In last Monday’s Commentary, I detailed how the market was going to face three tests, each of which could challenge (or even refute) three of the main forces behind this YTD rally. With last week’s tests complete, I want to review the results (not all of them are positive).
Test One: ASML and TSM earnings (Wednesday and Thursday). What we said last week: Taiwan Semiconductor and ASML, because they are the first AI infrastructure stocks to report, and the results need to continue to point to mania-level component spending by the hyperscalers, given very high expectations. If the results are underwhelming compared to expectations (like Samsung), then we will see more tech weakness. Verdict: Fail. Both ASML and TSM posted very strong results in an absolute sense, but neither of the stocks helped to ease growing concerns about the sustainability of the AI boom. Specifically, TSM and ASML both highlighted massive spending to increase production capacity (ASML will ramp capacity by 30%), and while they are doing that to meet booming demand from hyperscalers, it’s feeding into the “what if the demand slows?” concerns. Bottom line, the TSM and ASML earnings were good, but they only served to further emphasize the spending and manufacturing mania that’s gripped the tech industry and raised the ante on how bad it could be if demand falls off.
IBM, meanwhile, reminded investors that while some parts of tech are seeing massive earnings increases from the AI component buying mania, others are getting hit. IBM negatively preannounced earnings as more customers divert budgets to try and secure more AI component capacity, while TSM noted that non-AI parts of its business saw some softness as the entire tech industry is seeing price increase from the AI spending wars. TSM and ASML earnings weren’t bad, and there isn’t anything to imply the AI component buying wars/mania is slowing. But the results did remind investors of the risk if demand slows while other parts of tech start to suffer.
What’s Next: More tech earnings this week. GOOGL, IBM, TXN and NOW report on Wednesday after the close, while INTC reports Thursday evening. Markets will want to see strong results and more signs of robust demand but also evidence of restraint and a focus on stability (and not a further “doubling down” on the current AI component spending war).
Test Two: Inflation via CPI, PPI and U-Mich. What we said last week: We’re either going to see more proof inflation pressures have peaked and are receding (and the 10-year yield will drop) or we’re not, and the 10-year yield will have been “right” hanging around 4.50%. Verdict: Pass. The inflation data was about as good as hoped for last week with CPI and PPI beating expectations and the price indices in some of the July manufacturing surveys showing further drops (or no material increases). The escalation in fighting between the U.S. and Iran and higher oil prices stunted the benefit to markets of the better-than-expected inflation numbers, but the data last week does reinforce that inflation pressures likely peaked in May (and that should further reduce rate hike worries and put downward pressure on yields, which will be positive for stocks).
What’s Next: Oil prices. Brent crude (which is the key oil market to watch with regards to Iran) is pushing $90/bbl, and if we see a move through that and towards $100, then the progress on inflation will be reversed as investors brace for another jump in the inflation stats, which will bring rate hikes back into the conversation.
Test Three: Fed rate hikes via Warsh’s testimony. What we said last week: This week, Fed Chair Warsh gives his semi-annual testimony to Congress on Tuesday and Wednesday, and he has the opportunity, while not sounding too dovish, to reinforce [a not hawkish] that belief, especially if inflation data is encouraging.
Verdict: Pass. Warsh wasn’t dovish and did focus on restoring price stability, but he wasn’t hawkish either, and the reality is that Fed rate hike odds for July (which were about 50% two weeks ago) dropped to effectively zero. Warsh reiterated what we already know: The Fed doesn’t want to hike rates and will only do so if the inflation stats force them to.
What’s Next: The July FOMC decision. Next week the Fed has a rate meeting, and the key will be Warsh’s press conference, as the Fed almost certainly won’t hike rates and the statement will be short and vague. If Warsh doesn’t get more hawkish, rate hike concerns should continue to ease (which will be positive for stocks).
Bottom Line: If we look at the total volume of news last week, it was positive on balance as non-AI earnings were strong (especially banks/financials), inflation data implied a peak in inflation pressures and rate hike expectations fell. But the reality is AI is the most important force in this market, and concerns about AI offset those positives, and we can expect that to continue for the foreseeable future.
So, for stocks to rebound, we need some solid earnings from the key tech names this week (and de-escalation in Iran wouldn’t hurt).
Source: Sevens Report 7/20/26