There were plenty of fireworks leading up to the 250th birthday celebration of the US. Not all of them were in the sky around the Capitol, but on Wall Street during the shortened trading week. For the first time since the beginning of the war with Iran, the technology sector fell for two consecutive weeks. Led by semiconductors falling by 12%+ during those two weeks, investors are beginning to wonder if the AI trade is just taking a breather or breathing its last. There was a dud in the arsenal as well, in the form of the jobs data. Pointing to a less-than-expected gain in new jobs and a decline in the unemployment rate due to people leaving the workforce, it was what was behind the numbers that stood out. The usual hiring in healthcare continued to be strong, and overall wage gains were in line with inflation, but it was the hiring in bars, restaurants and hospitality that set economists off. There is this FIFA thing going on around the US, Canada, and Mexico that should be bolstering overall hiring in that sector rather than the stated contraction. Look for an adjustment when the numbers get released in August. Finally, the firecrackers that have exploded in the President’s fingers, from tariffs to the Iran war, have done little to quell the oohh’s and aahh’s of investors as the markets again reach new all-time highs.
The job data was indeed a mixed bag, still showing job gains, but not at the pace of the last few months. Indeed, even those were revised lower with this release. The headline unemployment rate declined a smidge to 4.2%, but that was due to people leaving the workforce. All that said, more jobs were created during the past six months than during the same period in 2025. The euphoria over AI in the stock market has been at the center of worries about job losses on Main Street. However, those fears have not materialized into reality, as “only” 127k in job losses can be attributed to AI since the beginning of 2025. The weekly jobless data has been steadfast in “calling” for an overall decent jobs report as the week-to-week trends have been in line with historically good periods of employment growth. The jobs data got a few economists excited enough to call for a rate cut by year-end, but based on Fed Chair Warsh’s (few) comments about the economy, it seems that inflation is the primary focus of this Fed. Unless the job market materially weakens, the inflation data due next week (and in the months to come) will likely drive the Fed and interest rate decisions on either hiking or cutting rates.
The bond market rallied on the jobs data, figuring that it was weak enough to keep the Fed from hiking rates before year-end. Interest rates have moved very little over the past three months, as the long end of the yield curve has been relatively unchanged. Yet, the short-term yields have bumped up over that same period, creating a flatter yield curve. Historically, a flat or “inverted” (where short-term rates are above long-term rates) yield curve is a signal for a recession. Another model that combines long-term rates and unemployment with inflation and short-term rates is also waving a yellow card. As in soccer, the yellow is more of a warning. Incidences have not yet begun to pile up to the point of the bond market week-to-week an economic slowdown. One other “yellow card” is the poor performance of high-yield bonds compared to Treasuries over the past few weeks. Persistence of that trend will be a better signal.
Technology has been the driver behind the popular averages for the past few years. Semiconductors have led the charge higher this year, by nearly doubling since the start of the year. Historically, that type of run in the market leads to some corrective action, as investor expectations get well ahead of reality. Using history as a guide, at the end of 1999, the big three companies that benefited from the internet were Cisco, Intel, and Microsoft. Cisco was selling at 32x revenue at its peak before declining from $70 to under $20 as late as 2006. Earnings over that period of time doubled. Intel took until 2010 to double its earnings, all the while the stock fell by 66%. Finally, Microsoft saw its earnings nearly triple by mid 2011, but the stock was half of the price in 2000. It is not that these were bad companies, just the stock price was far too high for the earnings generated. The same is true today for many of the companies that are selling at extraordinarily high valuations. They are likely to survive, generate growing earnings and even dividends, but the stocks may still fall as those earnings on today’s projects get pushed out much further than the next quarter or two.
A light economic week, likely highlighted by the release of the minutes of the first meeting of the Fed under Kevin Warsh. Investors hoping to gain some understanding of how the new sheriff will operate.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.