Big Tech Spending Jitters Meet Oil Price Swings

Equity markets extended their slide this week as the conflict between the U.S. and Iran continued to intensify. After Brent crude fell as low as $71 per barrel at the start of July, halted traffic through the Strait of Hormuz has pushed the price back toward $100 per barrel. With higher energy costs back in focus, inflation concerns have resurfaced, causing bond yields to rise and weighing further on equities. All three major U.S. equity indexes finished the week in the red, with the tech-heavy Nasdaq performing the worst, down 1.61%. At the sector level, energy was the only notable bright spot, gaining more than 3.34%. Consumer discretionary and communication services posted the largest weekly declines, falling 5.22% and 3.94% respectively. This market weakness came despite a strong start to earnings season, with results thus far exceeding expectations.

Second-quarter earnings season is underway, with 27% of S&P 500 companies having reported. Results to this point have been strong relative to expectations, as both the percentage of companies reporting positive earnings surprises and the magnitude of those surprises are above recent averages. Of the companies that have reported, 86% have exceeded earnings estimates, while aggregate earnings have surpassed estimates by 39.3%. It should be noted that the unusually high earnings percentage for the index is due to the surprisingly high EPS reported by Alphabet ($9.11 vs $2.88) which is attributed to unrealized equity investment gains. Both figures relating to overall company reported earnings are above their respective five-year and 10-year averages. As a result, the expected earnings growth rate for the quarter has risen to 37.9%, up from 23.2% at the end of the second quarter. At the sector level, 10 of the 11 sectors are reporting, or are projected to report, year-over-year earnings growth, with seven expected to deliver double-digit growth. Energy, information technology, and materials are expected to be the strongest performers, while healthcare is the only sector projected to report a decline.

Looking ahead to next week, investors will remain focused on earnings season, with Microsoft, Meta, Apple, and Amazon—four of the world’s largest companies—all scheduled to report. Management commentary will be just as important as the financial results, particularly as investors look for updated forecasts on AI-related capital expenditures, which have been a major driver of corporate investment and technology-sector growth. On the economic front, the Fed is scheduled to announce its next interest rate decision on Wednesday. Rates are expected to remain unchanged. However, following the recent surge in energy prices and its potential effect on inflation, the probability of a rate hike at this meeting has risen to roughly 36%, up from 12% just one week ago.