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♦ Waterloo Capital ♦
Last Week
on Wall Street
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S&P 500
7,458
▼ -1.55% WK
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DOW JONES
52,146
▼ -0.93% WK
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NASDAQ
25,520
▼ -2.90% WK
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10-YR YIELD
4.54%
▼ -2 BPS WK
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LEAD Markets & Macro
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A blockade returned to the Strait of Hormuz, a Chinese AI model rattled the chip complex, and the biggest banks opened earnings season with records. The chip trade fell into a bear market. The rest of the market spent the week refusing to follow it down.
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The week opened on the back foot. The U.S.-Iran ceasefire gave way over the weekend, the naval blockade of the Strait of Hormuz resumed, and crude jumped nearly 10% in a single session on Monday, dragging the inflation conversation right back onto the trading floor. Then Tuesday delivered the two best pieces of news the market has had in a month, in the same morning: a June inflation report that came in cooler than anyone expected, and a synchronized set of record results from the five largest banks in the country. More on both below. The indexes spent the middle of the week grinding higher on that combination.
Then the AI trade cracked. The selling started Thursday in the memory names and megacap tech, and it accelerated overnight when Taiwan Semiconductor delivered a quarter that beat on both lines, raised its full-year revenue and spending outlook, pledged another $100 billion toward U.S. fabs, and watched its stock fall 7.3% in Taipei anyway. Friday morning, Chinese startup Moonshot released Kimi K3, the largest open-weight AI model ever launched, and traders did not need the history lesson: the comparisons to last year's DeepSeek moment were instant. Tokyo took its worst session in months, the selloff went global, and by Friday's close the Philadelphia Semiconductor Index had fallen into a bear market, 20% below its record, capping the group's worst week since the tariff shock of April 2025. Notably, the damage did not trace back to demand. The results were strong and the analysts spent the week raising targets. This looked like a crowded trade thinning out, not a story ending.
Here is the part worth sitting with: the broad index lost a fraction of what its loudest sector did. Against a chip benchmark that shed a fifth of its value from the peak, the S&P 500 gave back less than 2% on the week and remains within shouting distance of its records. Energy and consumer staples led the sector tape, the equal-weight index held up better than the cap-weighted one, and Treasury yields finished slightly lower. Money did not leave the market; it moved within it, out of the year's hottest trade and into banks, energy, and the average stock. For diversified portfolios, this is precisely the week that breadth is for. The portfolios that held the whole basket collected from the sectors that worked while the loudest corner of the market took its medicine, and never had to guess which day the rotation would start.
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BOTTOM LINE
The chip trade fell into a bear market and the broad index gave back less than 2%, because banks, energy, and the average stock picked up the load. Rotation is not the same thing as retreat.
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By the Numbers
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Semiconductors: the Philadelphia Semiconductor Index entered a bear market Friday, 20% below its record, in the group's worst week since April 2025 |
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Crude snapped back: WTI jumped 9.4% Monday above $78 and Brent rose 9.6% above $83 as the Hormuz blockade resumed |
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Kimi K3: Moonshot's new model carries 2.8 trillion parameters, the largest open-weight AI model in the world at launch |
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Rotation: energy and consumer staples led S&P 500 sector performance on the week, and the equal-weight index outperformed the cap-weighted benchmark as tech fell sharply |
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Retail sales: rose 0.2% in June, in line with forecasts, cooling from May's revised 1.0% gain |
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Nikkei 225: fell about 4% Friday as the chip selloff went global, its worst session in months |
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· Two Stories That Moved the Tape ·
The Week's Defining Headlines
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STORY 01 Macro · Inflation
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The key takeaway,
consumer prices actually fell in June, the biggest one-month decline in more than six years, and core inflation did not move at all. Nearly all of the relief came from energy. The same strait that delivered it spent this week threatening to send the invoice back.
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After May's headline reading came in hot at 4.2%, economists penciled in only modest relief for June: a 0.2% monthly dip and a 3.8% annual rate. The Bureau of Labor Statistics beat both numbers on Tuesday morning. Headline prices fell 0.4% on the month, the largest single-month decline since April 2020, pulling the annual rate down to 3.5%. Energy did the heavy lifting, falling 5.7% as June's ceasefire pricing worked its way to the pump. But the quieter details were arguably better: core prices were flat on the month, shelter rose just 0.1%, and services outside of energy, the category the Federal Reserve watches most closely for signs that inflation is digging in, did not rise at all.
Treasury yields fell sharply on the release, and futures traders trimmed the odds of a September rate hike to roughly 63% from better than 75% a day earlier, the first meaningful softening in rate expectations since the Fed's hawkish June meeting. The asterisk on all of it is the calendar. June's relief was concentrated in an energy component that was priced during a ceasefire, and that ceasefire no longer exists: by Friday, crude had retraced much of its June decline as the blockade resumed. Whether the July report gives back some of June's progress is an open question, and energy moves have historically reached the broader index with a lag. The market took the win. It did not take it as the final word.
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DATA THAT DROVE THE STORY
| ■ | Headline CPI: fell 0.4% in June vs. consensus for a 0.2% dip, the largest monthly decline since April 2020 |
| ■ | Annual rate: 3.5%, down from 4.2% in May and below the 3.8% forecast, the first deceleration in five months |
| ■ | Core CPI: flat month over month and 2.6% year over year, both cooler than expected |
| ■ | Energy: down 5.7% on the month, the dominant driver of the headline decline |
| ■ | Services: shelter up just 0.1%, services excluding energy flat, transportation services down 0.3% |
| ■ | Rate expectations: per CME FedWatch, traders cut September hike odds to about 63% from more than 75%, with the target range at 3.50% to 3.75% |
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Source: CNBC: Consumer prices posted their biggest decline in six years →
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STORY 02 Earnings · Financials
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The key takeaway,
all five of the largest U.S. banks reported before Tuesday's open, and the results were not subtle: surging trading revenue, a full-throated dealmaking rebound, and the best quarter Goldman Sachs has ever printed. The volatility that has rattled everyone else this year showed up on Wall Street's income statement as revenue.
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JPMorgan Chase, Goldman Sachs, Bank of America, Citigroup, and Wells Fargo all released second-quarter results in the same pre-market window, one of the most concentrated single-day earnings signals the sector has produced in years, and the tape got records from the two that matter most. JPMorgan grew its profit 41% from a year ago in one of its largest beats in recent memory, with equities trading revenue nearly doubling and investment banking fees hitting their highest level since 2021. Jamie Dimon described the backdrop as "a particularly favorable environment with an elevated level of market activity," which is bank-speak for the same headlines that gave everyone else heartburn. Goldman went further: per-share earnings nearly doubled from a year earlier on a 39% jump in revenue, the strongest quarterly performance in the firm's history.
Two engines drove the quarter, and both are cyclical tailwinds that arrived at once. Choppy markets kept clients trading, pushing the five banks' combined trading haul toward a record. And the deal machine restarted: U.S. merger activity surged 72% industrywide in the first half, June's record-setting SpaceX listing spread underwriting fees across nearly the entire group, and David Solomon told analysts Goldman's advisory backlog now sits at its highest level in five years, with demand for AI-related financing spreading well beyond its original tech and infrastructure base. Whatever the rest of the market decides about the AI trade's valuation, the intermediaries have already been paid, and the backlog suggests the toll booth stays busy into the fall.
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DATA THAT DROVE THE STORY
| ■ | JPMorgan Q2: EPS of $6.14 vs. the $5.85 consensus on revenue of $58.02 billion vs. $50.19 billion expected; profit up 41% year over year |
| ■ | Goldman Sachs Q2: EPS of $20.98, nearly double a year earlier, on net revenues of $20.34 billion, up 39%; the best quarter in firm history |
| ■ | Trading: JPMorgan equities revenue up 86% to $6.0 billion; combined trading revenue for the five banks approached $39 billion |
| ■ | Dealmaking: U.S. M&A activity up 72% industrywide in the first half; JPMorgan investment banking fees up 30% to $3.3 billion, highest since 2021 |
| ■ | Pipeline: Goldman's deal backlog at its highest level in five years, per CEO David Solomon |
| ■ | Fee catalyst: SpaceX's $86 billion June IPO, the largest ever, generated fee income for nearly every bank in the group |
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Source: CNBC: Bank earnings takeaways →
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· Other Things Worth Knowing ·
Around the Water Cooler
Six stories from this week worth your morning coffee.
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Technical trading models are mathematically driven based upon historical data and trends of domestic and foreign market trading activity, including various industry and sector trading statistics within such markets. Technical trading models, through mathematical algorithms, attempt to identify when markets are likely to increase or decrease and identify appropriate entry and exit points. The primary risk of technical trading models is that historical trends and past performance cannot predict future trends and there is no assurance that the mathematical algorithms employed are designed properly, updated with new data, and can accurately predict future market, industry and sector performance.
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