The markets are very choppy as we endure another sharp geopolitical oil shock, the busy stretch of second-quarter earnings season, and a live Fed decision coming up on Wednesday. Brent crude tore through $100 a barrel on escalating Middle East tensions with Iran which so the inflation outlook shows no relief for Fed Chair Warsh who has made clear he has “no tolerance for persistently elevated inflation.”
We will also have some mega-cap earnings this week with Microsoft, Meta, Apple, Amazon and many others. Google/Alphabet reported excellent revenue growth this week but also upsized their CapEx spending on data centers to a size that concerns investors on the return on their AI spend.
Oil Complex
Brent crude settled near $100.68 a barrel and WTI near $92.36 earlier this week before easing back to roughly $98.38 and $87.88, respectively, by Friday. The move has little to do with demand and everything to do with supply risk: escalating conflict involving Iran, the Houthi movement in Yemen, and the United States has raised the unusual prospect of disruption at two strategic shipping chokepoints at the same time. Houthi forces claimed responsibility for an attack on a Saudi-flagged tanker in the Red Sea, and roughly ten vessels have already diverted away from Saudi ports rather than risk the transit. That’s a real logistics disruption, not just a headline risk.
In the chart below, you can see the most recent spoke reached $92.83 in WTI crude which is oil from the USA. The RSI indicator at the bottom of the chart shows an overbought condition so we may get some relief as buyers become concerned that a cease fire headline could quickly erase these gains.
Whether the rally has legs depends on whether the disruption stays contained to shipping routes and insurance premiums, or whether it starts showing up in actual barrels taken off the market. A geopolitical risk premium can fade quickly if tensions cool; it persists if production or export capacity is genuinely impaired. For now, the size of the move — Brent +12% in a week — tells you the market is pricing real uncertainty, not a routine risk-off wobble.
The S&P 500
The S&P 500 closed essentially flat for the week at 7,411.98, which masks a fair amount of turbulence underneath. Alphabet and Tesla both disappointed investors and oil-driven inflation concerns combined with a more hawkish rate backdrop weighed on risk appetite into Friday’s close.
In the chart below we can see that the last several weeks have acted as a consolidation zone as an overbought condition gets worked off from earlier this year. These periods can be very frustrating as we see stocks up one day and down the next. Eventually, this sideways trading will end and the market will make it known where the next big move is going. In an uptrend, consolidation periods are considered rest periods before the trend continues. Unfortunately, the stock market does not guarantee anything.
Interim Earnings Commentary
This is arguably the most important week of the entire Q2 earnings season. Monday and Tuesday bring AstraZeneca, Cadence, PayPal, Coca-Cola, Boeing, Visa and Ford; Wednesday is headlined by Microsoft, Meta, ARM and Qualcomm; Thursday features Apple, Amazon and Coinbase; and Friday closes the week with Chevron and ExxonMobil — a fitting bookend given where oil prices are sitting.
The aggregate numbers so far look strong on the surface: FactSet’s blended Q2 earnings growth rate for the S&P 500 stands at 37.9%, though that figure is heavily skewed by a one-time $98 billion gain in Alphabet’s reported EPS. Strip that out and blended growth runs closer to 25.9% — still a healthy number. Ten of eleven sectors are showing year-over-year growth, seven of them in double digits, led by Energy, Communication Services, Technology and Materials. Health Care is the lone sector in decline. Revenue growth is running at 13.2%, which suggests this isn’t purely a margin or cost-cutting story — top lines are actually growing.
The read-through for the week ahead: the mega-cap results Wednesday and Thursday will do most of the work in setting the market’s near-term tone, and Friday’s energy earnings will show how much of the oil rally is already showing up in producer cash flow.
The Fed and Yield Curve
The FOMC meets Tuesday and Wednesday this week, with the rate decision due 2PM on Wednesday. Warsh has been consistent since taking over in May: inflation is “too high,” the FOMC has “no tolerance for persistently elevated inflation,” and he has pushed back on any suggestion he made commitments to the White House on the path of rates. That posture is about to be tested by a genuine supply-side inflation risk arriving in real time, courtesy of the oil market. A Fed chair trying to establish inflation-fighting credibility now has a live example of the kind of shock that can complicate the “last mile” of disinflation.
The US yield curve below is positively sloped which is good for financial institutions and investors that want safe income in their portfolios. I doubt we see any rate changes at this meeting but they may do something about how they manage the size of their $6T balance sheet.
Wrap-Up
Three threads, one week: oil supply risk pushing energy costs higher, a mega-cap earnings gauntlet that will set the market’s near-term direction, and a Fed chair walking into a press conference having to explain how a geopolitical oil shock fits into his inflation narrative.
None of these are new problems in isolation, but the timing is what makes this week worth watching. If oil prices stay elevated into next week, the conversation shifts from “transitory shipping disruption” to “the Fed now has an actual inflation input working against it” — right as it’s trying to sound tough.
On the earnings side, strong headline growth is real, but investors are being reminded, again, that one-time items can distort the aggregate picture, and it’s worth watching ex-items growth and revenue trends for the cleaner read. I’ll be watching Wednesday’s Fed decision and Thursday’s mega-cap results to set the tone heading into August.
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President, Kisco Capital
