Good morning investors,
As you can imagine, I am a nervous wreck this morning ahead of England's semifinal with Argentina at the World Cup. We have reached the point where I am daring to believe, which for anyone who has followed England through the years, is the most frightening place to be. Hope is the dangerous part. I will try to keep my head in the markets today, though I make no promises about my productivity once kickoff nears.
Onto markets, where a cooler than expected inflation report gave stocks a lift yesterday. The S&P 500 rose 0.3%, the Nasdaq added 0.9%, and the Dow finished barely positive, up 0.02%. Treasurys rallied alongside, and the whole rate hike conversation shifted in a hurry. More on that below.
The Inflation Print That Changed the Math
June inflation came in well ahead of what anyone expected, and the market took it and ran. What made the report stand out was not deceleration, the usual flavor of good inflation news where prices simply rise a little less. Prices actually fell. Headline CPI dropped 0.4% on the month, the largest decline since April 2020, and the annual rate eased to 3.5%.
Gas prices did a lot of the heavy lifting, but the core reading, which strips out food and energy, was reassuring in its own right, with flat monthly growth and the annual figure down to 2.6%. Treasurys rallied on the news, pushing the 10-year yield back below 4.6%, still high but moving in the right direction. The rate hike outlook shifted fast and the odds of a July hike fell from 42% to under 20% on the CME's tracker.
I have been on the record with the contrarian call that a cut is more likely than a hike, and this is the first data point in a while that put some wind back in that view. I want to be measured about it though as one soft print does not settle the argument, the market still leans toward a hike later in the year, and there are real complications I will get to. But after months of the data cutting against me, it was a welcome shift.
The Complication Nobody Should Ignore
Two things temper the celebration however. The first is oil, which is climbing again. US Central Command launched fresh strikes on Iran overnight, aimed at degrading the military capabilities Tehran has used to attack shipping in the Strait of Hormuz. WTI is back above $80 and Brent near $86 this morning. The energy relief that drove yesterday's soft CPI is already reversing, which means next month's print may not be so kind. This is exactly why I have held energy exposure as a hedge, and the past week has justified it.
The second complication is more structural, and it showed up in the IBM disaster I will cover below. As Vital Knowledge put it well, energy did most of the work in June, but the easing was broad across categories, which is a relief. The Fed and the economy are not in the clear though. Inflation is still elevated in absolute terms, oil is turning back up, and AI is proving inflationary right now. Falling energy pulls inflation down while the AI buildout pushes it up, and the tug of war between those two forces is the whole story for the Fed this year.
The Banks Delivered
The big banks opened earnings season with a statement, and the numbers were strong across the board.
The banks with elite trading desks and capital markets franchises printed historic quarters. JPMorgan recorded its highest quarterly profit ever, $21.2 billion in net income, up 41% from a year ago, with equities trading revenue up 86%. Goldman was the standout, with net income up 78% and its equities desk generating a record $7.4 billion for the third straight record quarter. The stock rallied roughly 7% to fresh highs. Bank of America delivered a clean, balanced beat with trading up 33% and net interest income stabilizing. Wells Fargo pivoted successfully toward fee income and lifted its dividend 11%. Citigroup beat as well, though the stock fell more than 5% on rising restructuring costs and conservative expense guidance, a reminder that even in a strong quarter the market punishes anything that muddies the outlook.
Jamie Dimon summed the moment up in his usual style, saying it is getting close to as good as it gets. Goldman's David Solomon struck a more forward leaning note, saying momentum has accelerated across the businesses and that the pipelines point to the flywheel continuing. That combination, record results plus confident outlooks, cleared a high bar and set a constructive tone for the season.
Three things stood out to me beneath the headlines. Capital markets are unmistakably back, with investment banking fees up 30% to 55% across the group, which tells you corporate confidence has returned and companies are raising debt, issuing equity, and doing deals again. That transactional velocity supports broader valuations into the second half. Net interest margins have become a real divergence, with deposit costs pressuring the banks that lean on lending while the winners offset it through trading, wealth, and advisory. And the consumer looks resilient, with card spending up around 9% at both Bank of America and Wells Fargo, and Wells actually reporting lower loan charge offs. The resilient consumer narrative that Delta and the bank data keep reinforcing is very much alive.
IBM and the Rotation Underneath the AI Trade
The biggest story yesterday without doubt was IBM and it was a bad one. IBM preannounced weak results and the stock fell 25%, its worst trading day in the company's 115-year history, a session worse even than Black Monday in 1987. Revenue is tracking to $17.2 billion against expectations near $17.9 billion, with earnings short as well.
CEO Arvind Krishna said clients abruptly rewrote their budgets in the final week of June. Companies scrambled to lock in servers and memory chips ahead of the AI driven price increases everyone now sees coming, and that spending rotated straight out of software. In his words, they anticipated some supply chain impact but not the magnitude of the capex reprioritization.
If enterprise budgets were an ever expanding pool, AI spending would simply layer on top of everything else. IBM is telling us the opposite. The pool is fixed, or close to it, and dollars are rotating from old to new. Companies that sell memory and hard to replicate hardware keep their pricing power, their growing customer lists, and their lofty stock prices. Companies building everything else have to fight for whatever budget remains. This is the physical layer thesis I have leaned on all year, now showing up as a real casualty rather than a chart. It also flashes a caution for the broad software group, which is why CrowdStrike and others saw money rotate toward them as the perceived safe corner. IBM reports fully on July 22, and whether this snaps back will tell us a lot about how durable the rotation is.
ASML Confirms the Buildout Is Accelerating
On the other side of that rotation sits ASML, which raised its full year guidance for the second time this year and beat on both sales and profit. The company now sees 2026 sales between 43 and 45 billion euros, up from a prior 36 to 40 billion. Order intake stayed extremely strong through the first half, and management is adding 30% to both its EUV and DUV capacity for the year. The stock, already up 115% in 2026, jumped on the news.
ASML is the only company on earth that makes the extreme ultraviolet machines needed for the most advanced chips, so its order book is about as clean a read on the buildout as exists. When its customers accelerate capacity plans and commit across the product portfolio, that is the physical layer confirming demand years out. It lines up with TSMC's 68% jump in June sales and its plan to add two more advanced packaging plants. The one note of caution is valuation, with ASML trading near 50 times forward earnings, in line with its Covid era peak, which one analyst flagged as leaving little room for error. The demand is real. The price already reflects a lot of it.
A Few Other Moves
Johnson & Johnson beat on both lines but slipped slightly premarket, another case of good not being good enough into a strong run.
PayPal jumped 16% on a reported $53 billion joint takeover offer from Stripe and Advent, a sign that dealmaking appetite extends well beyond the banks' own results.
Alibaba rose 5% on news its Qwen model will be integrated into Apple Intelligence in China.
China reported its slowest GDP growth since 2022 at 4.3%, with industrial production and AI-linked exports propping up the headline while consumption and property stay weak. The global economy leans on the AI buildout even where the domestic picture sags.
Final Thought
Yesterday was an event filled day, that was a good one overall for the markets. The inflation print revived my long held view that the Fed's next move is more likely a cut than a hike, the banks cleared a high bar with confident outlooks, and ASML confirmed the buildout is accelerating rather than fading. The earnings engine that drives this bull market is running hot, and until that rolls over, the case holds.
The caution I have related to oil, which is turning back up as the Iran strikes continue, which threatens the very energy relief that produced yesterday's soft CPI. The AI buildout is inflationary in the near term even as it promises lower prices later, and that tension keeps the Fed's path uncertain. IBM showed that enterprise budgets are rotating rather than expanding, which rewards the physical layer and pressures everyone else. My posture stays where it has been. I favor the suppliers of the buildout, the sectors making new highs in financials, healthcare, and industrials, and I hold energy as a hedge while the Middle East stays live.
Watch PPI this morning to confirm the CPI story, watch the second wave of bank earnings, and watch oil. If this stretch has you wondering whether your portfolio fits your goals rather than the day's headlines, that is a conversation I am always glad to have.
Now, if you need me this afternoon, I will be the one pacing a hole in the floor ahead of kickoff. Come on England.
Best regards,
Dan Sheehan [email protected]
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Market Pulse with Dan Sheehan is a personal market commentary newsletter and is independent from my employer. The content is provided for informational and educational purposes only and reflects my views as of the publication date, which may change without notice. Nothing contained herein should be construed as personalized investment, legal, tax, or financial advice, or as a recommendation to buy or sell any security. Any positions discussed represent my own views and may not be suitable for every reader's objectives, financial situation, or risk tolerance. Information is derived from publicly available sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Readers should conduct their own research and consult their own professional advisers before making financial decisions.