Fixed Income & Equities Markets Week in Review

US equities were mixed this week as selling pressure in mega-cap technology and momentum stocks weighed on the S&P 500 Index and Nasdaq Composite. Market breadth improved, however, as investors rotated out technology names and into select cyclicals, defensives, and small caps. Through Thursday’s close, Health Care, Utilities, Real Estate, and Industrials led S&P 500 sector index performance. The Communication Services, Information Technology, and Consumer Discretionary sectors, homes to the Magnificent Seven, lagged, each falling more than 4% through Thursday.

Technology shares were under pressure for most of the week as investors reassessed AI investment returns amid rising component costs and intensifying model competition. Those concerns drove choppy trading and pushed the Nasdaq down more than 4% by Thursday. Taking those concerns in conjunction with WTI crude moving below $70/barrel and the 10-Year U.S. Treasury yield falling below 4.4%, investors seemed to favor broader market exposure over growth and technology stocks.

Geopolitical risk briefly resurfaced Thursday after Iran struck a container ship in the Strait of Hormuz. Despite that flare up, the US and Iran still appeared on track toward a peace deal though nuclear negotiations remain unresolved. Improving traffic flows through the Strait of Hormuz helped to support the continued decline in oil prices. Additionally, Federal Reserve rate expectations shifted modestly, with the CME FedWatch Tool showing a 23.1% probability the fed funds rate remains unchanged through year-end, up from 13.7% a week earlier.

The Magnificent Seven was a notable driver behind S&P 500 and Nasdaq weakness this week. The Roundhill Magnificent Seven ETF (MAGS) was down more than 5% for the week, driven in part by company-specific headlines from the likes of Alphabet, Apple, and Microsoft. Alphabet came under pressure early in the week on concerns over top-level AI talent departures, while Apple and Microsoft announced product price increases tied to higher component costs. Pertaining to the announcements from the latter two, investors have increasingly focused on whether AI supply-chain supply/demand imbalances could pressure margins and weigh on returns for major AI component buyers. Given the market-cap weightings of both the S&P 500 and Nasdaq, weakness amongst the Magnificent Seven weighed heavily on index performance this week. Also weighing on mega-cap sentiment were SpaceX (SPCX), which briefly traded below its post-IPO opening price, and OpenAI, which reportedly may delay its IPO until 2027 amid growing uncertainty over whether the public market would support its targeted $1 trillion valuation.

While selling pressure hit a cohort of technology stocks, it did not translate into broad risk-off market conditions, as investor flows rotated into other areas of the market, with cyclicals, defensives, and small caps faring well on the week. While the market-cap-weighted S&P 500 fell nearly 2% through Thursday’s close, the equal-weighted S&P 500 rose more than 1%, and the Russell 2000 gained nearly 1%. Lower oil prices and bond yields were supportive, while month- and quarter-end rebalancing may have also contributed to this week’s market rotations as institutional investors pursued target allocations.
Although semiconductors managed to rally on Thursday after Micron’s stronger-than-expected results and guidance, the group still lagged the broader market on the week; the iShares Semiconductor ETF was down more than 7% on the week as of Friday morning. As key suppliers to the AI infrastructure buildout, semiconductors were a preferred destination of investor funds over the second quarter. While elevated expectations, AI-driven concerns, and quarter-end rebalancing may have weighed on the group this week, selling pressure did not appear to be fundamentally driven. As AI component sellers, AI supply chain dynamics and the resultant pricing power, could remain a driver for the names if the AI capex cycle remains intact.