Good morning investors,
I hope everyone had a great long weekend.
I want to start somewhere a little different this morning. On Friday I played in a golf tournament, and I underperformed. I had been grinding on my game for weeks, putting in real work on the range, and when it mattered, in a team event where I was the lowest handicap in the field, a few flaws in my swing surfaced at exactly the wrong moment. It was humbling. The expectation was on me to deliver, and I did not play to my ability.
Here is the thing, though. It does not stop the practice. This week I will be back at it, because doing anything the right way is a long-term grind, not a single performance. The work I have put in does not evaporate because of one bad round, and the flaws that surfaced are precisely the things I now know to keep working on.
That is wealth creation in a nutshell, and it is why I keep returning to discipline in these pages. Building real, durable wealth is not about the one great trade or the one perfect week. It is about showing up, refining the process, absorbing the setbacks, and staying with it over years and decades. The market will humble you in a single session the way that tournament humbled me. What separates good long-term outcomes from poor ones is whether you let the bad day knock you off your process or whether you keep grinding toward doing it the right way. I share this mostly to be a bit more human with you all, but the link is real and it sits at the heart of how I think about your money.
Where We Stand
Markets reopen after the Juneteenth holiday with a genuinely unusual setup. The Fed just signaled a rate hike by year-end, oil is tumbling as the Iran peace path takes shape, and both the small cap Russell 2000 and the Dow notched their highest weekly closes on record. Those forces are pulling the market in different directions, and investors are left to sort it out.
Last week told the story in miniature. Wednesday's FOMC meeting triggered a sell off in both bonds and stocks, but Thursday staged a sharp rebound that salvaged a solid week. The S&P finished up 0.9%, led by a 7% surge in the Semiconductor Index, while oil fell 9% to $78. The yield curve flattened, with the 2-year up 10 basis points and the 30-year down 7, a move I will come back to because it speaks directly to where my real concern lies. Futures are quiet this morning, with the S&P down 0.2%, the Nasdaq near flat, and the Dow off 29 points, as the market awaits a packed week of data.
Oil continues its remarkable slide. Qatar and Pakistan reported over the weekend that US and Iranian officials agreed on a roadmap to reach a final deal within 60 days, and Brent has fallen below $80 for the first time since the early days of the war, with WTI below $76. Gas prices dropped under $4 a gallon for the first time since March, with GasBuddy projecting a move toward $3.70 now that the strait is reopening. That relief at the pump is the quiet hero cushioning the consumer and the inflation picture against the hawkish Fed.
An Energy Trade Worth Watching
The oil move has created an interesting dislocation. WTI rose from $67 the day before the war began on February 27th to a high of $113 on April 7th, and it ended last week back at $78. Here is the curious part. While crude is still up 16% from its pre-war level, the S&P energy subsector is actually down 5% over the same stretch.
When the spread between energy equities and the underlying commodity gets this wide, the risk versus reward on a trade starts to look compelling. The stocks have not kept pace with the commodity, and that gap tends to close. There is an added benefit here too. With the situation getting messy again over the weekend and likely a few more twists and turns before the memorandum of understanding becomes a final agreement, energy exposure also acts as a natural hedge. If the war re-escalates before it ultimately resolves, energy is exactly where you would want some exposure. It is a setup where you are paid to wait and protected if things deteriorate.
The Week's Main Event: PCE and Micron
There are two things that will dominate this week. Thursday brings May PCE, the Fed's preferred inflation gauge, and it carries enormous weight after CPI ran at 4.2% and PPI at 6.5%, both hotter than expected. Core PCE is projected to climb from April and may print around 3.5% year over year, running at an annualized 3.8% over the last three months. A hot number validates the nine FOMC members who penciled in a 2026 hike and would harden the market's view, with traders now pricing better than 70% odds of a quarter-point hike by October.
The other main event lands Wednesday after the close, when Micron reports. I want to spend real time here, because this may be the most consequential earnings report Micron has ever delivered.
Why Micron Matters So Much Right Now
Micron sits at the absolute center of the memory expansion that has driven this market, and the company has not been this large or this important since previous technology bubbles. The stock has climbed a blistering 297% this year, with the semiconductor index up 102%, so expectations are clearly, unmistakably high. UBS just raised its target to $1,500, a further 31% premium on top of that run, arguing DRAM demand will vastly outpace supply for years on memory-intensive AI workloads. Morgan Stanley pushed Western Digital to $650, and SK Hynix raised prices at supplier request as costs climb from tightened supply. The analyst community is convinced memory stays constrained through 2027 and into 2028.
Here is the tension I keep coming back to, and it is the single most important question hanging over this name. Micron looks genuinely cheap relative to earnings, trading around 10 times forward profits with a PEG ratio near 0.1. That looks like an extraordinary bargain but it looked cheap in 2000 too, and that is the warning worth sitting with. Back at the dot-com peak, Micron traded at a low forward multiple precisely because its earnings were nearing a cyclical top. Then DRAM prices collapsed, earnings evaporated, and the stock lost over 98% of its value. Memory has always been the most violently cyclical corner of semiconductors, where the stock looks cheapest right before the cycle rolls over and most expensive when earnings trough.
So the entire debate reduces to one question:
are Micron's earnings cyclical or structural?
My conviction, which I have held for months, is that this cycle is genuinely different because the demand is real, immediate, and driven by an AI buildout that the hyperscalers show no sign of slowing. The memory being sold is consumed now by compute already short of capacity, not laid down speculatively for demand that may never arrive, which was the fatal flaw of 2000. But I hold that view with real humility, because the commodity bears are making the one argument that deserves genuine respect.
Even if the print is strong, I would caution readers not to assume the stock rips higher. Micron has risen the day after earnings only once in its last six reports. Expectations this elevated are difficult to clear no matter how good the numbers are. Look at Jabil last Wednesday as a cautionary template. The company delivered a genuine beat-and-raise quarter on hyperscaler momentum, opened 10% higher, traded up as much as 14% intraday, and then closed a touch lower. That is what happens when a stock has already run hard into a strong report. The bar is the enemy. Wednesday's guidance, particularly on HBM as a share of DRAM revenue, will tell us a great deal about whether this is structural or cyclical, but the reaction may be volatile and counterintuitive regardless of the headline numbers.
The Token Economics Question I'm Watching
I am growing increasingly focused on a dynamic that could shape the back half of the year, and it is worth explaining carefully. Earlier this year we saw the rise of what people call "token maxxing," where companies and employees ramped up their AI usage aggressively, partly to signal productivity. That behavior, which started in late March, should have helped Q2 results at the big hyperscalers. My concern is what comes next. As the leading companies work to get their AI costs under control, token maxxing could turn into token minimization, and that shift could make Q3 guidance from the hyperscalers less robust than the market expects.
Reports suggest OpenAI is considering cutting prices, presumably to win enterprise share against Anthropic, but the entire bullish argument for why the AI buildout will not burst any time soon rests on the premise that there is not enough compute to satisfy current demand. If compute is truly the bottleneck, then what is the logic of cutting prices? Even if the goal is to gain enterprise share, they should not be able to service any incremental demand the lower prices generate, because the compute simply is not there. Those two ideas, compute scarcity and price cutting to drive volume, sit in direct tension with each other, and I do not think the market has fully reconciled them.
I want to keep this in perspective. This dynamic is only occurring at the top companies on the leading edge of AI. Roughly 95% of enterprises are still trying to figure out how to use agentic AI at all, so the broader adoption runway remains enormous. The leading firms are also pursuing token cost control intelligently, using orchestration layers to route workloads to cheaper open-source models when appropriate, which is a sign of a maturing, rational market rather than a collapsing one. But the read-through to Q3 hyperscaler guidance is something I am watching closely, because the market is pricing continued explosive momentum.
One more margin pressure worth noting on the consumer side. The surge in semiconductor prices is now starting to feed into consumer electronics, as Apple's CEO discussed last week. iPhone buyers skew toward higher income brackets and are less price sensitive, but on the margin, rising prices across consumer electronics generally are likely to weigh on demand. It is a small thing today, but it is the kind of second-order effect from the memory boom that bears watching.
My Framework: The Bull Is Transitioning, Not Ending
Let me lay out how I am thinking about the broader market, because the character of this rally is changing in an important way. The first phase of this bull market was driven largely by multiple expansion, with investors paying higher valuations in anticipation of an earnings recovery. That phase has now matured. Over the past six months, multiples have actually come down, yet the market has kept rising because earnings growth has been strong enough to offset the valuation pressure. This is no longer a valuation-led rally. It has become an earnings-driven one, and that is a healthier and more durable foundation.
The backdrop supports it. Nominal GDP is running around 7% to 8%, which is powerful for corporate revenues and operating leverage, and the data has been beating expectations across the board. The US Economic Surprise Index has surged to its highest level since August 2023, driven by stronger-than-expected jobs data, ISM services, factory orders, and job openings. The economy is genuinely outperforming, which is good news, even if it complicates the Fed's inflation fight.
I would be honest that the liquidity impulse that supercharged the first half of the year is now decelerating. Earlier in 2026, between the Fed, the Treasury, and deregulation effects, more than $500 billion of liquidity flooded the system, and it fueled a series of rotations through gold and silver, metals and rare earths, energy, and finally semiconductors. That asset-purchase run-rate has fallen from roughly $40 billion a month to around $10 billion. Liquidity is not disappearing, but the pace of support is slowing, and that typically creates a choppier market, especially where positioning has grown crowded.
This is exactly why the recent pressure in semiconductors and AI leaders makes sense, and why I do not read it as the end of anything. There is froth and leverage in parts of the market, and a pullback of around 10% in some of the previous leaders would be a perfectly normal reset rather than a thesis break, provided leadership broadens elsewhere. That broadening is the critical next step, and we are already seeing hints of it with regional banks, consumer goods, and other procyclical areas that could benefit from lower oil and underappreciated fundamentals. If those sectors begin carrying more of the load, the S&P can still push toward 8,000 by year-end even if the megacap leaders merely avoid a major breakdown rather than continuing to outperform at the same blistering pace.
I would offer one note of caution on the broadening, though. Some of the small-cap strength has a frothy character to it. Unprofitable Russell 2000 companies have actually outperformed profitable ones since April 2025, returning 60% against 38%, with the move accelerating after the April ceasefire as investors rushed into speculative small-cap tech. Healthy broadening is led by improving fundamentals, not by the lowest-quality names ripping hardest. I want to see the procyclical participation come from earnings strength rather than pure speculation for it to be durable.
One signal from the oil market is worth flagging within this framework. Despite a genuine Middle East shock that shut a fifth of global energy supply, crude only reached around $113 at its worst. In the context of a serious geopolitical crisis, that was relatively contained, and it tells me global energy supply is more resilient than feared. It also makes the long-term setup for oil look less bullish than it did earlier in the year, which is a tailwind for the inflation picture and the consumer.
So the conclusion is that the bull market is transitioning, not ending. Earnings remain strong, nominal growth is supportive, and leadership is broadening. The next phase will be less straightforward than the last, and given everything above, I am increasingly expecting a near-term "speed bump" even as I remain firmly bullish longer-term on S&P earnings growing over 25% in 2026 and the ramp of agentic AI. I do believe there is major volatility ahead leading into the midterms, but the fundamental backdrop still points higher.
The Warsh Uncertainty Lingers
Last week's hawkish hold continues to reverberate, and my concern with the new Fed remains more about substance than style. Uncertainty around a new chairman is normal, but it usually concerns communication style rather than the underlying framework. With Warsh, by stepping back from forward guidance entirely, he has left markets with little sense of the Fed's reaction function. The uncertainty band around policy has widened, and that means more volatility. He is busy building five task forces while markets are looking for clarity, and the other 18 officials will keep offering their own interpretations, potentially adding to the confusion about who leads and which data points take priority. Nine of those 18 members are now looking for at least one rate hike in 2026, up from none in March.
There is a counterintuitive wrinkle worth understanding, though. Despite the hawkish dot plot, policy actually became easier when judged against the Fed's own projections. The committee raised its 2026 rate projection to 3.8%, but it raised its core PCE projection even more, to 3.3%, implying a real policy rate of just 0.5%, down from 0.7% in March and well below the Fed's estimated neutral real rate of 1.1%. A Fed that holds rates steady while inflation runs this hot is not actually running restrictive policy. My base case remains that the Fed refrains from both hiking and cutting this year, with a slim majority choosing to tolerate elevated inflation rather than tighten. But the confidence band around that view has widened considerably.
The bond market took the message seriously, and this is where my real worry sits. The curve flattened last week, with the 2-year jumping 10 basis points to 4.15%, the highest of the year, while the 30-year fell 7 basis points. As I previewed going into the FOMC meeting, I am more concerned about bonds than I am about stocks, and the lesson I keep returning to is the 2013 taper tantrum, when a Fed signaling less accommodation sent yields surging even with the policy rate pinned. With the fiscal deficit near 6% of GDP, the bond market is where the vulnerability lies. The 10-year above 4.75% remains the level that would genuinely change my mind on equities.
A Note From Across the Atlantic
Worth flagging for those watching global markets that UK Prime Minister Keir Starmer announced his resignation this morning, ending months of political turmoil and opening a contest to replace him, the seventh leader in ten years. Sterling dipped toward its 2026 low but gilt yields were largely steady, as the resignation was widely anticipated and his likely successor Andy Burnham has been working to placate the bond market.
On Iran and the Midterms
The situation got messy again over the weekend, which is exactly the pattern of twists and turns I have warned about throughout this conflict, but my view has not changed, and I will say it again because it matters. US political parties wanting to get re-elected during the midterms is a powerful motivator to ultimately end this war. The incentive structure points squarely toward resolution, even if the path there remains bumpy and the headlines keep whipsawing oil in the meantime. The memorandum of understanding is a real step, and I continue to believe the deal holds together because the politics demand it.
Final Thought
This is a market being pushed and pulled in multiple directions, and the honest read is that the path ahead is genuinely less straightforward than the near-vertical climb we enjoyed since March. The Fed has turned more hawkish, the liquidity impulse is slowing, the megacap leaders are due for some rest, and the token economics question looms over Q3 hyperscaler guidance. I expect real volatility into the midterms and would not be surprised by a near-term speed bump or a 10% pullback in some of the former leaders.
But none of that breaks the bull. Earnings are strong and now doing the heavy lifting that multiple expansion once did. Oil is falling, which cushions both the consumer and inflation. Leadership is broadening into the procyclical corners that have lagged. And the structural AI buildout that powers names like Micron continues to show real, immediate demand rather than speculative excess. The bull market is transitioning into a more selective, earnings-led phase, and that path can still carry the S&P toward 8,000 by year-end, provided participation broadens and the former leaders simply avoid a major breakdown.
Micron Wednesday night may be the single most important read of the week, and perhaps the most consequential report the company has ever delivered, because it goes straight to the heart of whether the memory boom is structural or just another cycle waiting to roll over. I believe it is structural, but I will be watching the guidance closely, holding that conviction with humility, and bracing for a volatile reaction given how high the bar sits. PCE Thursday will tell us how much room Warsh actually has.
Like my golf game, the work here is a long-term grind. One hot inflation print or one bad Micron guide does not undo the process, and one good week does not complete it. Stay invested, stay disciplined, and keep refining the approach. That is how wealth gets built, on the range and in the market alike.
Best regards from home,
Dan Sheehan [email protected]
Subscribe: https://substack.com/@dansheehan3
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.