AI Buildout Spending? Receipts, Please. July managed to compress the market’s entire debate into roughly 24 hours.
On Wednesday, the Dow dropped more than 1,100 points after the Federal Reserve held rates steady and Kevin Warsh struggled to explain what might cause him to change course. Long-term Treasury yields surged, the Nasdaq 100 slipped into correction territory, and investors wondered whether the new Fed chair had lost the bond market before fully unpacking his office.
On Thursday, Microsoft reported strong cloud growth and evidence that its enormous AI spending was producing equally enormous revenue. The stock jumped, semiconductors rallied, and the Nasdaq recovered much of the prior day’s damage.
Same market. Different proof.
On Wednesday, the Dow dropped more than 1,100 points after the Federal Reserve held rates steady and Kevin Warsh struggled to explain what might cause him to change course. Long-term Treasury yields surged, the Nasdaq 100 slipped into correction territory, and investors wondered whether the new Fed chair had lost the bond market before fully unpacking his office.
On Thursday, Microsoft reported strong cloud growth and evidence that its enormous AI spending was producing equally enormous revenue. The stock jumped, semiconductors rallied, and the Nasdaq recovered much of the prior day’s damage.
Same market. Different proof.
The Fed Loses the Room
The Fed left its benchmark rate unchanged at 3.50%–3.75%, but the 9–3 vote was anything but routine. Three Fed officials wanted an immediate quarter-point hike, a sign that patience with inflation is thinning.
Warsh’s problem was not the decision to hold. It was the explanation. He declined to say what would trigger a hike, questioned whether the Fed should continue emphasizing its preferred PCE inflation gauge, and offered little guidance about the path ahead. The market filled in the blanks by pushing the 30-year Treasury yield above 5.2%, its highest level since 2007.
Wall Street Journal senior writer Jon Hilsenrath put it less delicately: “Warsh didn’t convey the message clearly or explicitly, and the bond market puked on him.”
The latest inflation data provided some relief. Headline PCE eased to 3.7% in June from 4.1% in May, helped by falling energy prices. Core inflation remained at 3.3%—better, but still well above the Fed’s 2% target. The Fed may not need to raise rates immediately. It does need investors to believe it knows what would make a hike necessary.
Oil Refuses to Leave
The Iran conflict also returned to the foreground. A brief détente gave way to renewed strikes, tanker disruptions, and another surge in crude, with Brent reaching roughly $94 a barrel before retreating when hostilities paused again.
The chain reaction remains simple: war moves oil, oil moves inflation expectations, inflation moves bonds, and bonds move stocks. Iran is no longer the market’s only story. It remains the shortest route from geopolitics to portfolios.
AI: The Blank Check Ends
Earnings season reinforced a shift that has been building for months. Investors still believe in the AI buildout. They are simply less willing to finance it on faith. They need evidence. Revenue. Margins. Orders. Cash flow. A plausible path from data-center construction to shareholder return.
Big Tech’s combined AI-related spending is now measured in the hundreds of billions of dollars. At that scale, “trust us” is no longer an investment thesis. It is an expense report waiting for signatures.
The Economy: Slower, But Not Weak
Second-quarter GDP grew at a 1.5% annual rate, down from 2.1% in the first quarter. Underneath that soft headline, consumer spending rose at a 3.2% pace, business investment remained strong, and a measure of underlying domestic demand expanded 3.9%.
The economy is slowing in places, but it is not rolling over. The consumer is still spending, and the AI investment cycle is carrying unusual weight. That gives earnings room to grow—but also gives the Fed little urgency to cut.
Bottom Line
The S&P 500 closed July virtually flat, with the Nasdaq Composite dipping into correction territory before clawing its way back to a loss of 3.2% for the month. July did not break the bull market—it clarified the terms.
The Fed can hold rates, but it cannot be vague without consequence. Big Tech can spend aggressively, but it must show returns. The economy can slow, but the consumer must remain standing. And geopolitical risk can be ignored—right up until oil makes it impossible.
This market is still willing to finance the future.
It just wants receipts.
And For What It’s Worth…
As reported by The Week, the quirky, hulking Norwegian striker Erling Haaland, who stole American hearts during Norway's World Cup campaign, deplaned in Oslo carrying a memento of his time in the U.S - a taxidermied raccoon clutching a whiskey bottle. The images immediately went viral. The animal "followed me home," Haaland joked on social media.
Purchased from Wild Bill's Western Store in Dallas, the raccoon is now sold out online.
Nike—its stock down roughly one-third on the year—clearly missed an open goal. With Haaland already serving as the marquee athlete for the Phantom series of soccer shoes, just imagine a tiny custom pair fitted for the raccoon. The shoes would have flown off the shelves. Ah well.
_____
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection remains paramount.
--David
The Fed left its benchmark rate unchanged at 3.50%–3.75%, but the 9–3 vote was anything but routine. Three Fed officials wanted an immediate quarter-point hike, a sign that patience with inflation is thinning.
Warsh’s problem was not the decision to hold. It was the explanation. He declined to say what would trigger a hike, questioned whether the Fed should continue emphasizing its preferred PCE inflation gauge, and offered little guidance about the path ahead. The market filled in the blanks by pushing the 30-year Treasury yield above 5.2%, its highest level since 2007.
Wall Street Journal senior writer Jon Hilsenrath put it less delicately: “Warsh didn’t convey the message clearly or explicitly, and the bond market puked on him.”
The latest inflation data provided some relief. Headline PCE eased to 3.7% in June from 4.1% in May, helped by falling energy prices. Core inflation remained at 3.3%—better, but still well above the Fed’s 2% target. The Fed may not need to raise rates immediately. It does need investors to believe it knows what would make a hike necessary.
Oil Refuses to Leave
The Iran conflict also returned to the foreground. A brief détente gave way to renewed strikes, tanker disruptions, and another surge in crude, with Brent reaching roughly $94 a barrel before retreating when hostilities paused again.
The chain reaction remains simple: war moves oil, oil moves inflation expectations, inflation moves bonds, and bonds move stocks. Iran is no longer the market’s only story. It remains the shortest route from geopolitics to portfolios.
AI: The Blank Check Ends
Earnings season reinforced a shift that has been building for months. Investors still believe in the AI buildout. They are simply less willing to finance it on faith. They need evidence. Revenue. Margins. Orders. Cash flow. A plausible path from data-center construction to shareholder return.
Big Tech’s combined AI-related spending is now measured in the hundreds of billions of dollars. At that scale, “trust us” is no longer an investment thesis. It is an expense report waiting for signatures.
The Economy: Slower, But Not Weak
Second-quarter GDP grew at a 1.5% annual rate, down from 2.1% in the first quarter. Underneath that soft headline, consumer spending rose at a 3.2% pace, business investment remained strong, and a measure of underlying domestic demand expanded 3.9%.
The economy is slowing in places, but it is not rolling over. The consumer is still spending, and the AI investment cycle is carrying unusual weight. That gives earnings room to grow—but also gives the Fed little urgency to cut.
Bottom Line
The S&P 500 closed July virtually flat, with the Nasdaq Composite dipping into correction territory before clawing its way back to a loss of 3.2% for the month. July did not break the bull market—it clarified the terms.
The Fed can hold rates, but it cannot be vague without consequence. Big Tech can spend aggressively, but it must show returns. The economy can slow, but the consumer must remain standing. And geopolitical risk can be ignored—right up until oil makes it impossible.
This market is still willing to finance the future.
It just wants receipts.
And For What It’s Worth…
As reported by The Week, the quirky, hulking Norwegian striker Erling Haaland, who stole American hearts during Norway's World Cup campaign, deplaned in Oslo carrying a memento of his time in the U.S - a taxidermied raccoon clutching a whiskey bottle. The images immediately went viral. The animal "followed me home," Haaland joked on social media.
Purchased from Wild Bill's Western Store in Dallas, the raccoon is now sold out online.
Nike—its stock down roughly one-third on the year—clearly missed an open goal. With Haaland already serving as the marquee athlete for the Phantom series of soccer shoes, just imagine a tiny custom pair fitted for the raccoon. The shoes would have flown off the shelves. Ah well.
_____
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection remains paramount.
--David
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