Good morning investors,
With the ceasefire torn up, markets are back adrift like ships in the Strait of Hormuz, yet the reaction has been more measured than you might expect given the headlines. The stock market got genuinely mixed signals yesterday and did not overreact. Despite a repricing of oil and inflation through the bond market, the S&P fell just 0.3%, and while the Dow dropped 1.1%, the Nasdaq actually closed green, up 0.2%, as semiconductors bounced. That divergence tells you that the market is treating this as a geopolitical shock to absorb rather than a reason to abandon the underlying trend.
This morning is trying to extend that resilience. Futures are mixed to higher, with the Nasdaq up 0.6% led by semiconductors, and Micron up 3.4% in the premarket. The wild card, as always, is oil and Iran, and the overnight developments there genuinely matter. Trump said late yesterday that Iran called wanting to make a deal after the US strikes, which cooled crude from its highs, though his skepticism about whether Iran would honor any agreement keeps the situation firmly unresolved. We also get initial jobless claims.
The On-Again, Off-Again War
Within 24 hours we went from Trump declaring the ceasefire over and calling negotiations a waste of time, to reports that Iran phoned wanting a deal, to Trump musing that he did not think the war would fully restart while also floating the idea of taking Iran's Kharg Island oil distribution site. Crude, which had surged 6% on the ceasefire's collapse, came back off its highs on the talk of renewed negotiations. This is the on-again, off-again pattern that has defined the conflict for months, and it makes sense to expect it to continue.
No deals are final, and that uncertainty itself gets priced in. Even if we find ourselves with a renewed peace in a few days, the market has now been reminded that the resolution it had grown complacent about is fragile and reversible. The danger, should a blocked Hormuz persist with renewed mining and attacks on shipping, is that we end up back where we started, with an energy crisis, higher inflation, and a Fed forced to respond. Bond yields zooming up alongside oil this week highlighted exactly that risk to the inflation fight.
I want to be balanced rather than alarmist. As Wells Fargo put it well, any assumption of a swift return to normalized Gulf exports is being challenged, and with global reserves already low, further escalation would reinforce a higher risk premium in oil even once negotiations resume. That is the honest near-term reality, but my medium-term view is unchanged. The political incentive on both sides to resolve this before the midterms remains powerful, and Trump's quick pivot to talk of a deal suggests neither side wants a full-scale war. This is precisely why I have counseled holding some energy exposure as a hedge, so that a morning like this cushions the portfolio rather than purely punishing it. I would not make dramatic changes on headlines that reverse within hours.
The Best Earnings in History Keep Getting Cheaper
Set the geopolitics aside for a moment, because the more compelling story for long-term investors is what is happening to valuations in the chip space, and it is genuinely striking. The best earnings in semiconductor history are getting cheaper by the day. Nvidia, Micron, and the other AI leaders keep printing record quarterly numbers while their stocks stall, and that disconnect has created some of the most compelling valuations we have seen in years.
Nvidia is the clearest example. It logged $81.6 billion in revenue last quarter, up 85% from a year ago, yet the stock has been essentially flat for most of 2026. On a forward price to earnings basis, Nvidia now trades around 21 to 22 times, in line with the S&P 500 and its cheapest valuation since 2019, against a five year average near 72 times. Think about what that means. The most popular stock in the world entered the year at a rich multiple, and even as its earnings kept doubling, the multiple compressed all the way down to market levels. It has arguably never looked this cheap and compelling. Micron, after gaining 245% over six months and then pulling back, now trades near 7 times forward earnings.
When a stock stays hot for this long, blowout earnings can paradoxically become a reason to take profits rather than buy, which is exactly the dynamic pressuring these names now. But step back and look at what the market is actually doing. It is marking down record smashing earnings on an industry set to collect enormous capital, with hyperscaler capex still projected to hit $1 trillion in 2027. If that forecast holds, the disconnect between the fundamentals and the prices becomes an opportunity rather than a warning. I have said I would let the semiconductor decline play out rather than chase it, and that patience has been right, but valuations like Nvidia at 21 times and Micron at 7 times are the levels where patient capital starts getting genuinely interested, provided you believe the capex holds, which I do.
I would offer one note of nuance, because it matters. Cheaper is not automatically a buy, and the AI winds have been blowing toward less expensive chips for inference, which is part of the custom silicon risk I flagged yesterday. Not every cheap chip stock is equal, and the market is discriminating. For the highest quality names at the center of the buildout, the compression of world class earnings into ordinary multiples is the kind of setup that rewards patience over panic.
Diversification Matters Again
The first half delivered a lesson I have preached all year, and it is worth stating plainly because it is the antidote to exactly the kind of anxiety this week produces. A central tenet of investing is that nothing leads forever, and 2026 has proven it in spades. Emerging markets and international stocks outperformed US equities. Small and mid caps beat large caps. Value beat growth. And the Magnificent Seven, the darlings of the prior three years, were actually down for the half. In short, diversification matters again.
The small cap story is the standout. Entering 2026, the Russell 2000 had trailed large caps for five consecutive years, matching the record underperformance streak of 1994 to 1998. Then came a dramatic reversal, with small caps gaining over 22% in the first half, their best since 1991, and outpacing large caps by 12 percentage points, the widest first-half margin since 2001. This is the "Year of the Small Cap" thesis I laid out in January playing out in real time, and it is why I have carried an overweight there against a traditional diversified portfolio. When leadership rotates this dramatically, the investors who were diversified across geographies, sizes, and styles captured the gains without needing to predict which group would lead. That is the whole point of a plan built to hold either way.
The Volatility Is Real, and It's Concentrated in Tech
I want to acknowledge honestly just how turbulent this stretch has been, because pretending otherwise would do you a disservice. Tech is experiencing one of its most volatile periods in history. The ratio of the Nasdaq volatility index to the broad market VIX has climbed to 1.7, the highest in 23 years and above even the 2008 financial crisis peak. Tech volatility has now been elevated for five straight months, the longest such streak since the 2022 bear market. This is a structurally more volatile flavor of leadership than the steady megacap advance of prior years, and the memory bear market, the SpaceX round trip, and the daily Iran headlines are all feeding it.
Yet here is the reassuring counterpoint. Broad financial conditions have actually eased to their loosest since February and near the easiest in over a decade, driven by rising equity markets and tightening corporate bond spreads. So beneath the tech specific turbulence, the overall backdrop for risk assets remains supportive. That combination, high tech volatility sitting on top of easy broad conditions, tells me this is a repricing and rotation within a bull market rather than the onset of a bear. The violence is concentrated in the most crowded, most extended corner, which is exactly where you would expect it in a healthy shakeout.
PepsiCo Reads the Consumer
PepsiCo reported this morning, and the results offer a useful read on the American consumer at a delicate moment. The numbers were mixed, with earnings of $2.20 just shy of expectations and revenue slightly ahead. The more telling story was the divergence between a soft North American business and strong international demand. US food volume was flat and North American beverage volume fell 4%, with the CEO citing consumer budgets tightening under inflationary pressure.
This matters for the macro picture. During Pepsi's quarter, gas prices hit a four year high of $4.56 in late May amid the Iran war, and you can see the effect in the pullback in domestic demand. It reinforces why the energy relief mattered so much, and why this week's renewed oil spike is worth watching for its consumer impact. Pepsi has been cutting prices on its snack brands by as much as 15% to win shoppers back, which connects to the price sensitivity signal I flagged from other consumer names. The demand is there when prices come down. The domestic consumer is stretched but not broken, and cheaper energy, if it returns, would be a genuine tailwind into the back half.
Final Thought
This has been a genuinely volatile week, with a shattered ceasefire, surging then cooling oil, a memory bear market, and tech volatility at 23 year extremes. Any of it could rattle nerves, and I will not pretend the uncertainty is not real. But the market's measured reaction yesterday, with the S&P down just fractionally and the Nasdaq actually higher, tells you the underlying trend is more resilient than the headlines suggest.
My posture stays anchored. On Iran, I expect the on-again, off-again pattern to persist, I lean on my medium term view that the political incentive to resolve it eventually wins, and I hold energy exposure as a hedge precisely so this volatility is cushioned. On the chips, I find the compression of the best earnings in history into ordinary multiples increasingly compelling, with Nvidia near 21 times and Micron near 7, though I would remain selective and patient rather than chase every cheap name. And I keep returning to diversification, because the first half proved emphatically that nothing leads forever and that a portfolio spread across geographies, sizes, and styles captured this year's rotation without needing to predict it.
I still expect a bumpy second half, and this week embodies exactly why. Yet the reasons for longer-term optimism remain intact beneath the noise, with earnings acceleration, easy financial conditions, improving breadth, and valuations in the leaders that keep getting more attractive. Wells Fargo reaffirmed its 7,800 to 8,000 year end target on strong earnings momentum and ongoing AI strength even amid the geopolitical risk, and I remain constructive on upside as participation broadens.
Days like these are when discipline earns its keep. Do not let a week of whiplash knock you off a plan built to absorb precisely these shocks. Stay invested, stay diversified, keep some ballast against the geopolitical risk, and if this stretch has you questioning whether your portfolio is genuinely built for your goals rather than the headlines, that is the conversation I would most welcome having. I will keep watching Iran, oil, and the chips closely.
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.