Oil and inflation
WTI is back around 85, Brent above 90. Markets look comfortable with that, but the risk is a move back up in headline inflation. Recent CPI and PPI reports looked milder, yet the parts inside them that feed PCE, the Fed's preferred inflation gauge, suggest inflation will not get back to the Fed's target anytime soon. This does not force an immediate Fed move; the Fed stays on hold for now. Oil feeds headline inflation directly, and it also ripples into core inflation. We are not out of the woods.
The earnings bar for tech
Macro data is light this week and the Fed is in its blackout period, so attention shifts to company results. Reports come from the hyperscalers, Tesla, and some software names.
The bar is higher for tech than for other sectors. What matters with anything AI or tech-adjacent is the gap between two sets of estimates: the sellside consensus (Wall Street's published forecasts) and the buyside expectations (what big investors actually expect, the "whisper number"). When that gap is wide, a company can beat the sellside consensus but still miss the higher buyside expectation, and the stock will not be rewarded. The Samsung report a few weeks ago showed exactly this.
Compare that to a day when 3M and GM posted a double beat and triple beat; that kind of clean beat serves those stocks well. Tech is more sensitive. The key thing to watch is how stocks react when results land between the consensus bar and the expectations bar.
Capex fear and the rotation
What if hyperscalers announce a cut in capital spending (capex)? That worry is already part of why money has rotated out of tech. It shows up in the recent weakness in semiconductor stocks and a shift toward more classically defensive sectors. There is nervousness that the capex bar has been set too high. The outlook in these reports matters as much as the numbers.
Across any grouping of these stocks, whether the Mag 7 or what I call the "neural 9" (which adds Micron and Broadcom), consensus expects a slowdown in the rate of earnings growth. Growth stays positive and in double digits, but it is decelerating. The slowdown is big enough that by the end of this year, the other 493 stocks in the S&P 500 are expected to grow faster than the Mag 7. Direction and rate of change matter more than simply good or bad. Better-or-worse beats good-or-bad. This explains much of the volatility inside the tech and tech-adjacent space.
Smooth surface, churn beneath
The S&P 500 has traded in a narrow range for two months, calm on the surface, with fierce rotation underneath. The energy sector has more than 50% of its stocks trading at four-week highs, while every other sector sits between 1% and 13%. That tells you the recent market strength is largely confined to energy, driven by oil's move up after the war with Iran reescalated.
Under the calm, there is historically high dispersion and historically low correlation. Individual stocks show far more volatility than the index does. The VIX is up, but even that masks much more volatility beneath it. Energy's rebound puts it firmly back in the lead year-to-date. Oil could move in fits and starts, which could flip the rotation again, back into tech or into defensive names.
The right strategy is not to try to get ahead of these sector moves. Better to rebalance more often, either on a set schedule or based on volatility, trimming the winners and adding to the laggards so the portfolio stays in gear.
Chipflation and demand destruction
TSMC reported price hikes coming in 2027. Rising chip prices, "chipflation," were the Achilles heel for many of these companies last earnings season. Higher prices matter a lot here. Enterprises are now weighing their options as prices, well beyond token prices, go through the roof. That feeds inflation through import inflation and through software and equipment costs.
At some point, higher prices cause demand destruction, or they invite lower-priced competition, which is what China is doing by managing to do things far more cheaply. That competition makes it hard for companies to justify their costs and free cash flow. This is creative destruction, the natural result of a powerful new technology. We are now living in that destruction period. That is why it is far too soon to stop worrying about inflation, and why the threat of demand destruction from higher prices is still real.
