Two of the biggest influences on the markets right now are 1) AI-related spending/investment and 2) Inflation, and there were a lot of conflicting headlines on both last week, so I wanted to take a moment and make sure we know the issue that will determine if they continue to fuel a rally or end it: Sustainability.
Starting with inflation, many financial media headlines last week focused on the Core PCE Price Index, noting that it rose to its highest level since 2023. That is accurate, but it really isn’t what’s important regarding last week’s Core PCE Price Index. I say that because everyone knows that, given the spike in oil prices, the headline PCE Price Index and even the Core PCE Price Index would rise relative to pre-war levels.
Yes, the Core PCE Price Index excludes food and energy, but higher oil prices do feed through to other goods and services (think fuel surcharges). However, with oil falling to pre-war levels, analysts expect that inflation metrics will begin to recede and fall back towards pre-war levels (which was 3.0% y/y for the Core PCE Price Index).
So, it’s not the fact that the Core PCE rose to early 2023 levels; everyone expected that given the rise in oil prices. What matters is if that rise is sustainable, meaning, do important inflation metrics stay elevated despite the drop in oil prices? If they do, that’s a major negative for the market because the Fed will have to aggressively hike rates because inflation will have become “sticky” again in the economy.
Conversely, if the rise in inflation is not sustainable and we see inflation metrics recede with the price of oil over the summer months, then rate hikes will be off the table, and that will provide a new tailwind for stocks (as potential rate cuts are again discussed). Bottom line, the key with inflation isn’t how far it’s risen; it’s how sustainable the rise is—and that’s what will determine if we get rate hikes in 2026 or not.
Looking at AI, sustainability is also the key issue, and Micron (MU) provides that key example. Micron’s earnings results were simply jaw-dropping, with earnings blowing past expectations. But the most important part of the entire release was Micron management announcing 16 “strategic customer agreements” (or SCAs) that, depending on the contract language, imply demand for memory will be sustainably higher (for years), not just a temporary spike and then a crash. And it’s not just memory; it’s all the data center/AI components.
Yes, demand and margins are off the charts now for memory, semiconductors, processors, cloud space, etc. But that demand is also playing “catch-up” as the hyperscalers race to secure capacity. The key factor to watch is whether this type of demand can be sustainable, and if the spending from the hyperscalers and AI companies is sustainable (because their spending is truly driving all this earnings growth). This is why capex is so important, as is the commentary from the hyperscalers, because they need to continue to reiterate that all this spending is sustainable so earnings growth doesn’t reverse. Positively, there has been no wavering on their part about the spending being sustainable. Near term, Micron reminded investors the “fire hose” of money from the hyperscalers on the economy isn’t slowing anytime soon, and that’s a positive thing for all sectors, not just tech.
Bottom line: the market momentum is not going to stop near-term. We will stay the course.
Source: Sevens Report 6/29/26