U.S. equities finished lower last week as investors weighed an escalating conflict with Iran against renewed concern over the scale of AI-related spending. The technology-heavy NASDAQ Composite was the worst performer, falling 2.1 per cent, while the S&P 500, an index of the largest U.S. companies, declined 0.6 per cent. Small caps also fell, with the Russell 2000 down 1.1 per cent. Treasury yields moved sharply higher, with the U.S. 10-Year yield crossing above 4.7 per cent for the first time since early 2025. The move weighed on fixed income, as the Bloomberg U.S. Aggregate Bond Index (the “Agg”), a broad measure of investment-grade fixed income, declined 0.7 per cent.
Geopolitics returned to the forefront as the conflict with Iran escalated. Three U.S. service members were killed in an Iranian attack on a base in Jordan, and the U.S. deployed additional forces toward the region as it considered a broader response. The conflict also widened along a new front, as Iran-backed Houthi militants extended their campaign into the Red Sea, claiming attacks on two Saudi oil tankers and raising the prospect of a second major disruption to global energy flows alongside the Strait of Hormuz. The renewed threat to supply pushed oil roughly 12 per cent higher on the week, with WTI crude ending the week above $90/bbl.
Attention also turned to an important slate of earnings, led by Alphabet (GOOG) and Tesla (TSLA). Alphabet delivered a strong quarter, with cloud growth and AI demand topping expectations, yet its shares fell nearly eight per cent for the week after the company again raised its capex plans and pointed to another large investment ramp in 2027. Tesla dropped 18 per cent and posted its largest single-day market-cap loss on record, as a profit miss and heavy capital spending outlook overshadowed progress on Robotaxi. This reaction captured a broader dynamic this earnings season: even with the market expecting a robust 37 per cent earnings growth for the S&P 500 in the second quarter, strong results have often been met with muted or negative moves, underscoring how high the bar has become for large technology companies.
See more: Market Implications and Manager Reactions to Iran Escalation
Beneath the headlines, the labor market remains firm. Initial jobless claims fell to their lowest level since 1969, pointing to limited layoffs even as the broader outlook stays uncertain. Inflation risk, meanwhile, moved higher on several fronts: alongside the jump in energy prices, the administration reimplemented tariffs of up to 12.5 per cent on most major trading partners. Against that backdrop, markets have leaned toward Fed tightening, with CME Group’s FedWatch tool showing a 34 per cent probability of a rate hike at next week’s July meeting and a 57 per cent probability by the September meeting. Another consequential week lies ahead, with the Fed’s decision landing alongside earnings from megacap tech companies including Microsoft (MSFT), Meta (META), and Amazon (AMZN).
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