Semiconductor stocks took a beating, and they dragged the broader tech market with them. The rest of the market held up better. The S&P 500 ended basically flat. That is because two other forces pushed in the opposite direction - falling oil prices and a strong earnings season.
To date, 85% of firms in the S&P 500 that have released earnings this quarter surpassed profit expectations. This marks the best earnings beat rate in half a decade, based on Bloomberg Intelligence data. This earnings season has seen an exceptionally high beat rate, providing a buffer against geopolitical headwinds and sector-specific shocks like the semiconductor rout. Such strong corporate results have helped anchor the broader market even as tech faced pressure.
Brent crude, the global benchmark, slipped from $100 a barrel. That is notable because Middle East tensions are still high. But crude kept moving through trade routes despite the hostilities, and there are hopes for mediated talks between the U.S. and Iran.
Pakistan is looking into restarting negotiations, after China encouraged the move, Reuters reported. Meanwhile, Donald Trump gathered his top counselors to consider escalating military strikes, as reported by the New York Times.
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The drop in oil prices alleviated concerns about rising consumer prices. Ulrike Hoffmann-Burchardi at the UBS Chief Investment Office said: "This means that inflationary pressure should subside as the year progresses, and that an aggressive tightening cycle remains unlikely in the near term."
That is good news for bonds, too. Yields dropped as oil eased.
The real story this quarter has been corporate profits. The market has a solid foundation.
Thomas Lee, a strategist at Fundstrat Global Advisors, said: "As we have seen multiple times in the past few years, equity markets tend to overreact to war developments, partly because war events tend to create uncertainty."
He added that these risk-off moments have historically been buying opportunities. "And we expect this to be the case again."
Meanwhile, U.S. business growth hit an eight-month high, driven by robust service-sector demand that counterbalanced weaker manufacturing, longer supply chains, and higher expenses. New-home sales climbed in June.
Earnings from major tech firms like Microsoft, Meta, and Apple are due next week. Investors are seeking stronger proof that huge AI investments are yielding revenue gains, not just eating into earnings.
The Middle East remains the wildcard. The chance of additional conflict remains high, and if hostilities increase, oil could revisit its 2023 peaks, Hoffmann-Burchardi warned. However, she believes crude shipments via the Strait of Hormuz will eventually bounce back.
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