Good Morning Investors,
The S&P 500 closed Friday at another record high, capping a remarkable week that reinforced a simple thesis: this market rewards vision over caution. With earnings beats continuing to pile up and AI Capex translating from slides to steel, we're witnessing something rare, investors betting on transformation rather than retreating to safety. The weekend brought President Trump's announcement of a trade deal with the EU, setting 15% tariffs instead of the threatened 30%. While still a headwind, this removes a major uncertainty heading into the final trading days of July.
The backdrop remains constructive. Institutional skepticism persists despite the rally, positioning remains only in the 44th percentile, and cash continues sitting on the sidelines. This isn't euphoria, it's grudging acceptance of a trend that's becoming harder to ignore. As we head into the Fed meeting this week, the underlying momentum suggests July's strength has legs.
Opening Bell
Stock futures opened modestly higher Monday morning, though the gains were muted despite the weekend's EU trade deal announcement. S&P 500 ($SPY ( ▲ 1.59% )) futures rose 0.18%, Dow ($DIA ( ▲ 1.95% )) futures added 38 points (0.08%), and Nasdaq 100 ($QQQ ( ▲ 1.63% )) futures climbed 0.34%. The measured response suggests markets had largely priced in a resolution ahead of the August 1 deadline.
The measured response reflects markets that are increasingly comfortable with removing tail risks rather than celebrating every headline. Each trade deal - Japan, Indonesia, and now the EU - systematically dismantles the bear case by converting uncertainty into manageable outcomes. This week brings an exceptionally heavy calendar: over 150 S&P 500 companies reporting earnings, the Fed meeting concluding Wednesday, and crucial inflation data Thursday with the PCE reading.
Market Framework: The EU Deal Changes the Game
Trump's Sunday announcement of a 15% tariff deal with the EU removes a significant overhang that was weighing on August expectations. The agreement includes $750 billion in U.S. energy purchases, $600 billion in additional investments, and substantial military equipment orders. While 15% tariffs still represent a meaningful cost burden, adding roughly 0.2 to 0.3 percentage points to CPI, it's far better than the 30% threat that had markets bracing for impact.
This development matters beyond the immediate relief. It signals that Trump's negotiating strategy, while aggressive, can produce workable outcomes. The EU represents America's largest trading partner, and removing this uncertainty allows markets to focus on fundamentals rather than tariff anxiety.
The timing is also strategic. With the Fed meeting this week and August 1 representing the broader trade deadline, this deal provides cover for continued risk-taking. European markets should respond positively, and any spillover strength into U.S. equities would extend July's momentum.
Corporate Framework: Samsung-Tesla Deal Signals AI Infrastructure Acceleration
The morning brought another validation of our AI Capex thesis with Samsung Electronics announcing a $16.5 billion chip supply agreement with Tesla ($TSLA ( ▲ 5.82% )), running through 2033. Samsung's Texas fab will produce Tesla's next-generation AI6 chips, with Musk noting the deal value represents "just the bare minimum" and actual output could be "several times higher."
This partnership exemplifies the strategic realignment happening across tech. Samsung's foundry division, previously struggling to retain major clients, now has a decade-long anchor customer in Tesla's AI ambitions. Samsung shares surged 6.8% in Seoul to their highest level since September, while suppliers like Soulbrain jumped 16%.
Beyond the immediate financial impact, this deal reinforces the infrastructure build-out we've been tracking. Tesla's AI6 chip will form the foundation of its driving hardware suite, representing another massive Capex commitment in the name of future monetization. The market's willingness to reward such long-term positioning continues to separate winners from laggards.
Last week's earnings confirmed what we've been tracking: companies spending aggressively on AI infrastructure are being rewarded, while those playing it safe are being punished. The Magnificent 7 are now projected to invest over $320 billion in AI Capex during 2025, with Amazon ($AMZN ( ▲ 3.16% )) leading at $100 billion, Alphabet ($GOOGL ( ▲ 3.26% )) at $85 billion, and Microsoft ($MSFT ( ▲ 0.67% )) around $80 billion.
This isn't just spending, it's positioning for the next decade. Nvidia's ($NVDA ( ▲ 1.66% )) benchmark of $4 million in earnings per employee has reset expectations for operational leverage, and the broader tech ecosystem is responding. Alphabet's 70% Capex increase, despite a 61% drop in free cash flow, was met with buying, not selling. The market understands that in an arms race, hesitation is defeat.
The breadth is encouraging. Beyond the headlines, mid and small-cap names in edge computing, AI software, and vertical hardware are beginning to participate. Even legacy players like IBM are pivoting, with 8% consulting growth tied to generative AI projects. This suggests the AI theme has staying power beyond the usual suspects.
Economic Framework: Fed Decision Looms as Data Mixed
Wednesday's Fed meeting comes at a critical juncture, with markets expecting a pause but watching for September signals. While CME FedWatch shows 95% probability of steady rates, this week's economic calendar could shift that calculus. Wednesday brings Q2 GDP estimates (expected 2.3% annualized), Thursday delivers the crucial PCE inflation reading (core expected steady at 2.7%, headline rising to 2.5%), and Friday's July jobs report (102,000 jobs expected, unemployment ticking to 4.2%).
The mixed signals create room for debate within the Fed. Mike Dolan's column suggests "incoming U.S. inflation signals are offering the Federal Reserve little or no justification to resume interest rate cuts," but the broader economic picture remains nuanced. Manufacturing continues contracting (ISM at 49.0 for four months), housing affordability sits at historic lows, and true inflation adjusted for housing distortions remains near target.
Chair Powell faces mounting pressure to provide clarity on the September path, especially with inflation effectively at target when adjusted for housing distortions. Using European-style measurements that exclude imputed rent, U.S. inflation sits at just 1.8%, the same level that prompted ECB cuts to 3.25%. With the Federal Funds rate at 4.5%, real rates near 2.7% are arguably too restrictive for an economy facing tariff headwinds and housing market paralysis.
The 1998 Greenspan precedent remains relevant. The Fed cut rates from 5.5% to 4.75% despite no formal recession, responding to financial stress and economic softening. Today's setup, ISM Manufacturing at 49.0 for four straight months, housing affordability at historic lows, and true inflation at target, suggests similar preemptive action may be warranted.
Strategic Outlook: The Pain Trade Remains Higher
Chris Harvey's recent analysis reinforces our bullish stance through multiple lenses. This rally is being called "the most hated V-shaped rally," with institutional skepticism still running high. Markets typically peak on euphoria, not doubt, and we're nowhere near euphoric positioning.
The technical picture supports continued upside. High beta stocks and momentum ETFs are leading, which is normal in early bull phases. The Russell 2000's recent 6% monthly gain, despite continued ETF outflows, suggests the small-cap rotation is just beginning. When sentiment finally turns positive, the catch-up trade could be explosive.
Valuations remain reasonable relative to growth. Alphabet's PEG ratio of 1.2, Amazon's at 1.5, and Microsoft's premium multiple all screen well given their AI positioning and execution. The late-90s bubble comparisons miss the mark as today's fundamentals are significantly stronger, and the productivity uplift from AI could add 1.5 to 3% to annual economic growth.
The M&A angle deserves attention. Harvey notes that mergers represent a logical response to tariff pressures, as companies seek scale to protect margins. This cycle could act as a catalyst for mid-caps and underperformers, creating re-rating opportunities for patient investors.
Retail participation continues providing stability. Since 2020, improved access to information and trading platforms has allowed retail investors to navigate volatility more effectively. Social media sentiment toward AI leaders remains positive, and retail flows are shortening drawdowns. The VIX averaging 15 in 2025, down from 20 in 2022, reflects this increased resilience.
Analyst Recommendations
Blackstone: Piper Sandler raises price target to $181 from $157 on improved revenue outlook
Coinbase: JPMorgan raises target to $404 from $215 citing better Bitcoin ETP impact and crypto rally participation
Cognizant Technology: JPMorgan cuts target to $93 from $98 due to muted client discretionary spending in IT services
Key Earnings This Week
Meta and Microsoft report Wednesday, followed by Amazon and Apple Thursday. Focus will center on AI spending commentary and forward guidance as investors assess whether hyperscaler investments are justified.
Final Thought
The EU trade deal removes a key uncertainty, but the bigger story remains AI infrastructure spending and its market implications. We're watching the early stages of a technological arms race that will define the next decade. Companies building aggressively today, with Alphabet, Microsoft, Amazon positioning for tomorrow's monetization opportunities.
The market's message is clear: spend to win. With institutional skepticism still high, positioning underweight, and cash on the sidelines, the path of least resistance remains higher. The Fed meeting this week will provide the next catalyst, but the underlying trend toward rewarding commitment over caution continues.
I expect continued strength into month-end and maintain my constructive outlook for the balance of 2025.
Please feel free to reach out to me on LinkedIn or by email if you would like help navigating this market environment or have any planning-related questions.
Dan Sheehan
This newsletter is for informational purposes only and should not be considered as investment advice. Please consult with your financial advisor about your specific situation.