It is truly the dog days of summer right now. We are now head long into earnings season and aside for a seriously bifurcated market, everything is pretty much the same. War in Iran, still going. War in Ukraine, still going. Conflict with Isreal, still going- with Turkey now really heating up. But at the end of the day, all of these conflicts, although not comfortable from a humanitarian standpoint, are good for economics of things. I have gone into the action of US equity markets following global conflicts and markets have mostly responded positively coming out the back end of the conflict. The price of indexes and your portfolio depends on where you look. Major indices sit within reach of all-time highs and breadth keeps passing the test, yet the AI trade has corrected fast, with memory stocks down ~40% and the record-crowded long-semis boat effectively encountered quite a storm. Whether the glass looks half full or half empty right now says as much about your psychology as it does about the market.
Earnings season is the referee, and the US record at this point looks much like Spain’s shot on goal vs. that of Argentina. Yet breaks of support levels are the potential red cards for the majority of past winners. Results are strong so far (88% earnings beats, ~25% blended growth), but big tech's guidance on AI spending is the main event. Last week gave us a great sigh of relief with very disinflationary readings from both the CPI and the PPI vs. what the street was expecting. This speaks to the need for the Fed to remain sitting on their hands vs. considering a rate hike. We’re back to reading tea leaves! Hooray! Next week the Federal Reserve will have its second meeting since Kevin Warsh officially took the helm. And, at this point, the outcome is far from certain, which is unusual given that ever since Ben Bernanke instituted “forward guidance” the market usually knew what to expect. Warsh does not think “forward guidance” is a good idea, therefore the market needs to read the tea leaves like in the old days. Second, Powell won’t leave and appears to be quietly leading an opposition force. And third, the inflation data are murky at best, with a few months of what appears to be a war-induced bump in inflation, and last month, the reverse.
A rate “cut” would be a huge surprise, and even though the futures market is pricing in about a 10-20% chance of a “hike,” we think this is highly unlikely. So why do markets think a hike is possible?
I think we are back to the earnings picture. I highlighted above the current record of earnings that have been seen so far, and just like the past 6 quarters, the economy is hitting on all cylinders. So smoothly in fact, that as I showed last week, the US equity market although higher in price since the beginning of the year is actually cheaper!!!
As has been the case for much of the past few months, ask two investors for an opinion on the stock market right now and you may very well get two completely different responses. The optimist sees major indices sitting within shouting distance of all-time highs after a healthy consolidation, breadth that refuses to break down, and fresh leadership emerging from long-dormant corners of the market. The pessimist sees the most important theme of the entire bull market (AI) imploding, and carnage in various higher-beta groups that would qualify as a bear market if it were happening at the index level. Both descriptions are perfectly accurate. This is a glass half full versus glass half empty market, and which half you focus on likely says as much about your positioning as it does about the tape. The perceived beauty of the market is completely in the eye of the stockholder. The true problem is that it has just been so very long since there has been a significant correction in Technology Land that it makes investors question the length of the runway for AI. It is almost as though the party is ready to end right at its very start!
Ready to adjudicate this debate is earnings season, which is now getting underway in earnest. This week we get the chip maker, Intel and the biggest cloud compute company, Google. It could hardly come at a more important time. Expectations are elevated after one of the strongest quarters in years, and a market this dispersed will not grade on a curve – we have already seen how violently single stocks can move in both directions when results hit or miss. The banks and a few high-profile names have started to give us a read on the economy, and that read is, so far, very strong: 88% of S&P 500 companies have beaten earnings estimates with 10% of the index having reported.
Of course, the main event will be guidance from the big technology companies over the coming weeks. The quarterly numbers themselves almost don't matter; what matters is what management teams say about AI spending plans. Confirmation that budgets remain intact would go a long way toward stabilizing the semis and would likely send the S&P to new highs. Confirmation of the slowdown the market has begun to sniff out would test just how well the rest of the market can carry the load. Either way, earnings season should finally inject some clarity – and possibly some volatility – into what has been a choppy, rotational summer tape.
The S&P 500 has stalled in recent days despite having a clear and open opportunity to break to new highs. That is one of the things that has started to worry me some (in the short run). It is beginning to feel reminiscent of what happened back earlier this year and at the start of last year when the index just stopped going up and that eventually culminated in a deeper pullback. For now, the index is coiling up tightly, with resistance holding just above. If 7500 falls, we could begin to see some of those lower support levels tested quickly. The toughest part about this picture is that the high point is way back to May 14th, just before the false ultimate high at the beginning of June. This means that we have been in a very frustrating tug-o-war for two months now. This wears on the nerves of almost anyone given all the other turmoil going on throughout the world. Here is the updated picture of where we are with a red high point and green bars representing various levels of support:
The memory of the March bottom seems almost eons ago given how much information has been thrown at us since then. It should stand to reason then after such an aggressive advance that this sideways action in the broad indexes is even more discomforting. An even clearer picture is that of the NASDAQ 100. This chart takes us all the way back to this time last year. People almost completely forgot the rollover from late October to the late March 2026 low, namely because the move up from March to June was just so dramatic:
Iran and Drill Baby Drill
American oil companies have now taken major interests in Iraq oil which has huge reserves and ways to ship that do not need the straits. The new relationship between the US and Iraq with the new Iraqi government makes a total difference in added access to their oil. The relationship with the new government in Syria allows new pipelines to avoid the straits. In summary, Iran has pushed the world to totally reconfigure oil production and shipments, and Trump’s drill baby drill combined with his policies and actions to remake the Mideast, has completely changed the oil markets, and the changes will become even greater as the pipelines and Iraq come online and as the US becomes a more permanent supplier and as Venezuela comes back online. However, in the short run it is very possible WTI goes to near $100 as the war will now ramp way up. This will be a key week in the war and for oil. Everything is different now that the climate crazies have been shut down, and fossil fuels are once again being recognized as the main source of reliable energy. The Europeans, and especially the UK, still have not gotten the memo, and so their energy prices remain much too high, and that will continue to restrain their economic growth. Oil is in a whole new place, and all the old sources, rules and methods of transport are being changed by the war and the end of Biden’s attempt to shut down fossil fuels.
Where oh where have the data centers gone
The current sell-off in tech is not unexpected nor unusual. Memory stocks have had a meteoric rise, and so some large sell-down was inevitable. That does not change the long-term fundamental growth of the company, nor the long-term potential rise in the stocks. A Chinese tech company announced a new AI model that competes with some US models, and suddenly analysts concluded it will have a major impact on Anthropic, and so on data centers, and so on suppliers to data centers. That is a leap off a bridge without a rope which is not unusual for Wall St. Act first, get facts and understanding later. It is like what happened when a Chinese company, Deep Seek, announced it had built an AI model for a fraction of the cost of US models, and they used a bunch of laptops wired together. It was BS, but Wall St jumped suddenly and claimed data centers were now obsolete, before they even tried to understand what was the reality. I listened to traders make all sorts of uninformed claims at the time, and they really had no idea what they were talking about. They just made a bunch of stupid assumptions, and then the whole data centers bubble talk began. This conversation has reemerged again due to the pullback in memory and related companies.
We just need to wait out the selloff, as we have so many times before. A perfect case in point is the world’s favorite fruit stock, Apple. How did they quietly go to new all-time highs last week and yet they have been public about a lack of AI spending. Stocks that had such huge rises always have some sell off as funds and institutions need to recognize profits and retail holders just decide to get some cash off the table. It is the long-term fundamentals that matter if you are a long-term investor who does not need the money and you don’t need to report results. Warren Buffet never really traded, he invested in long term fundamentals. If you stick with fundamental analysis and good companies with very good products and good managements, and do not get rattled by periodic Wall Street rumors, false assumptions and volatility, you will make very good long-term returns.
The demand for compute is massive and growing, and the US is building the data center capacity to try to meet that demand. Just because China now has a competitive model, is not the same as China now will suddenly, or anytime foreseeable, have the data center capacity to meet the compute demand, nor will any corporation or intelligent individual use a Chinese data center and expose itself to being hacked. Everyone is not going to suddenly stop using the US models and data centers. Construction of US and other international data centers is accelerating, not suddenly stopping because China now has this new model. I have to shake my head at the cover of Barron’s from Saturday, July 11th that showed a photograph of a man with a NO Datacenters shirt on the cover. Of course, nobody wants either a datacenter or a utility plant in their back yard, but the fact is that progress is progress, and data centers are a reflection of very current progress. This is only to be further outdone by Hochel of New York signing into law a complete moratorium on data centers being built in the great state of New York. I wonder how that is going to work out for the future financial well-being of the state? Data center capacity demand is far from met and will not be for several more years, so the suppliers of things like fiber, memory chips, and other components is going to continue to increase no matter what this new Chinese model can do. In addition, the US model makers are not standing still and letting China get ahead. The overreaction is ridiculous and is a repeat of the overreaction to Deep Seek. Classic Wall St nonsense. This could be another buying opportunity.
In the end, I keep coming back to earnings earnings earnings. If 88% of companies so far are beating expectations and guiding higher, and if the prices of companies are actually getting cheaper as they are earning money faster than their prices per share are reflecting, then I can only hope that prices will go through periods of digestion but eventually be rewarded by great companies doing really great things.
-Ken South, Tower 68 Financial Advisors, Newport Beach
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Investing involves risks including possible loss of principal.
The Standard & Poor's 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The S&P 500 is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States. Indexes are unmanaged and cannot be invested in directly.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
The Nasdaq-100 is a large-cap growth index. It includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. Indexes are unmanaged and cannot be invested in directly.
The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
Data sourced from Bloomberg (2025).
Stock investing includes risks, including fluctuating prices and loss of principal.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Bonds are subject to availability, change in price, call features and credit risk.
Government bonds are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
Bond yields are subject to change. Certain call or special redemption features may exist which could impact yield.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
The financial professionals with Tower 68 Financial Advisors are registered with, and securities and advisory services are offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.
LPL Tracking #1143851