US stocks head into the final week of July facing a cluster of tests: earnings from the largest megacaps, a Federal Reserve rate decision, and renewed Middle East conflict. The major averages are on track to close the month with losses, and the two months that follow are historically the weakest for the S&P 500.
The market enters next week already on edge. Amazon, Meta and Microsoft report Wednesday and Thursday, after disappointing commentary from Alphabet sank its stock this week and hurt the broader market. Apple and Qualcomm also post results. Investors are watching to see how long the current dynamic — big AI spenders punished while semiconductor makers are rewarded — can last.
AI spending unsettles investors
Alphabet delivered solid results on the surface, but its spending plans and negative free cash flow spooked investors. Week to date, the Roundhill Magnificent Seven ETF fell more than 5%, while semiconductor ETFs rose. Ken Mahoney of Mahoney Asset Management said investors fear the companies are spending all their cash flow on AI and data centers, leaving nothing for shareholders through buybacks or dividends.
The anxiety has spread to the bond market. Yields climbed after Alphabet lifted its capex forecast, raising concerns that other hyperscalers could follow. Google, Amazon and Meta are seeing credit spreads widen as fixed-income investors demand more reward to lend to them. Meta is looking to finance its $12 billion Texas data center, with pricing expected to be finalized early next week, according to a source familiar with the talks.
The Fed adds to the tension
On Wednesday, the Federal Reserve announces its rate decision. The consensus view is that the central bank will hike, but not until September; even so, fed funds futures price a 35% chance of a quarter-point increase as soon as next week, according to the CME FedWatch tool. A move next week would be a rate hike the market has not fully priced.
Oil is meanwhile back above $100 a barrel as hostilities resume in the Middle East, and the bond market is signaling that inflation expectations are rising on both the long and short ends.
Earnings strength versus the calendar
Not everyone is bearish. S&P 500 companies are expected to post year-over-year earnings growth of 38% in Q2, according to FactSet — far above original expectations. Citigroup’s Dirk Willer flagged risks ranging from a more hawkish Fed to further Middle East escalation, but remains bullish on stocks, writing that “The market continues to climb a wall of worry”.
The calendar is less forgiving. August and September are historically the two weakest months for the S&P 500, falling 0.4% and 0.8% respectively in midterm election years, according to the Stock Trader’s Almanac.
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