforcing the message from bank earnings that consumer spending remains on solid footing. While one month does not establish a lasting trend, the combination of moderating inflation and resilient demand was an encouraging development for both consumers and financial markets.

That progress may be tested if the renewed conflict in the Middle East keeps energy prices elevated. U.S. and Iranian military activity intensified late last week and over the weekend, disrupting traffic through the Strait of Hormuz and pushing Brent crude back toward $90 per barrel after trading near $70 at the start of July. Both sides have continued to signal some openness to negotiations, but the rise in oil prices bears watching because a sustained increase would pressure household budgets and could slow the recent improvement in inflation.

The week ahead is relatively quiet for major economic releases, leaving corporate earnings at center stage. Alphabet’s report will be especially important for assessing advertising demand, cloud growth, AI adoption, and the return on its heavy infrastructure spending. Results from Tesla, IBM, ServiceNow, Texas Instruments, Intel, GE Vernova, and several industrial and transportation companies will also provide a broad read on business investment and economic demand.

On a lighter note, sports fans were treated to a memorable World Cup final over the weekend as Spain defeated Argentina to lift the trophy. While the tournament has concluded, the market now enters its own pivotal stretch, with the coming weeks of corporate earnings likely to shape investor sentiment through the remainder of the summer.

2026 The Long View | First Merchants Bank