Equities Climb as Investors Look Beyond AI Leaders

For the week ending 2 July 2026

As of midday Thursday, global equities were higher on the week amid a rotation away from AI names toward smaller-cap and value stocks. The yield on the US 10-year Treasury note rose 8 basis points to 4.47%, while the price of a barrel of West Texas Intermediate crude oil continued to ease, slipping to $67.40 from $69.50 last Friday. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), fell to 17.9 from 19.6.

MACRO NEWS

US hiring slowed in June

The recent streak of outsized gains in US nonfarm payrolls was snapped in June, with the economy adding just 57,000 new workers — half of what had been expected. In addition, readings for the prior two months were revised down a total of 74,000 jobs. The three-month average payroll gain fell from 164,000 to 111,000 per month, still a solid pace. On the bright side, the unemployment rate fell to 4.2% from 4.3%, though the decline was driven by a drop in the participation rate. After the data were released, Fed rate hike odds declined with 29 basis points of tightening now priced in by the end of the year, down from 36 bp at Wednesday’s close.

Warsh charts a new course at the Fed

Speaking at the European Central Bank’s annual symposium in Sintra, Portugal, Fed Chairman Kevin Warsh signaled that he intends to “chart a new course” at the central bank and previewed “a good family fight” at the July FOMC meeting, though he declined to offer explicit rate guidance. He also said inflation risks have come down since he took office and reiterated the Fed’s recommitment to delivering price stability, but he acknowledged that inflation is still too high. He framed the current backdrop as “a time of huge opportunity” for the US given the AI boom, which is currently most prominent in the US. Warsh also reiterated that forward guidance is “not the right policy for the current moment,” saying it is “no secret” that he wants a smaller Fed balance sheet. He stressed, however, that he is still open-minded on size and that any decision will be deliberated publicly, and he confirmed the Fed will maintain the dot plot in the short term. Warsh also flagged uncertainty around the timing of AI’s impact on jobs and emphasized that the Fed must deliver on both employment and stable prices. Reuters reported that Warsh was well received by his international counterparts, helping ease concerns that cooperation among central banks could take a lower priority under his leadership. Separately, Bloomberg reported that Warsh plans to appoint former Bank of England Governor Mervyn King to lead the Fed’s communications task force.

Supreme Court reshapes the administrative state — but shields the Fed

In a landmark ruling, the US Supreme Court overturned Humphrey’s Executor vs. the United States, the 1935 precedent that has underpinned independent federal agencies for almost a century, upholding President Donald Trump’s firing of a Federal Trade Commission member without cause — a decision that could open the door to significant dismantling of the administrative state. In a notable carve-out, however, the Court held in a 5-4 decision that the president cannot remove Fed Governor Lisa Cook without first providing notice and an opportunity to respond, rejecting an attempt to fire her over unproven allegations of mortgage fraud. Chief Justice John Roberts’ majority opinion set a high bar to prove cause for removal from the Fed Board, effectively reinforcing central bank independence even as agency independence more broadly erodes.

US declines to renew USMCA

US Trade Representative Jamieson Greer issued a statement on Wednesday announcing that the US has not agreed to renew the USMCA in its current form, the deadline for which was July 1. According to his statement, the US will continue to engage with Mexico and Canada to address the agreement’s shortcomings and any trade deficits with these countries. For now, however, it remains in force pending resolution of these issues or until it is terminated. Intellectual property and rules of origin will be the focus of talks between the US and Mexico on July 20, an administration official said. Markets showed little reaction to the announcement.

Canadian officials noted that the USMCA remains in force and reaffirmed Canada’s support for its renewal, and Mexican officials said the July talks will help reduce uncertainty.

QUICK HITS

After rebounding sharply as tensions in the Persian Guld deescalated, global manufacturing PMIs eased modestly in June.

Q2 was fantastic for stocks. The S&P 500 had its best quarter since Q2 2020, rising 15.2%. The Philadelphia Semiconductor Index rose 88%, South Korea’s KOSPI gained over 64%, and Japan’s Nikkei was up 34.1% in total return terms. The Magnificent Seven lagged, falling just under 2%.

On Friday, S&P Global affirmed the US AA+ sovereign credit rating with a stable outlook.

According to FactSet Research, the net profit margin for S&P 500 companies reached 14.8% in Q1, the highest since FactSet began tracking the metric in 2009 and up from the previous peak of 13.2%, set just a quarter earlier.

According to analysts at JP Morgan, over the past 10 years, the S&P 500 has averaged a +3.37% return in July with a 100% hit rate.

Eurozone inflation fell to 2.8% year over year in June, with the core easing to 2.4%. This benign outcome suggests the ECB is unlikely to hike rates more than the 0.25% already priced in by markets. ECB President Christine Lagarde said Tuesday that the central bank doesn’t need to fight inflation with the same force as it did in 2022-2023.

Retail sales in Japan rose 1.9% in May — a third consecutive monthly gain, following an upwardly revised April — and were up 5.3% year over year, supported by wage gains and government cost-of-living subsidies.

The Case-Shiller US National Home Price Index rose 0.85% year over year in April.

The US Bureau of Economic Analysis announced this week that it plans to overhaul its PCE methodology. Changes to measurements related to asset management, software, and legal fees are expected to reduce the headline reading by roughly 20 basis points.

The Wall Street Journal reported that leveraged ETF assets nearly doubled between March 30 and June 3, raising concerns that a forced unwind could amplify volatility. Recent large swings in Korean equities have reportedly been magnified by such positioning.

SpaceX will join the Nasdaq 100 next week.

EU trade chief Maroš Šefčovič held “intensive, focused, and constructive” talks with China’s Wang Wentao this week. The two sides agreed that increased market access can help balance trade and set an October deadline to reset ties and address the EU’s large annual trade deficit with China.

The UK’s new defense budget lifts spending to 2.7% of GDP next year, still short of its NATO commitment to reach 3.5%.

The Bank for International Settlements warned this week that Big Tech’s AI spending spree risks ending in a prolonged investment bust that could rattle financial markets and damage the global economy.

South Korea unveiled an $880 billion public–private AI infrastructure plan focused on semiconductors, robotics, and data centers, with a large share earmarked for boosting memory chip fabrication amid persistent shortages.

US Treasury Secretary Scott Bessent said Tuesday that Iran is struggling to sell oil beyond China as buyers grow wary of sanctions risk. Bloomberg reported Thursday that more than 20 million barrels of Iranian crude are in floating storage in Asian waters, waiting to find buyers.

THE WEEK AHEAD

Monday: Eurozone PPI, retail sales; US services PMI

Tuesday: US trade balance

Wednesday: US FOMC minutes

Thursday: US existing homes sales

Friday: Canada employment report

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Past performance is no guarantee of future results.

Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research.