The bullish thesis that has underwritten the significant rally since the March lows will be tested in multiple ways this week by data, Fed speak, and earnings, and the outcome of this week could easily set the market up for a higher run through the summer. Or it could negatively damage the bullish case that’s powered stocks higher for more than three months.
The bullish “thesis” for stocks since April has largely gone as such: AI data center spending mania is powering incredible earnings growth across the economy (but most especially in the AI infrastructure sectors such as chips, memory, etc.) and it’s showing no signs of abating. Neither the U.S. nor Iran want a full-scale war, which takes the upside risk out of oil. That, in turn, means we’ve likely seen the peak in inflation, and that means no rate hikes (and even the possibility of cuts). Meanwhile, economic data remains solid as the AI spending boom creates a private sector stimulus plan for the economy, keeping the economic tide rising.
Each of those ideas will be challenged this week, starting with AI-driven earnings growth. Test One: ASML and TSM earnings (Wednesday and Thursday). This week is the effective start of the Q2 earnings season, and as always, we’re going to see the result dominated by the big banks, and their performance should be solid. Underscoring how the AI data center mania is spreading throughout the economy, even financials are benefiting in the form of fees from debt offerings and IPOs from the hyper-scalers and AI companies as they continue to have massive demand for capital.
But it’s not the financials that matter most this week; it’s 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 hyper-scalers, because expectations are very high. If the results are underwhelming compared to expectations (like Samsung last week), then we will see more tech weakness.
Test Two: Inflation via CPI, Consumer Price Index, PPI, Producer Price Index, and U-Mich. CPI and PPI come tomorrow and Wednesday, respectively. Almost as importantly, the University of Michigan inflation expectations will be released on Friday, and markets are expecting declines across the board, solid drops in headline and core CPI, as well as a continued fall in one- and five-year inflation expectations. But while that’s reasonable given the plunge in oil prices since May, the reality is the bond market is not giving a positive signal on inflation, with yields still near 4.50%. 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%.
Test Three: Fed rate hikes via Fed Chair Warsh’s testimony. Markets have priced in one rate hike by the end of the year, but Fed fund futures out beyond a month are as much of a guess as anything (there’s just too much data looming for the opinion to be valid), and the reality is the market doesn’t “believe” the Fed’s serious about hiking rates. Instead, the market views the Fed as reacting to the spike in inflation metrics and, as soon as those metrics start showing signs of declining (hopefully this week), then the Fed will quickly abandon the rate hike chatter and the possibility of rate cuts will come back.
This week, Fed Chair Warsh gives his semiannual testimony to Congress on Tuesday and Wednesday, and he has the opportunity, while not sounding too dovish, to reinforce that belief, especially if inflation data is encouraging.
Bottom Line The positive outcome (markets “passing” the test) will look like this: 1) ASML and TSM earnings best expectations and reinforce the AI data center mania is going as strong as ever, 2) CPI and U-Mich inflation expectations drop as expected (or ideally more) and reinforce the idea that inflation has peaked, and 3) Warsh is not hawkish and highlights some progress on inflation, confirming that rate hike possibility will fall, quickly, as inflation metrics fall. This outcome should result in new highs for stocks, as long as fighting doesn’t dramatically re-escalate between the U.S. and Iran.
Still makes sense to maintain our current posture with 40% in bonds as the midterm elections are soon to become a focus for stocks.
Source: Sevens Report 7-13-26