Equities
US equities advanced as mega-cap growth regained leadership, reversing part of the previous week’s rotation into cyclicals and defensive sectors. The Nasdaq gained 1.59%, followed by the S&P 500 at 1.05% and the Dow at 1.04%, while the Russell 2000 rose only 0.05%. The equal-weight S&P 500 increased 0.63%, trailing the cap-weighted index by 42 bps and confirming that the advance remained concentrated in the largest companies rather than representing a broad market rally.
Consumer Discretionary surged 8.30%, and Communication Services gained 5.37%, driven by strong reactions to selected mega-cap earnings. Consumer Staples rose 1.15%, and Financials added 1.05%. Health Care, Information Technology and Energy were broadly unchanged, while Industrials fell 1.59%, Materials declined 1.72%, and Utilities dropped 4.24%. The combination of mega-cap outperformance, limited small-cap participation and pronounced weakness in Utilities was consistent with a rotation away from defensive exposure, but not yet a comprehensive broadening of risk appetite.
Performance dispersion at the stock level was equally pronounced. Garmin (+21.2%), Microsoft (+19.4%), Cognizant (+17.6%) and Amazon (+17.4%) led the S&P 500 following strong earnings, while Regeneron (+14.3%), DexCom (+13.7%) and Huntington Ingalls (+13.3%) also posted double-digit gains. At the other end of the spectrum, Lennox International (-24.0%), Vertiv (-16.0%), C.H. Robinson (-15.3%), NXP Semiconductors (-14.4%), GoDaddy (-14.2%) and Qualcomm (-13.2%) were among the week’s weakest performers, highlighting the increasingly company-specific nature of post-earnings price reactions.
The defining theme of the week remained increasing dispersion within the AI trade. Investors rewarded companies demonstrating tangible monetisation of AI investment while becoming considerably less tolerant of businesses where capital expenditure continues to outpace visible earnings or cash-flow generation.
Amazon was the clearest beneficiary. Shares recorded their strongest weekly advance since 2012 after AWS revenue increased 37% YoY to $42.2bn, extending accelerating cloud growth into a fifth consecutive quarter and directly addressing investor concerns about AI returns on investment. Microsoft similarly emerged as one of the week’s strongest performers, with the two companies accounting for much of the S&P 500’s recovery into Friday’s close.
By contrast, Apple suffered its largest one-day decline in 16 months after guiding fiscal fourth-quarter revenue growth of 9-11%, below expectations of more than 12%, citing shortages of memory chips and processors. Roblox fell 27% in its largest one-day decline on record, demonstrating how aggressively investors punished companies failing to meet elevated expectations.
Semiconductors remained volatile throughout the week. SK Hynix reported a 557% increase in quarterly profit but still missed exceptionally high market expectations while announcing record annual capital expenditure of at least $31bn, reinforcing concerns that AI infrastructure investment may be approaching diminishing marginal returns. Kioxia’s weaker-than-expected outlook added further evidence that memory pricing momentum may be moderating. Earlier weakness across the semiconductor complex was compounded by reports of continued progress in Chinese advanced-chip manufacturing, increasing concerns over future competitive dynamics and the sustainability of current AI infrastructure spending.
Outside technology, earnings remained broadly constructive. Ford raised full-year adjusted EBIT guidance to as much as $11bn from a previous range of $8.5-10.5bn after reporting adjusted EPS of $0.42 versus $0.36 expected. Visa delivered adjusted EPS of $3.32 compared with consensus estimates of $3.23 while announcing approximately 2,600 job reductions and a $563m restructuring charge. Coca-Cola raised both its organic revenue growth target to 5% and full-year EPS growth guidance. In energy, ExxonMobil and Chevron more than doubled quarterly net income as higher oil prices supported profitability, although both prioritised debt reduction over materially larger buybacks, signalling management caution regarding the durability of conflict-driven oil prices.
Q2 earnings season continued to exceed expectations. With 386 of 503 S&P 500 companies (76.7%) having reported, 65.5% exceeded EPS estimates and 79.0% beat revenue expectations. Average EPS surprises reached 14.9%, while average revenue surprises were 2.5%. Earnings quality remained strongest across Hardware & Semiconductors (14-0 EPS beats), Financial Services (20-0), Health Care (29-1) and Industrial Services (17-1). However, forward revisions remain balanced, with 159 EPS upgrades versus 161 downgrades over the past month, indicating that positive earnings surprises have yet to translate into a broad-based earnings upgrade cycle.
Investor positioning reinforced the return to mega-cap leadership. Nasdaq-100 ETF (QQQ) attracted approximately $2.0bn of inflows during the week, while SPY recorded $1.2bn of outflows and the Russell 2000 ETF (IWM) lost $363m, indicating investors continued rotating towards large-cap technology rather than increasing overall equity exposure. Growth outperformed Value by 250 bps, while Large Caps outperformed Small Caps by 165 bps. Interestingly, both Momentum (-0.91%) and High Beta (-0.99%) underperformed despite the broader market advancing, illustrating the violent intra-week unwinding of crowded positions before earnings-driven buying re-emerged into Friday’s close. Goldman Sachs also estimated CTAs were positioned to sell approximately $7.5bn of global equities during the week, including roughly $4.4bn of S&P 500 futures, providing an additional source of mechanical selling pressure during the mid-week drawdown.
Performance across AI-related investment baskets further highlighted the market’s growing selectivity. Enterprise software materially outperformed as investors increasingly favoured companies demonstrating immediate AI monetisation through productivity and workflow software. Hyperscalers were led by Microsoft and Amazon following exceptional cloud results, while AI compute infrastructure lagged as semiconductor companies remained under pressure from mixed earnings, elevated capital spending and intensifying competitive concerns. Physical infrastructure also diverged sharply, with power equipment outperforming while data-centre infrastructure and cooling names, including Vertiv, came under significant pressure.
Corporate activity remained supportive despite elevated market valuations. ICE announced the $6bn acquisition of MarketAxess at a 33% premium, while Alimentation Couche-Tard agreed to acquire Poland’s Żabka Group for approximately $8.7bn. Reports also emerged that KKR was considering a take-private transaction for Integer Holdings, while NXP Semiconductors explored a potential acquisition of Ambarella to strengthen its edge AI capabilities. Capital returns remained healthy, with several financial institutions announcing dividend increases and additional share repurchase authorisations.
Market volatility eased significantly by week-end. The VIX declined from 18.58 to 15.99 (-14%), while the VVIX fell below 91 to its lowest level since early July. Dealer positioning amplified market moves throughout the week, with short-gamma dynamics intensifying the mid-week selloff before reversing into a supportive tailwind during Friday’s recovery as market positioning stabilised. IPO markets remained more subdued, with several new listings delivering disappointing aftermarket performance despite solid investor demand during bookbuilding, highlighting that primary market sentiment continues to lag the recovery in large-cap equities.
Internationally, European equities outperformed expectations, with the Euro Stoxx 50 (+1.21%), CAC 40 (+1.23%), DAX (+1.06%) and FTSE 100 (+0.80%) all advancing as the region remained relatively insulated from AI infrastructure volatility. Asia experienced considerably greater dispersion. Hong Kong outperformed, while South Korea and mainland China came under pressure as the semiconductor selloff accelerated following reports of continued progress in Chinese advanced-chip manufacturing. The resulting weakness in Asian semiconductor shares set the negative tone for US trading early in the week before stronger US earnings reversed sentiment into Friday’s close.
The principal message from this earnings season is that markets have become significantly more discriminating. Strong headline earnings alone are no longer sufficient to drive sustained outperformance. Investors increasingly require evidence that AI-related capital expenditure is translating into revenue growth, operating leverage and cash-flow generation. Companies demonstrating rapid monetisation, most notably Amazon and Microsoft, continue to command premium valuations, while those relying primarily on future AI optionality or accelerating capital expenditure face a materially higher hurdle. Although aggregate earnings remain robust and corporate activity remains supportive, leadership has become more concentrated, suggesting the market continues to reward execution, monetisation and capital discipline rather than AI exposure alone.