Geopolitical Tensions Escalate While Risk Assets Fall
Stuart Katz
Markets traded lower this week as geopolitical tensions escalated in the Middle East and the price of oil surged +15%. The S&P 500 and Nasdaq each declined around -2%, with the Russell 2000 close behind at -1.5%. Most equity factors traded lower, including Growth, Value, and Equal-Weight, with market breadth weakening. The two exceptions were Momentum and High Beta, which outperformed after trading lower in recent weeks as semiconductor stocks sold off. Energy and Utilities were the top performing sectors, while Consumer Discretionary declined nearly -7% as rising oil prices weighed on consumer stocks. Bonds traded lower as interest rates rose across the yield curve, with longer-maturity bonds underperforming. The VIX climbed back toward 20 late in the week, and the U.S. dollar strengthened as interest rates rose and markets turned volatile.
Key Takeaways
1. Oil Prices Rise as the U.S.-Iran Conflict Escalates
The U.S. carried out a 12th consecutive night of strikes, and Iran continued targeting tankers in the Strait of Hormuz, the waterway that carries a large share of the world’s oil trade. Yemen’s Houthi rebels escalated tensions by threatening a naval blockade against Saudi Arabia and opening a second source of disruption in the Red Sea. Oil prices rose in response: WTI crude climbed above $90 and Brent crude, the international benchmark, briefly touched $100 a barrel, both around six-week highs. Diplomatic progress has been limited, with Secretary of State Marco Rubio saying Iran is “not serious about talks.” Why it matters: The conflict had shown signs of easing, but each new escalation, including the Houthi threat, adds fresh pressure to oil prices.
2. Rising Oil Prices Push Treasury Yields to Fresh 52-Week Highs & Revive Bets on Fed Rate Hike
This week’s move in yields was a direct extension of the Middle East story above. The 10-year Treasury yield rose above 4.70%, a new 52-week high, as inflation concerns worked their way into the bond market. Fed funds futures now assign a greater than 80% probability to a rate hike at the Fed’s September meeting, up from around 50% odds a week ago. Why it matters: Treasury yields are tracking the Middle East conflict, underscoring how closely linked energy and interest rates have become.
3. Alphabet’s Strong Quarter Was Overshadowed by A Growing AI Capex Commitment
The company reported second-quarter results Wednesday that beat expectations across the board. Revenue rose +24% to $120 billion, Google Cloud revenue jumped +82%, and operating margins expanded. However, shares still declined about -5% in after-hours trading as investors worried about the spending driving that growth. The company raised its 2026 capital expenditure guidance to a range of $195 billion to $205 billion, up from $180 billion to $190 billion previously, and said spending would increase further in 2027. Quarterly free cash flow was negative for the first time in the company’s history, as capital spending outpaced the cash generated by the operating business. Why it matters: The market isn’t questioning whether AI is driving growth; Alphabet’s numbers say it is. The question is whether the growth is worth its price, with investors wanting evidence that the company can earn a positive return on its investment.
4. Calendar Events Could Answer Many of the Questions Discussed Above
The Fed’s two-day meeting concludes Wednesday, July 29, with a rate decision and press conference that will show whether officials are treating the energy-driven inflation pressure as a reason to alter policy and potentially raise interest rates. Microsoft and Meta report earnings the same day after the market closes, adding two more data points to the AI-spending debate. Thursday brings the Q2 GDP advance estimate and the June PCE index, the Fed’s preferred inflation gauge, with Apple and Amazon reporting earnings after the market closes. Why it matters: Each item discussed above, including oil’s effect on inflation, the return on AI capex investment, and the Fed’s next move, will be tested within a two-day window next week.
Insights
Geopolitical Tensions Escalate While Risk Assets Fall
Stuart Katz
Markets traded lower this week as geopolitical tensions escalated in the Middle East and the price of oil surged +15%. The S&P 500 and Nasdaq each declined around -2%, with the Russell 2000 close behind at -1.5%. Most equity factors traded lower, including Growth, Value, and Equal-Weight, with market breadth weakening. The two exceptions were Momentum and High Beta, which outperformed after trading lower in recent weeks as semiconductor stocks sold off. Energy and Utilities were the top performing sectors, while Consumer Discretionary declined nearly -7% as rising oil prices weighed on consumer stocks. Bonds traded lower as interest rates rose across the yield curve, with longer-maturity bonds underperforming. The VIX climbed back toward 20 late in the week, and the U.S. dollar strengthened as interest rates rose and markets turned volatile.
Key Takeaways
1. Oil Prices Rise as the U.S.-Iran Conflict Escalates
The U.S. carried out a 12th consecutive night of strikes, and Iran continued targeting tankers in the Strait of Hormuz, the waterway that carries a large share of the world’s oil trade. Yemen’s Houthi rebels escalated tensions by threatening a naval blockade against Saudi Arabia and opening a second source of disruption in the Red Sea. Oil prices rose in response: WTI crude climbed above $90 and Brent crude, the international benchmark, briefly touched $100 a barrel, both around six-week highs. Diplomatic progress has been limited, with Secretary of State Marco Rubio saying Iran is “not serious about talks.” Why it matters: The conflict had shown signs of easing, but each new escalation, including the Houthi threat, adds fresh pressure to oil prices.
2. Rising Oil Prices Push Treasury Yields to Fresh 52-Week Highs & Revive Bets on Fed Rate Hike
This week’s move in yields was a direct extension of the Middle East story above. The 10-year Treasury yield rose above 4.70%, a new 52-week high, as inflation concerns worked their way into the bond market. Fed funds futures now assign a greater than 80% probability to a rate hike at the Fed’s September meeting, up from around 50% odds a week ago. Why it matters: Treasury yields are tracking the Middle East conflict, underscoring how closely linked energy and interest rates have become.
3. Alphabet’s Strong Quarter Was Overshadowed by A Growing AI Capex Commitment
The company reported second-quarter results Wednesday that beat expectations across the board. Revenue rose +24% to $120 billion, Google Cloud revenue jumped +82%, and operating margins expanded. However, shares still declined about -5% in after-hours trading as investors worried about the spending driving that growth. The company raised its 2026 capital expenditure guidance to a range of $195 billion to $205 billion, up from $180 billion to $190 billion previously, and said spending would increase further in 2027. Quarterly free cash flow was negative for the first time in the company’s history, as capital spending outpaced the cash generated by the operating business. Why it matters: The market isn’t questioning whether AI is driving growth; Alphabet’s numbers say it is. The question is whether the growth is worth its price, with investors wanting evidence that the company can earn a positive return on its investment.
4. Calendar Events Could Answer Many of the Questions Discussed Above
The Fed’s two-day meeting concludes Wednesday, July 29, with a rate decision and press conference that will show whether officials are treating the energy-driven inflation pressure as a reason to alter policy and potentially raise interest rates. Microsoft and Meta report earnings the same day after the market closes, adding two more data points to the AI-spending debate. Thursday brings the Q2 GDP advance estimate and the June PCE index, the Fed’s preferred inflation gauge, with Apple and Amazon reporting earnings after the market closes. Why it matters: Each item discussed above, including oil’s effect on inflation, the return on AI capex investment, and the Fed’s next move, will be tested within a two-day window next week.
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