The AI boom has kept this bull market on fire. While no one doubts the transformative power of AI, and we don’t yet know the full impact, if the gigantic investments don’t yield substantial profits later, there will be problems. According to Greg Ip’s column in today’s WSJ, “investment in information processing equipment has expanded 23%, after inflation, while total gross domestic product has expanded just 6%.” Half of the GDP growth in the first half of the year was due to AI investments. AI is essentially driving this economy, mitigating some or all of the negative impacts of immigration and tariff policy.

Companies like Alphabet, Meta, Amazon, and Microsoft used to be free cash flow juggernauts. Since 2023, while net income increased for these companies by 73%, free cash flow declined by 30% to $40 billion, according to FactSet. Other start-ups like OpenAI and Anthropic are losing money.

These companies are no longer the asset-light businesses that investors fell in love with.

MARKET RECAP

• US stocks -2.53%, international stocks -3.18%, bonds +1.04%.It was the worst week since May. Stocks declined in spite of solid earnings by MSFT, META, and APPL.
• Remarkably, Trump announced trade deals with the EU and South Korea, which will have a 15% tariff on imports coming into the US and a zero-tariff for US exports. You have to give Trump credit for getting the EU and South Korea to agree to this; it would appear as a Trump “win”. But 15% is about 5x the current rate, and that will be a tax on those imports. Who ends up paying for it? Time will tell, but someone will. In addition, a tariff is about as inefficient a tax as you can get. While the previously announced tariffs since “Liberation Day” have not resulted in substantial inflation (yet), they have had an economic impact (see further below).
• Trump also announced a sweeping tariff plan imposing high “reciprocal tariffs” on imports from nearly 70 countries, including Canada (35%), India (25%), and Switzerland. (39%). These would be on countries for which no deal has been made.
• GDP in Q2 was up by 3%, a significant improvement over the 0.5% contraction in Q1, mainly due to a pullback in imports and modest increases in consumer spending. For the first six months, growth was 1.2%.
• The Fed kept interest rates steady, but two governors dissented, which is highly unusual. It would appear the Fed will cut in September, but higher prices might complicate the decision.
• The PCE inflation index was released and it was up by 0.3%, and 2.6% annualized. The core PCE had a year-over-year rate of 2.8%. These numbers were higher than expected and might have been influenced by tariffs.
• Payroll increased by 73,000 in July, less than the 100,000 estimate. Revisions to May and June meant that job growth was only 19,000 and 14,000, respectively. Tariffs, workplace raids, and cuts to the Federal workforce are all impacting the economy and hiring. In response to the news and in a typical Trump move, he fired the head of the Bureau of Labor Statistics, because, of course, the job numbers must have been manipulated and not the result of some of his policies!
• The unemployment rate increased to 4.2% from 4.1%.
• The ISM Manufacturing Index fell to 48 in July, marking five months in a row below 50.
• According to the Challenger Job Cuts Report, there were 62,075 job cuts announced in July, a 29% increase from June and up 140% from July of 2024.

SPX

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MARKET RECAP

• US stocks +1.49%, international stocks +1.98%, bonds +0.35%.
• The Leading Economic Index fell by 0.3% to 98.8. The index was pulled down by low consumer expectations, rising unemployment-insurance claims and weak new orders in manufacturing.
• The Nasdaq has been above it’s 20-day moving average for about 65 days, the longest such streak since 1999.
•  Other speculative signs in the market include the top 10 stocks accounting for approximately 40% of the S&P market cap, heavily shorted stocks experiencing significant gains, and an increase in stocks being bought on margin.

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MARKET RECAP

• US stocks +0.67%, international stocks +0.16%, bonds were flat.The S&P 500 closed just below a record high set on Thursday. Bitcoin hit a record on Monday, breaking $123,000, but is currently trading at around $118,000.
• Trump announced a 30% tariff on the EQ and Mexico on Thursday.
• Trump eased export restrictions on certain types of AI chips, which helped advance the market.
• Trump spoke a lot about firing Fed Chair Powell during the week, and started reviewing cost over runs on the Fed’s building project, as a way to get Powell to leave his post. But as the week went on, Trump backed off and said he wouldn’t fire him.
• Wholesale prices were up 2.3% year over year, lower than the 2.5% forecast.
• So far, earnings are beating expectations. JPM was positive about the economy.

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MARKET RECAP

• Dow was down 1%, SPX down 0.3% and the NASDAQ down 0.1%. The dollar was down to levels dating back to 2000 on the impact of Trump’s tariff moves.
• Trump is back to his crazy tariffs, threatening a 200% tariff on pharmaceutical imports and 50% on copper, sending the metal to a record high price.
• The One Big Beautiful Bill Act, passed last week, is estimated to increase the deficit by $3.3 trillion over the next decade, according to the CBO. Trump and the Republicans insist this won’t happen. In either case, both political parties continue to ignore the deficit. Small changes now can make a big difference later. However, we are not taking any action to correct the problem. And when at some future point, the situation becomes too big to ignore, it is going to be much more difficult to fix. As the late economist Stanley Fischer once said, financial crises “take much longer to develop than you expect, and then…they happen much more quickly than you expect.”
• Trump continues to go after Fed Chair Jerome Powell, in his push for lower interest rates. Blaming Powell for not lowering rates, but the Fed has held off to see the impact of tariffs on inflation. Trump would help his cause if he didn’t resume has campaign to raise tariffs to ridiculous levels, and didn’t just pass a bill that will increase the deficit by trillions.
• NVDA broke above $4 trillion in market value.

BITCOIN – Bitcoin broke through resistance and is trading at 118,800.

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MARKET RECAP

• Trump signed the “big, beautiful” bill. Right on time to the target of July 4th that he had set.
• Trump indicated that he would impose unilateral tariffs of up to 70% on August 1.
• Jobs increased by 74,000 in June, but over half of private industries cut jobs during the month. That was only the third time since April 2020 that it had happened. Businesses cited uncertainty as the reason for holding back on hires due to immigration issues and tariffs. There is also an artificial intelligence factor, hesitancy to hire if AI can do the job at some future point. The average workweek dropped by 0.1 hours to 34.2. The unemployment rate fell by 0.1 percentage points to 4.1%, but part of that decline was due to a workforce decrease of 130,000 people.
• CPI was only up by 0.1% in May, leaving one to wonder where the increased tariffs are going. Tariffs are currently running at approximately $400 billion annually, and aggregate profits of the S&P 500 are around $2 trillion. If the $400 billion is not being covered by higher profits, it means it will come from US companies or overseas vendors.

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MARKET RECAP

• US stocks were flat on the week.
• The US joined Israel’s fight against Iran yesterday and put on what will hopefully turn out to be a knockout punch to the Iranian nuclear program.
• Oil is expected to open between $80 and $85 per barrel, up from $77 on Friday. If Iran carries out threats to close the Strait of Hormuz, prices will spike much higher.
• Social security will run out of funds in 2034, a year earlier than expected, as both political parties continue to ignore the problem.
• The Fed left interest rates unchanged.

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