Weekly Newsletter: June 29, 2026
At the end of a close and meaningful game, players tend to get a bit more aggressive, and tensions get very high. This “chippiness” is beginning to play out in the financial markets as the semiconductor (chips) stocks begin playing a central role in AI, the economy, and inflation. The buying of the chip stocks has been aggressive, pushing many to valuation levels last seen in 1999/2000. Some companies are raising prices (ex: Apple) in response to the dearth of chips floating around for purchase. As the prices rise and spending on AI remains strong, the demand and prices of the chips continue to rise. The higher chip prices are also filtering into inflation data as auto, medical, and appliance makers all are forced to spend more on what has become an integral part of their products. By the end of the week, even after very good earnings from Micron, investors were selling the chip sector and began wondering how this might end. Historically, the sector is very cyclical, going from boom to bust and back again. The current boom cycle will end, and companies now selling at ten times revenue will be selling at a more “normal” valuation of one to three times revenue. If investors continue to chip away at their holdings in the semis, the unwind could see a bigger decline in the various market indices.
In what was supposed to be a quiet week on the economic front, there were a few fireworks ahead of the 4th of July. Worries about the consumer continue as Amazon’s Prime Day saw more spending on basics than in the past. Retailers have noted a shift in spending toward more value. However, the government figures on incomes and spending show a fairly healthy consumer, even in the face of (still) high inflation. Wage growth kept pace with inflation, but the still low savings rate (the difference between income and spending) remains at very low levels. Energy prices remain a feature of the Personal Consumption and Expenditures Index (PCE), keeping that annual figure running above 4%. As market prices for a barrel of oil return to pre-war levels, it will take some time to filter through the inflation data over the summer. The Friday market holiday means the economic data will get compressed into the remaining four days, so the jobless data will be on Thursday. Expectations are modest, roughly 100k in new jobs and a steady unemployment rate with wage growth in the 3.5% range. Unemployment has ticked a bit higher from year-ago levels, but by no means is it at a level that is getting the Fed excited. Fed Chair Warsh is expected to talk on Tuesday, which may shift some of the focus from the jobs report on Thursday.
Bond yields have been following oil prices, rising during the early stages of the war, and falling over the past few weeks as an “understanding” has been reached. Under the surface, a few things are going on. The spread between two- and ten-year bond yields is narrowing. A further “flattening” of the curve or outright inversion (when 2-year yields are above 10-year) has historically pointed to a recession. It is hard to believe, given the generally good economic data and recent revision higher to GDP. High-yield spreads are widening, but not yet dramatically so. The higher yields on junk bonds may be attributed to investors pushing back on the huge issuance of debt by many of the AI companies, including a large offering by SpaceX. While the ratings on these bonds are investment grade, the large supply may be pushing up yields to entice investors to buy these bonds.
As mentioned in the intro, chip stocks dominated the discussion last week as well as performance. The semiconductor index fell 8% last week, the worst since the end of February. The tech sector overall fell by 5.25%, while the average stock within the SP500 rose over 0.5% on the week. This week is nearly the exact inverse of what has been happening in the markets for much of this year. Tech stocks pushed the averages higher, while average stocks are modestly higher. Investors have demonstrated a near insatiable appetite for tech stocks, eschewing nearly everything else. At some point, investors will want to see profits from all the spending, and those profits (and outlooks) will need to be reconciled with what are today, historically high valuations for the sector as a whole. If the weakness persists within the tech sector, the remaining portion of the markets should benefit from the rotation to “other things” than just tech.
Another holiday-shortened week pushes the jobs data to Thursday. Chair Warsh is set to speak on Tuesday, and markets will be listening closely for some indication of how the Fed will be handling data, communications, and overall guidance under his leadership.
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.