The S&P 500 broke its run of weekly gains last week, a movement Wolfe Research attributes to robust employment figures that have heightened worries about possible Federal Reserve interest rate increases later in the year. Rising tensions between the U.S. and Iran also exerted downward pressure on markets.
Equity markets were further strained when Alphabet announced plans to raise capital through a stock issuance and reports surfaced that Meta may be considering a similar move. Those developments added to selling pressure over the course of the week.
Despite the recent decline, Wolfe Research does not interpret the move as a reversal of the broader trend. The firm noted that U.S. markets have grown more reactive to employment and inflation data amid elevated oil prices and the leadership change at the Fed - factors that have increased sensitivity to macroeconomic prints.
Looking ahead, Wolfe Research expects market sentiment to improve following this week’s inflation reports, provided there are no negative surprises. The firm expects investor attention to shift back toward developments in artificial intelligence and the planned initial public offering from SpaceX.
Wolfe Research highlights that 24 of the top 25 performing stocks in the S&P 500 year-to-date are linked to AI, and it notes that spending on data centers remains robust. On that basis the firm retains a constructive stance on the market, specifically preferring technology and semiconductor sectors.
However, Wolfe Research sees limited scope for market leadership to broaden beyond a small number of areas. The firm adds that consumer discretionary stocks could see gains if a settlement is reached with Iran and oil prices fall, but any rotation into that sector would likely be short lived.
Key macro releases this week include the Consumer Price Index on Tuesday and the Producer Price Index on Wednesday. Wolfe Research warned that inflation readings above expectations could prompt a near-term selloff, particularly if tensions with Iran remain unresolved.
Market context and near-term focus
Wolfe Research expects inflation prints to be the primary near-term market catalyst. If those prints are neutral to favorable, the firm anticipates renewed appetite for AI-related stocks and semiconductors, and renewed focus on SpaceX’s IPO timetable. Conversely, higher-than-expected inflation in the absence of geopolitical de-escalation could amplify selling pressure.