The S&P 500 fell 0.61% last week and is now ~2.59% off recent highs, and that shouldn't come as a surprise given the tenor of the headlines, with negative commentary on AI, Iran, the Fed, and tariffs having pressured the major indices over the past several weeks. However, I wanted to start this week by defining and ranking the market’s “problems,” so we know which are the most important and how much of a problem they really could become.
1. The market’s biggest problem: The shifting narrative around AI stocks. We all know that AI stocks have powered this bull market, but recently AI has become a headwind for the S&P 500 and that’s due to several factors, starting with the sheer size of the rallies of many AI-linked stocks. That context is critical to understand. It’s not that any AI news this week was “bad” in an absolute sense. It was not. Even the AI stocks that got hit on earnings (GOOGL) posted fantastic results by any financial measure. The problem is the previous rally and surging expectations have produced very small windows for these companies to get it “right” and satisfy analysts who want to see stronger revenues and restrained capex. Put simply, the problem with AI right now isn’t the results; it’s the expectations, and we need remaining AI-linked companies to “thread” that needle and show strong revenue growth and sustainable capex increases to help rejuvenate AI enthusiasm.
2. Problem Two: Iran. For most of May and June, investors expected this situation to be mostly “over” by now, but the opposite is happening. The U.S. has escalated attacks on Iran while the Houthis are attempting to reroute Saudi crude out of the Red Sea, further disrupting oil supplies and causing the price of oil to rise back to six-week highs. However, oil still remains far below the post-war highs (near $120 in Brent), and the market still expects some sort of ceasefire to be agreed to, mainly because continued escalation is in neither the U.S. nor Iran’s interests. Markets can stomach oil around $100/bbl, so while the direction of this conflict is troubling, the reality is that it’s more about changing previous dismissive attitudes towards the war than it is about a real worst-case scenario returning.
3. Problem Three: Rising Bond Yields. This problem is tied, at least partially, to the previous problem in that rising oil prices are pushing longer-dated bond yields to YTD highs. If this keeps going, this could become the biggest problem for the market, and the fact that yields have not really declined at all over the past few months is unsettling. The fact that they have not implies that there’s more going on here than just oil prices, and that the bond market may be pricing in higher longer-term inflation is due partly to the spending mania from the AI hyperscalers, which is boosting the cost of most things as they firehose money across the economy. The 10-year yield at 4.60% isn’t a problem for this rally. But the 10-year yield above 5.00% sustainably is. The sooner the 10-year yield drops below 4.50% and stays there, the better.
4. Fed rate hikes and tariffs. From here, the severity of the problems drops sharply. The financial media is focused on the Fed, and there is a 30% chance of a rate hike Wednesday, but the reality is that the Fed has shown it won’t raise rates unless the inflation stats make them, and the recent jump in oil isn’t likely to cross that threshold. Yes, the Fed is on hold, but reading between the lines, it does not appear they are eager to embark on a rate hike cycle. Finally, tariffs reappeared on investors’ radar this week as the Trump administration used different authorities to essentially “replace” the reciprocal tariffs that were struck down by the Supreme Court. But while this generated some attention from the financial media, the reality is the tariff rates are no higher than they were before, and many of them will be challenged in court, again. So, tariffs are not a problem for investors right now.
Bottom line, this market is facing potential problems, but each of them can be quickly resolved and none of them, so far, are bad enough to require a major strategy shift. We remain moderately conservative with 40% in bonds and only 20% in large-cap growth, with the balance in value and int’l. This mix is not heavy in AI stocks and is positioned to take advantage of the current environment.
My prediction is that most of these negatives will dissipate before the end of the year. At that time, we will think about repositioning for the rally I expect next year based on historical precedent.
Source: Sevens Report 7/2/7/26
Some of you know that I enjoy painting with watercolors in my spare time. It has become one of the unexpected blessings of this season of my life. I've recently created a website to display my artwork: josephsturnioloartwork.com.
Sharing this feels a little awkward because I never want to come across as boasting. Instead, I simply want to share with friends the joy of discovering a gift that God gave me later in life. Painting has become a source of peace, creativity, and gratitude, and I hope some of that comes through in my work.
If you have a few minutes, I'd love for you to take a look. I hope you enjoy it as much as I've enjoyed creating it.