The exchange of strikes between the US and Iran rattled international participants in US markets, producing broad weakness overnight. When US cash markets opened, equities rallied, but the bounce was narrow and selective. The Nasdaq 100 closed up roughly 80 points, yet only about 20-22% of S&P 500 components finished higher. Strip out semiconductors and the S&P would have been down almost 1%. Energy led as the sector, the standard first reaction to geopolitical conflict through a crude oil spike, but it added only three to five points to the index. The semiconductor industry group contributed well over 30 points. Chip stocks took the wheel as the day wore on and drove market leadership.
The conflict no longer carries the shock factor it did three or four months ago. With crude oil in the mid-60s, market positioning had reached a point where only negative surprise was left; there was little good news still to price in. That showed in the crude futures curve, which had flattened and even normalized, with longer-dated crude turning slightly more expensive than short-dated. After the strikes it flipped back to the pattern seen through the conflict: August crude cheaper than September, September cheaper than October, October cheaper than November, sloped in that direction.
The Fed minutes
Markets started bouncing off session lows heading into the minutes, so the shock factor was absent there too. Inflation drew more discussion than employment at the meeting. A Bloomberg headline framed it well: the Fed was pretty hawkish, but you already knew that. There was little new. One note stood out: the AI build-out, whose ultimate goal is higher productivity that could be deflationary down the line, is inflationary in the interim, before those productivity gains are realized, because of bottlenecks. Apple's decisions reinforce this, as do rising power bills and electricity demand. There is a consensus hope the productivity gains arrive, but for now the build-out pushes prices up rather than down.
The memory trade
Memory is a highly volatile part of the market. SK Hynix is coming to US markets this week with an offering of almost 178 million ADRs, each representing about a tenth of a share of its common stock, reportedly over seven times oversubscribed. That demand has to come from somewhere: cash, increased leverage, or selling other memory stocks. Time will tell which, but it is a large block of liquidity the market must absorb. Combined with Micron, these are super high-beta names right now, and their importance to the overall market cannot be understated.
Bank of America laid out the fundamentals well while reiterating a buy rating on Micron. It argues AI and cloud infrastructure spending could reach $1.5 trillion next year, 40 to 50% above this year's level, with memory capturing up to 40% of that spend. Its $1,550 price target values Micron's traditional memory business separately from its high-growth HBM memory business, using a sum-of-the-parts approach on forward earnings multiples. At $1,550, the high-end memory business trades at only 31 times price to earnings. Between that and a potentially blockbuster SK Hynix debut, there is heavy action in memory.
PepsiCo earnings
The maker of Pepsi and Frito-Lay traded lower pre-market on quarterly results, with real worries still hanging over the consumer. The stock has been range-bound this year as the company works a turnaround, trying to refocus toward a more health-conscious consumer than it faced a couple of decades ago. Core EPS came in at $2.20, roughly in line. Unadjusted EPS was $2.18, better than the 92 cents a year earlier. Operating profit was just over $4 billion, in line to a slight miss. Operating margins missed at 16.4% against an expected 17.3%.
Regionally, North America revenue fell about 1.7% year-over-year, missing estimates, while Latin America rose 15%, beating. International has been the standout while North America lags. The shift toward protein-focused and fiber-focused snacks is taking longer than hoped. Full-year guidance held unchanged at 2 to 4% organic revenue growth, probably lighter than the street wanted. Tying back to the inflation theme, management sees input cost inflation running higher in the second half of the year than in the first.
