Stocks Edge Higher as Chipmakers Rebound

The S&P 500 Index ($SPX) (SPY) today is up +0.46%, the Dow Jones Industrial Average ($DOWI) (DIA) is down -0.14%, and the Nasdaq 100 Index ($IUXX) (QQQ) is up +0.86%. September E-mini S&P futures (ESU26) are up +0.43%, and September E-mini Nasdaq futures (NQU26) are up +0.78%.

Stock indexes are mostly higher today amid a rebound in chipmakers. Short covering emerged in chipmakers and AI-infrastructure stocks ahead of earnings results of megacap technology stocks this week, beginning with Alphabet on Wednesday. Stocks also found support after crude oil prices fell from their highs on signs that diplomatic efforts to end the US-Iran war were ongoing. Weakness in software stocks today is limiting the overall market's upside.

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Geopolitical risks continue, as the US conducted a ninth straight day of airstrikes on Iran in an attempt to reopen the Strait of Hormuz, bombing military targets and communications networks. Iran retaliated by launching drones and missiles at US bases in Kuwait, Jordan, Bahrain, and Iraq and attacking tankers transiting the Strait of Hormuz. The New York Times reported today that the US is sending more warplanes to the Middle East, including F-35 and F-16 fighter jets, a possible sign that US military operations could expand in the coming days.

Also, signs that the conflict in the Middle East is widening are supporting crude oil after Houthi rebels said they will impose a maritime blockade on Saudi Arabia in retaliation for what they say is the kingdom's siege on the Yemeni capital, a potential threat to Saudi Arabian crude exports through the Red Sea.

However, WTI crude oil (CLQ26) prices fell from their highs after Iran said it wouldn't abandon diplomacy and that Qatar and Pakistan had reached out to mediate an end to the conflict, proposing a 10-day cessation of strikes between the US and Iran. Crude prices initially climbed to a 5-week high today as the resumption of hostilities between the US and Iran has reduced traffic through the Strait of Hormuz to a near standstill, tightening global oil supplies.

The outlook for strong Q2 earnings, which begin in earnest this week, is a bullish factor for stocks. Forecasts compiled by Bloomberg Intelligence suggest Q2 earnings may increase by +23%, close to Q1's blowout earnings of +30%, which was more than double the +12% analysts had expected. AI spending is expected to account for most of earnings, with AI infrastructure stocks set to contribute nearly 60% of the S&P 500's earnings-per-share growth in Q2.

The markets are discounting a 14% chance of a +25 bp rate hike at the next FOMC meeting on July 28-29.

Overseas stock markets are mixed today. The Euro Stoxx 50 is down -0.11%. China's Shanghai Composite recovered from a 10.5-month low and closed up +0.85%. Japan's Nikkei-225 Stock Average did not trade, with Japanese markets closed for the Marine Day holiday.

September 10-year T-notes (ZNU6) today are down -4 ticks, and the 10-year T-note yield is up +1.2 bp to 4.560%. Sep T-notes are under pressure today from a rebound in stocks, which has reduced safe-haven demand for T-notes. Also, today's rally in WTI crude oil to a 5-week high has boosted inflation expectations and is negative for T-notes.

European government bond yields are moving higher today. The 10-year German bund yield is up +0.4 bp to 3.130%. The 10-year UK gilt yield is up +2.4 bp to 4.974%.

German Jun PPI fell -0.3% m/m and rose +1.8% y/y, right on expectations.

Swaps are discounting a 3% chance of a +25 bp ECB rate hike at its next policy meeting on Thursday.

Chipmakers and AI-infrastructure stocks are moving higher today, providing support to the overall market. The iShares Semiconductor ETF (SOXX) is up +2%. Western Digital (WDC) is up more than +4%, and Intel (INTC), Advanced Micro Devices (AMD), Seagate Technology Holdings Plc (STX), and Sandisk (SNDK) are up more than +3%. In addition, Applied Materials (AMAT), Marvell Technology (MRVL), Microchip Technology (MCHP), and Texas Instruments (TXN) are up more than +2%.