Macro
The macro narrative this week shifted from pure Iran-war risk toward a more complicated mix of geopolitical de-escalation hopes, sticky but moderating inflation, higher-for-longer central banks, and renewed frontier-tech exuberance. Trump again claimed that a peace deal with Iran could be signed “in the coming days,” and oil fell sharply after he cancelled planned retaliatory strikes. Front-month WTI dropped to $85.05/bbl, down 5.8% w/w, while Brent fell to $87.81/bbl, down 5.2% w/w, though both remain up 48% and 44% YTD, respectively. The market is treating the headlines as directionally positive, but the unresolved issues remain substantial: Iran’s enriched uranium, reopening Hormuz, blocked Iranian assets, sanctions relief, and Iran’s demand that Israel halt operations against Hezbollah. Until Hormuz fully reopens and trapped Gulf crude returns to global markets, the inflation relief remains conditional rather than durable.
Inflation remains the key macro debate, but the data continue to be more benign than feared. May CPI was broadly in line with expectations, with headline inflation accelerating to 4.2% y/y from 3.8% and rising 0.5% m/m, driven primarily by energy prices. However, core CPI surprised to the downside at 0.2% m/m, down from 0.4% in April, leaving annual core inflation at 2.9%. Importantly, there remains little evidence that higher energy prices are passing through into broader core inflation. Core goods inflation remained subdued, while services inflation reaccelerated only modestly to 3.4% y/y from 3.3%. May PPI was more mixed: core producer inflation cooled modestly and came in below expectations, while headline PPI rose to 6.5% from 5.7%, largely reflecting higher energy prices. Several categories feeding into the Fed’s preferred PCE measure remained firm, but the overall picture suggests inflation is proving sticky rather than accelerating.
A notable pattern is emerging globally. Across the US, Europe, and several emerging markets, inflation remains above central bank targets but consistently comes in below consensus expectations. Similar to last year’s tariff-driven inflation fears, economists have repeatedly revised inflation forecasts higher, only to be met by inflation that is stubborn but less severe than anticipated. This time the inflation impulse is coming from oil rather than tariffs, but inflation expectations have so far remained well anchored, and there is still little evidence of meaningful second-round effects.
Activity data remained mixed rather than recessionary. The US trade deficit narrowed to $55.9bn, existing home sales rose 3.2% in May, helped by modest improvements in affordability, and preliminary June consumer sentiment rebounded from 44.8 to 48.9, recovering from May’s record low and beating expectations. However, labour market signals softened at the margin. Initial jobless claims rose for a third consecutive week and reached their highest level since February 2026, while the New York Fed’s Survey of Consumer Expectations showed lower one-year inflation expectations but deteriorating labour market sentiment. The broader picture remains one of slowing but still resilient growth: households are becoming more cautious, but there is little evidence yet of a sharp deterioration in economic activity.
This leaves the Fed in an increasingly uncomfortable position. Inflation remains too high to justify cuts, but core inflation continues to surprise on the downside and growth remains resilient. Markets continue to price tightening risk into the front end of the curve, but the more likely outcome remains a prolonged period of policy inertia. The Bank of Canada held rates at 2.25%, while the ECB raised rates by 25 bp to 2.40%, with the deposit rate increasing to 2.15%. Next week, the FOMC is expected to leave the funds rate unchanged at 3.75%, despite White House pressure to cut and some economists arguing for hikes. The BoE is also expected to remain on hold at 3.75%, while the BoJ is expected to raise rates to 1.0%, although Governor Ueda’s hospitalisation introduces some uncertainty around timing and communication.
Europe remains the weakest major macro bloc. ECB tightening is coming just as French HICP rose to 2.8%, Spanish inflation increased to 3.6%, and German data remained mixed: industrial production rose 0.4%, but factory orders fell 3.8%. The UK looks more fragile. GDP fell 0.1% m/m in April after +0.3% in March, industrial production fell 0.2%, and political instability increased following the resignation of the Defence Secretary. UK funding costs remain structurally vulnerable, with the 10-year gilt yield around 4.85%, while growing defence spending commitments continue to clash with fiscal realities.
Japan continues to stand out as one of the few major economies demonstrating resilience despite the energy shock. Q1 GDP expanded at an annualised 1.8%, industrial production rose 0.5% m/m and 2.0% y/y, machine tool orders surged 37.4% y/y, and the Eco Watchers Survey improved meaningfully, with both current conditions and outlook measures rebounding from March lows. Inflation pressure remains visible, with PPI rising 6.3% y/y, but growth indicators suggest the economy has slowed rather than stalled. Combined with firm wage growth and rising inflation expectations, the backdrop remains supportive of further Bank of Japan normalisation.
China’s external sector remained the standout performer. Exports surged 19.4% y/y, pushing the trade surplus to $105.4bn, with rare earth exports up 237%, semiconductor exports up 110%, and automobile exports up 39%. Notably, exports to the US increased 35% y/y despite ongoing trade tensions. However, domestic demand remains less convincing. CPI held at 1.2%, below expectations, while vehicle sales fell 2.1% y/y for a second consecutive month, suggesting consumers remain cautious despite the strength in manufacturing and exports.
Markets are increasingly balancing macro caution against speculative technology optimism. The SpaceX IPO raised $75bn, valued the company at $1.8tn, and was reportedly three times oversubscribed, reinforcing investor appetite for frontier technology assets ahead of expected IPOs from OpenAI and Anthropic later this year. The offering further supports the view that AI remains the dominant investment narrative. However, it also strengthens the bubble-risk debate. SpaceX remains loss-making overall, with highly profitable Starlink operations offset by cash-burning rocket and AI divisions. The growing pipeline of mega-IPOs could eventually create a new source of equity supply. Historically, major IPO waves have often coincided with periods of weaker forward market returns and slower valuation expansion, particularly within technology, where new listings dilute the scarcity premium currently enjoyed by incumbent AI winners.
Despite rising geopolitical and inflation risks, earnings remain the dominant support for risk assets. Markets continue to look through geopolitical volatility, provided earnings expectations remain intact. At current oil prices, investors appear willing to treat the Iran conflict primarily as an inflation risk rather than a growth shock. The key macro question remains whether the current de-escalation efforts will produce a genuine reopening of the Hormuz and a normalisation of oil markets, or whether another escalation will renew inflation pressures.
Equities
U.S. equities rebounded following last week’s selloff, with the Dow +0.66%, S&P 500 +0.65%, Nasdaq +0.70%, and Russell 2000 +3.90%. Market breadth improved materially, with the equal-weight S&P 500 outperforming the cap-weighted index by more than 120 bp, suggesting broadening participation beyond the mega-cap technology complex. Small-caps were the standout performer, recording their strongest week since mid-April. Despite the positive index performance, leadership beneath the surface shifted meaningfully, with several of the largest technology names lagging, including Microsoft (-6.2%) and Apple (-5.3%).
Sector performance reflected this rotation. Materials (+3.00%), Consumer Staples (+2.59%), Financials (+2.01%), Real Estate (+1.31%), Industrials (+1.12%), and Consumer Discretionary (+0.73%) outperformed, while Communication Services (-1.90%), Energy (-0.39%), Utilities (+0.36%), Healthcare (+0.52%), and Technology (+0.53%) lagged. At the industry level, strength was concentrated in small-caps, semiconductors (SOX +9.4%), industrial metals, cosmetics, beverages, apparel, casual dining, QSRs, cruise lines, banks, and credit cards. Underperformers included software (IGV -5.3%), entertainment and media, space-related stocks, China technology, payments, medical devices, and life sciences.
A notable theme this week was the continued rotation away from the narrow AI and software leadership that has dominated much of 2026. Mid-week weakness in semiconductors and memory names triggered concerns about crowded positioning and stretched momentum following an exceptional rally. Several strategists highlighted that the breadth of earnings revisions in semiconductors had reached historically extreme levels, with the percentage of companies receiving upward revisions approaching the lowest level seen in the past 25 years. While forward earnings estimates continue to move higher, the pace of upgrades appears to be moderating. The market increasingly interpreted this as a slowdown in earnings revision momentum rather than a deterioration in earnings fundamentals. As a result, leadership broadened into financials, industrials, transportation-related businesses, consumer stocks, and small-caps, while software and parts of the AI complex consolidated.
Another notable development was the continued improvement in market breadth. The equal-weight S&P 500 outperformed the cap-weighted index by more than 120bp, while the Russell 2000 posted its strongest weekly gain since mid-April. This broadening contrasts with much of the first half of 2026, when returns were heavily concentrated in a small number of AI-linked mega-cap names. Recent performance suggests investors are becoming more willing to rotate into cyclicals, financials, industrials, transportation stocks, regional banks, and selected consumer sectors while maintaining exposure to the longer-term AI theme. The shift comes as earnings revision momentum in semiconductors appears to be peaking from historically elevated levels, prompting profit-taking in some of the market’s most crowded positions rather than a reassessment of the underlying earnings outlook.
Despite intermittent volatility, investors remained constructive on the broader equity outlook. Support came from continued AI-related capital expenditure commitments, resilient earnings growth, positive economic surprise momentum, and growing expectations for a potential agreement with Iran. Reports suggested the U.S. and Iran are nearing a memorandum of understanding that could include a 60-day ceasefire extension, reopening of the Strait of Hormuz, commitments regarding Iran’s nuclear program, and a framework for broader negotiations. While similar talks have failed previously, investor confidence increased following corroborating reports from Iranian media. Oil markets remain cautious, with December WTI futures still trading well above pre-conflict levels despite expectations that the Strait of Hormuz could reopen within 30 days. Goldman Sachs now expects Gulf oil exports to normalise by late August.
AI remained a dominant market theme. Reports emerged that OpenAI confidentially filed for an IPO while pursuing additional monetisation initiatives after reportedly reaching 1 billion monthly users in May. Anthropic launched the public version of Mythos and completed a $35 billion financing round. Investor attention was also focused on the highly successful SpaceX IPO, which raised approximately $75 billion and valued the company at roughly $1.77 trillion, reinforcing investor appetite for large-scale technology and AI-related listings. Nvidia announced a multi-year partnership with SK Hynix to develop next-generation AI memory chips, while optimism surrounding Intel (+25.6%) increased as hyperscalers reportedly evaluated the company as a potential alternative supplier within the AI infrastructure ecosystem.
Corporate developments remained heavily concentrated around AI infrastructure spending. Oracle (-13.8%) delivered a strong fiscal Q4 beat and raised guidance, but investors focused on plans to spend approximately $70 billion in capital expenditures in FY27 and to raise an additional $40 billion in capital to support AI infrastructure expansion. Adobe (-18.6%) beat expectations and raised guidance, but disappointed investors with a lower-than-expected organic ARR forecast. Super Micro Computer (-26.8%) announced a $7 billion equity offering to support AI server demand. Apple (-5.3%) underperformed after WWDC announcements, which were broadly viewed as incremental rather than transformative.
Elsewhere, Campbell’s (+5.2%), J.M. Smucker (+12.5%), and Cracker Barrel (+39.2%) delivered some of the strongest post-earnings reactions, while Wix (-12.4%), Chewy (-6.4%), and Lennar (-0.2%) faced pressure from weaker outlooks. Amazon (-3.1%) expanded its U.S. less-than-truckload freight business nationwide, while Perplexity indicated it is targeting a 2028 IPO, further reinforcing the growing pipeline of large-scale AI-related public offerings expected over the coming years.
The broader takeaway from the week was that equity leadership continued to broaden despite ongoing strength in the AI theme. Earnings growth expectations remain supportive, but investors increasingly appear willing to rotate into sectors that have lagged the AI rally. The combination of broadening breadth, strong small-cap performance, continued AI investment spending, and expanding participation across cyclical sectors suggests the bull market is becoming less dependent on a handful of mega-cap technology stocks and more reliant on broader market participation.