Market Storylines: AI Rotation, Jobs Weakness + Earnings Ahead

**Michael Reinking** (0:00)
Hello, I'm Michael Reinking, Senior Market Strategist at the New York Stock Exchange, and this is Market Storylines. Every week, well, almost every week, we're here to keep you up to date on the key trends and events driving global markets. Now, welcome back, hopefully you survived the heat wave, and we're able to enjoy the long holiday weekend. Now, it has been a couple of weeks since we were last with you, straddling the end of Q2 and the start of Q3, and we've got a lot to cover, so let's dive in. Since Eric was last on, we officially put Q2 and the first half of the year in the books. Let's just rewind the clock for a second. As Q1 drew to a close, the S&P 500 was near year-to-date lows. However, there were some green shoots in the final days of the quarter. Markets started to bounce as it appeared the administration was looking for an off-ramp in Iran. As the ceasefire came to fruition, investors were mispositioned, leading to a scramble to put capital back to work. And one of the strongest earning seasons in recent memory, and in the case of technology, my career, threw some fuel on the fire. The rally continued pretty much unabated throughout the quarter, sending major indices to new all-time highs, closing out the quarter with double-digit gains.
Initially, the rally took everything higher, but as the quarter progressed, there was quite a bit of ebb and flow beneath the surface, in terms of leadership. That being said, there was one constant throughout most of the quarter, the leadership of the AI CapEx beneficiaries, particularly semiconductor and memory stocks, which pretty much went parabolic until the middle of June. To put that in perspective, in Q2, the ICE semiconductor index was up nearly 100%.
Volatility increased on the way up, and that along with some growing concerns around token maxing, the use of cheaper open source models, and the durability of CapEx spending, as there was an increase in the amount of capital being raised, caused some profit taking. And that has led to some very violent rotational activity over the last two weeks, as traders have trimmed momentum winners, and have been looking to reposition portfolios for the second half of the year.
Now, the last couple of weeks have been dominated by AI related headlines, Shocker, which have added to the volatility. And I'll try to summarize those, how those have kind of come full circle in a minute. Now, last Thursday, ahead of the long holiday weekend, the main story was the June jobs report.
And after a couple of months of very strong numbers, this report was pretty disappointing. Non-farm payrolls increased 57,000 below the street estimate of 110,000. And there were negative revisions to the previous two months, leaving the trailing three-month average at a pretty healthy 110,000.
Now, the more volatile household survey told a very different story, with 507,000 jobs lost and a big drop in the labor participation rate, which fell to 61.5% from 61.8%, helping the unemployment rate drop to 4.2%, but obviously for the wrong reason. Now, the mix of job gains were not positive with education and health care services accounting for the entire increase. And somewhat surprising was the 61,000 job decline in the leisure and hospitality. Now, there was some expectation that this segment would be strong given the world cap impact, that which for the record outside of the US exit this week, this has been a very entertaining tournament. Roe. Now, the fact that the data center build out is not translating into job gains in the employment data is also raising some eyebrows. Now, overall, the report was disappointing, but this could just be some balancing out of the data after a couple of surprisingly strong readings. Now, the claims that over the last couple of weeks doesn't suggest any real change in current labor market conditions, keeping us firmly in this low hire, low fire environment.
Now, there was expected to be a bit of a summer lull this week, ahead of next week, which is full of catalysts, but as the Rolling Stones said, you can't always get what you want. Geopolitics came back into the fray with the US and Iran exchanging fire and President Trump saying the ceasefire was over as far as he was concerned on the sidelines of the NATO summit in Turkey on Wednesday, where he also discussed Greenland, potentially pulling troops from Europe, and his disappointment with Spain. Meanwhile, Russia and Ukraine is also a hot topic as that conflict continues. Now, the Iran news caused some volatility yesterday as traders broke out the typical conflict playbook, but the overall moves were muted as investors continue to discount a significant escalation of kinetic activity ahead of midterms. And as President Bush once said, fool me once shame on you, fool me, you can't get fooled again.