U.S. equities finished higher last week, supported by a geopolitical reprieve, continued enthusiasm around artificial intelligence infrastructure, and another sharp rally in semiconductors. For the week, the tech-heavy Nasdaq led the way with a 2.4% gain, while the S&P 500 and Dow Jones rose 0.9% and 0.7%, respectively. Small caps also participated, with the Russell 2000 up 1.2%. Semiconductor stocks continued to lead the market advance, rising 7% last week, with memory chipmakers increasingly in focus as constrained supply emerges as a key bottleneck in the AI data center buildout.

The biggest macro development was further progress in U.S.-Iran negotiations. The agreement reached last week is best understood as an interim memorandum of understanding rather than a final peace settlement, but it is still meaningful for markets. The framework reportedly creates a 60-day roadmap toward a final agreement, while establishing communication channels intended to reduce the risk of renewed fighting in Lebanon and keep energy shipments moving through the Strait of Hormuz. That helped drive a sharp drop in oil prices, with WTI crude falling more than 10% for the week, easing concern that energy prices would feed a renewed inflation impulse.

This weekend’s developments also served as a reminder that the process remains fragile. Shipping through the Strait of Hormuz reportedly slowed on Sunday following Israeli attacks on Hezbollah, and markets are still not treating full normalization as a certainty. At the same time, reports that Iran moved a large amount of crude through the Strait following the disruption suggest both sides still have incentives to keep energy flowing while negotiations continue. For investors, the near-term tail risk around energy supply has improved, but the story is not over and will remain important for inflation expectations.

While progress toward fully reopening the Strait of Hormuz remains choppy, gas prices have been easing lower from May’s peak, a welcome development for consumers and businesses, especially as the boost from robust tax refunds begins to fade. At the same time, the broader economy continues to look resilient but uneven. Retail sales were stronger than expected in May, reinforcing that the consumer has not rolled over. Weekly jobless claims ticked higher but remain contained at 229,000, consistent with a labor market that is cooling but not cracking. However, housing remains a soft spot, with May housing starts falling more than 15% to the slowest pace since 2020, while regional manufacturing surveys were mixed. The economy is still expanding, but it is doing so with enough inflation pressure and sector-level weakness to keep the Fed’s job complicated.

That uneven economic backdrop set the stage for Kevin Warsh’s highly anticipated first meeting as Federal Reserve Chair. The Fed held rates steady, as expected, but the meeting marked a clear shift in tone. The policy statement was shortened dramatically and removed much of the usual forward guidance, ending instead with a blunt commitment that the Fed “will deliver price stability.” Warsh also chose not to submit his own economic projections, while downplaying the precision of the dot plot and emphasizing that internal Fed forecasts should not be viewed as promises.

The practical takeaway is that the Warsh Fed appears less interested in carefully guiding markets meeting-by-meeting and more focused on preserving flexibility to respond to inflation. That shift gives the Fed more room to maneuver, but it may also leave investors with less certainty about the path of rates. Markets took the meeting as hawkish as expectations moved from debating no hikes or one hike this year to pricing close to two hikes, with roughly 90% odds of at least one move.

Looking ahead, investors will watch PCE inflation, durable goods, final first-quarter GDP, and consumer sentiment. On the corporate side, earnings from Micron, one of the largest U.S. memory chipmakers, will offer an important read on whether AI-related demand is continuing to outpace supply. This matters because memory chips have become a key constraint in the AI buildout, helping determine both how quickly new data centers can scale and how much that expansion will cost. As we move toward quarter-end, markets remain supported by solid earnings momentum and easing energy stress, but Fed policy and the durability of U.S.-Iran progress will remain key swing factors.

2026 The Long View | First Merchants Bank

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