Weak Retail Sales and Falling Sentiment
Retail sales fell 0.6% in July, the weakest month since May 2025 and well below forecasts for a small gain. This followed a 0.2% rise in June. The drop was worst in online shopping, autos, gasoline, and electronics.
Some weakness may be short-lived. Amazon's Prime Day moved into June this year, which helped cause a 2.2% fall in online sales in July. Earlier spending had also been lifted by the World Cup and tax refunds. Even after removing the more jumpy categories, retail sales still fell overall, which points to real cooling in consumer spending.
Consumer sentiment also came in weak. The University of Michigan's early August index dropped to 51 from 55.2 in July, below the 54.5 economists expected. People are more worried about the economy and rising living costs. One-year inflation expectations rose to 4.3%, while five-year expectations held at 3.3%.
The July retail drop includes some one-off factors. The key question for markets is whether this is a short pause in spending or the start of a wider slowdown. Guests earlier were not very worried about the consumer, so it stays unclear if this is a real trend.
AI Earnings Validate the Tech Trade
Markets cleared several hurdles this week. Coming in, there were worries about a tech bubble and the inflation outlook, but earnings backed the AI trade and eased anxiety in the sector. Companies across key layers of the AI infrastructure buildout - networking and optics - reported, showing that funding and demand stay strong.
This was reinforced by SanDisk at its investor day, which gave strong growth visibility for the next few years and fueled the rotation into memory names this week. The KOSPI swung back into a technical bull market (a rise of 20% or more from a low).
The Late-August Setup
The rest of the month could be the calm before a late-August storm, when Nvidia (NVDA) earnings, the PCE inflation report, and Jackson Hole all arrive. Kevin Walsh may have an easier job going into those events after milder-than-feared inflation prints plus today's retail sales and sentiment data. The sentiment report suggests inflation pressure may be cooling, which lowers the urgency for a rate hike for now. That is why small caps have been rallying.
What to Watch Next Week
Retailer earnings are the main focus. Reports come from Home Depot (HD), Lowe's (LOW), Target (TGT), Walmart (WMT), TJX (TJX), and Ross Stores (ROST). These give a broad view of the consumer across all parts of the K-shaped economy. With retail sales lower and sentiment weak, the test is whether the consumer kept spending this quarter even as many reports say people are tightening their belts - a signal that shows up in report after report.
A few Chinese ADRs are also on the radar. For Alibaba (BABA), the watch is whether margins and profits recover the way they did at JD (JD); this is a big AI story and needs proof of making money from it. Baidu (BIDU) is a tricky case: AI is its biggest chance but also its biggest threat, because heavy spending to gain efficiency risks hurting its own traditional search business - much like Google (GOOGL).
