Market Pulse with Dan Sheehan

Good Morning Investors,

Markets pushed to fresh records on Thursday, with the S&P 500 ($SPY ( ▲ 0.18% )) gaining 0.5% to close at 6,297, just shy of the psychologically important 6,300 level. The Nasdaq ($QQQ ( ▲ 0.18% )) surged 0.8% to a record close of 20,886, while the Dow ($DIA ( ▲ 0.26% )) added 0.5%. Strong economic data reinforced the resilience narrative, with retail sales roaring back 0.6% in June (crushing expectations of 0.1%) and jobless claims falling to a three-month low.

The consumer's comeback story took center stage, completely reversing May's weakness and alleviating concerns about tariff-induced spending pullbacks. Combined with declining unemployment claims for the fifth consecutive week, the data painted a picture of an economy that simply doesn't need the rate cuts President Trump continues to demand. This convergence of robust consumption, labor market strength, and earnings momentum continues to validate my year-end S&P 500 target of 6,500.

Major bank CEOs' indirect defense of Powell amid political pressure has reinforced central bank independence, while TSMC's record profits and raised guidance provide further validation of the AI infrastructure super-cycle that continues to drive market leadership.

Futures are pointing to a modest positive open, with S&P 500 futures up 0.1% and Nasdaq futures flat. Today's focus shifts to housing data and consumer sentiment, with building permits, housing starts, and the preliminary Michigan Consumer Sentiment reading all due. The University of Michigan sentiment index is expected to tick up to 61.8 from 60.7.

The market's ability to digest both strong economic data and maintain record valuations demonstrates institutional confidence in the current cycle. With major earnings from American Express, 3M, and regional banks on tap, the fundamental story remains front and center.

Chevron's $53 billion acquisition of Hess finally cleared its last hurdle after prevailing in a landmark legal battle against Exxon Mobil, securing access to what many consider the largest oil discovery in decades. The Stabroek Block off the coast of Guyana holds more than 11 billion barrels of oil equivalent, representing a transformational growth asset for Chevron as the company works to reverse its lagging performance relative to peers. This victory is particularly significant given Exxon's superior scale and resources, validating CEO Mike Wirth's strategic vision and execution capabilities.

The implications extend beyond Chevron's corporate strategy to the broader energy sector's consolidation narrative. Union Pacific's exploration of a potential Norfolk Southern acquisition, which would create a $200 billion railroad behemoth, signals management confidence in long-term commodity demand and the strategic value of scale in capital-intensive industries. These mega-deals reflect a maturing energy complex where companies are prioritizing portfolio optimization and operational efficiency over pure growth, a shift that should drive margin expansion and return on capital improvements across the sector.

Netflix ($NFLX ( ▼ 0.72% )) delivered another compelling quarter that reinforced its evolution from a premium subscription service to a diversified media platform. The company posted earnings per share of $7.19 versus consensus estimates of $7.08, while revenue grew 16% year-over-year to $11.08 billion. Management raised full-year guidance to $44.8-$45.2 billion, citing foreign exchange tailwinds from dollar weakness and robust underlying business momentum across member growth and advertising sales.

The most significant development continues to be the advertising tier's explosive adoption trajectory. Monthly active users on the ad-supported plan surged to 94 million from 70 million in November, with engagement metrics matching ad-free subscribers at approximately 41 hours per month. This convergence in viewing behavior validates the ad tier's value proposition and positions Netflix to capture a larger share of the global advertising market. Management's expectation for ad revenue to double to $3 billion in 2025 represents a fundamental shift in the company's monetization model, creating a new growth vector that should drive multiple expansion despite the stock's current 40x forward earnings valuation.

The strategic repositioning extends beyond advertising to encompass live events and sports content, with Netflix securing NFL Christmas Day games, major boxing matches, and WWE Raw programming. This content diversification, combined with the company's pioneering use of generative AI for visual effects production, demonstrates management's commitment to technological innovation and market leadership. The confluence of pricing power, advertising scale, and content differentiation creates a compelling investment thesis that should drive sustained outperformance.

This week's speculation about potentially firing Fed Chair Powell sparked immediate and unified pushback from major bank CEOs, who emphasized the critical importance of central bank independence without directly addressing the political implications. The market's initial wobble on the news quickly reversed as both political and economic realities set in. The robust economic data has effectively neutralized arguments for emergency monetary accommodation, with September rate cut probabilities declining to 56% from 70% last week.

Fed Governor Christopher Waller's increasingly isolated call for a July rate cut appears mistimed given the economic momentum, particularly as two additional voting FOMC members have argued against premature easing. The data-dependent approach championed by Powell has proven prescient, with retail sales growth and labor market resilience demonstrating that the economy requires no artificial stimulus. This dynamic has created an unusual but effective form of dollar policy, where political pressure on the Fed has contributed to currency weakness without compromising monetary policy independence or market stability.

The broader implications for monetary policy transmission mechanisms bear close monitoring. The unconventional approach of using political jawboning to influence currency markets while maintaining actual policy independence represents a delicate balance that has shown early success but could face stress tests if yields continue rising toward problematic levels. For now, the market appears comfortable with this arrangement, viewing it as a net positive for export competitiveness without undermining institutional credibility.

Taiwan Semiconductor's record quarterly performance provided another emphatic validation of the AI infrastructure investment thesis that continues to drive market leadership. The company's net income surged 61% year-over-year while management raised full-year revenue guidance to 30% growth in USD terms, up from previous expectations in the mid-20s. Perhaps most importantly, TSMC's observation that there has been "no change in our customers' behavior so far" regarding AI-related spending should definitively address any lingering concerns about demand sustainability.

The valuation dynamics within the semiconductor complex remain particularly compelling from a strategic perspective. Despite the sector reaching consecutive all-time highs, the forward price-to-earnings multiple has compressed to 30.5x from 35.4x in June 2024, even as index weighting has increased to a record 12.9%. This divergence suggests that fundamental earnings growth is significantly outpacing price appreciation, a dynamic that typically precedes sustained multiple expansion rather than contraction.

The implications extend beyond pure semiconductor plays to the broader AI infrastructure ecosystem. Hyperscalers continue to demonstrate insatiable appetite for advanced computing capabilities, while enterprise adoption curves remain in their early stages. The semiconductor shortage narrative of 2021-2022 has been replaced by a capacity expansion story that should drive multi-year capital expenditure cycles across the entire technology stack. This fundamental shift supports our constructive outlook on the sector despite elevated valuations, as the underlying demand profile appears more sustainable than previous technology cycles.

My technology and artificial intelligence overweight positioning continues to generate alpha, with particular strength in software, cybersecurity, and AI infrastructure components. The software complex, as represented by the IGV ETF's advance from $80 to $110, demonstrates the broadening of AI adoption beyond pure hardware plays. Cybersecurity remains one of our highest-conviction themes, driven by the expanding attack surface created by AI implementation and the persistent threat landscape that continues to evolve in sophistication and scale.

The financial services sector has delivered exceptional results this quarter, with collective second-quarter trading revenues rising 17% and investment banking revenues advancing 7% year-over-year. This performance validates our overweight positioning based on the sector's ability to generate consistent profits across varying market conditions, supported by resilient loan growth, improving net interest margins, and aggressive capital return policies. The sector's operating leverage should become increasingly apparent as interest rate normalization progresses and fee income stabilizes.

Energy positioning remains tactically underweight in the near term, though we continue to monitor for potential second-half catalysts as AI infrastructure buildout creates unprecedented demands on power generation and grid reliability. Crude oil's recent technical breakdown suggests vulnerability to a test of $61 or potentially $55, but the longer-term structural thesis remains intact as data center proliferation and AI model training create insatiable electricity demands that will ultimately benefit traditional energy producers and renewable infrastructure developers alike.

Ethereum ($ETH.X ( ▲ 3.44% )) surged to $3,677, its highest level since January 6, driven by stablecoin growth and institutional adoption. The crypto's outperformance versus Bitcoin reflects the underlying blockchain's utility for stablecoin transactions, with companies like BitMine ($BMNR ( ▼ 5.85% )) and SharpLink ($SBET ( ▼ 1.0% )) aggressively accumulating ETH treasuries.

Stablecoin catalyst: Most dollar-pegged stablecoins operate on Ethereum, driving transaction fee demand and creating a sustainable use case for institutional adoption. This fundamental driver differentiates the current cycle from previous speculative waves.

Labor market health: Initial claims at three-month lows provide comfort, but watching for any deterioration in quits rate or wage growth.

Inflation dynamics: Core services inflation remains the Fed's primary concern. Any tariff-related bumps in Q3 likely to be temporary.

Credit conditions: Corporate spreads remain tight, but monitoring for any widening as leverage ratios normalize.

Geopolitical risks: China tensions persist with Wells Fargo employee travel ban highlighting ongoing business risks.

Today: American Express, 3M, regional banks including Truist, Regions Financial, and Huntington Bancshares.

Next Week: The mega-cap gauntlet begins with Microsoft, Nvidia, Apple, and Meta. Focus on AI capex, margin expansion, and forward guidance.

In a week dominated by Federal Reserve speculation and political theater, the market's message emerged with crystalline clarity: earnings growth and economic fundamentals matter significantly more than headline noise. The consumer spending surge, combined with labor market resilience and corporate profit expansion, continues to validate the structural bull case that underpins our year-end S&P 500 target of 6,500.

The market's progression toward 6,300 and ultimately my 6,500 target isn't being driven by speculative euphoria or multiple expansion, but rather by methodical earnings growth and operational efficiency improvements across the corporate landscape. With S&P 500 earnings approaching $300 per share for 2026, even a modest 21x forward multiple suggests substantial upside potential from current levels. The path higher may encounter periodic volatility as political narratives ebb and flow, but the fundamental drivers supporting this rally demonstrate no signs of deterioration.

The institutional capital deployment patterns we've observed throughout this consolidation period reinforce our constructive outlook. Rather than panicking during periods of uncertainty, sophisticated investors have consistently stepped in to purchase quality assets at reasonable valuations. This behavior pattern suggests that the current cycle has significantly more runway than bears anticipate, particularly as earnings season continues to validate the resilience of American corporate profitability in an increasingly complex global environment.

Dan Sheehan

[email protected]

This newsletter is for informational purposes only and should not be considered investment advice. Please consult your financial advisor about your specific situation.