On Thursday, Taiwan Semiconductor Manufacturing (TSM) reported strong earnings and raised its sales outlook, yet its shares fell 4.6%, failing to propel the technology sector higher. Markets continued the cautious trend seen across most asset classes, as traders assessed whether corporate profits are sufficient to sustain further gains in the AI trade, while uncertainty in the Middle East persisted.

As of the time of writing, Dow futures were up 0.17%, S&P 500 futures were down 0.26%, and Nasdaq futures were down 0.93%. Companies reporting earnings today include UnitedHealth (UNH), GE Aerospace (GE), and Netflix (NFLX).

The European Stoxx 600 index fell 0.4%. Tech bulls were still trying to resist selling pressure as ASML rose in Amsterdam. However, these gains were offset by weakness in other sectors, with utilities and telecoms falling between 0.5% and 1%.

Despite the strong results from the Taiwanese chip giant, South Korea's KOSPI index fell 6%. Having doubled in the first half of the year, the index has plunged nearly 20% this month, as concerns over the sustainability of the AI rally intensify.

AI Trade Faces Valuation Test

The dominant role chipmakers have played in this year's stock market gains is increasingly being challenged, as traders contend with high equity valuations and question whether AI hyperscalers are building capacity beyond actual demand.

Investors are also looking for opportunities within the AI trade, hoping to pivot to areas that could benefit from global AI infrastructure build-out but appear more attractively priced.

"Market concentration has been very high, which means there is little room for error," said Richard Flynn, Managing Director at Charles Schwab UK. "Global geopolitical risks are rising, so the overall market tone from a macro perspective is cautious."

While stocks related to chipmaking were broadly lower in pre-market U.S. trading, previously lagging tech stocks, such as software names, attracted buyers. Among the "Magnificent Seven" mega-cap techs, Alphabet led the gains.

"There has been a lot of rotation within the AI trade, and also some smaller rotation in the broader market," said Toni Meadows, Investment Director at BRI Wealth Management. "A consolidation could be a healthy thing. The further the run goes, the more stretched valuations can become and the more violent the reaction can be."

South Korean Chip Stocks Plunge, Leveraged ETFs Draw Regulatory Scrutiny

An exception in Thursday's subdued trading was the Seoul market, where the KOSPI index fell sharply again due to severe volatility in heavyweight chip stocks.

South Korean regulators announced a temporary halt on launching new single-stock leveraged exchange-traded funds (ETFs).

Many market participants had believed such products exacerbated market volatility because they require daily rebalancing trades to maintain their promised leverage ratios.

Middle East Conflict Escalates, Oil Prices Remain Elevated

Brent crude held above $84 a barrel, up about 11% for the week so far, after the U.S. struck Iran for a fifth consecutive day and hit a sanctioned tanker near a key Iranian export terminal. U.S. officials stated that President Trump is considering further escalation of U.S. military action against Iran.

"While tanker traffic continues with U.S. assistance, the escalation threatens the shipping routes that previously helped the UAE and other Gulf producers keep crude flowing during supply disruptions," said Soojin Kim, an analyst at Mitsubishi UFJ Financial Group (MUFG).

"It's hard not to focus on the war in Iran, Trump's tweets, and the oil price, as these could have significant implications for global interest rates," said James Athey, a fund manager at Marlborough.

He added, "There is still enormous volatility in the equity market. The market is still a bit messy, or still trying to find a better way to judge the value of the AI trade and whether this uptrend can actually be sustained."

Furthermore, SpaceX stock fell below its initial public offering price for the first time on Wednesday. Athey noted this also further dampened market sentiment.

Broad-Based Decline in Bond Markets

U.S. Treasuries edged lower, with the 10-year yield rising 2 basis points to 4.57%, after a 7-basis-point drop over the previous two sessions. The 2-year yield rose 2 basis points to 4.1514%, following a 14-basis-point decline over two days.

However, European bond markets showed a different picture. Germany's 10-year Bund yield, the eurozone benchmark, rose 1 basis point to 3.13% on Thursday, its highest level since May 20. The yield is up 9 basis points this week and 26 basis points since July. This comes as traders worry that renewed strength in oil and gas prices could force the European Central Bank into a more aggressive rate-hiking stance, while also potentially dragging on long-term economic growth.

The UK 10-year Gilt yield briefly touched 5% again on Tuesday. "The cooling in U.S. PPI aligns with the recent trend of inflation data coming in below expectations, which is positive for the Fed," said Felix Vezina-Poirier, a strategist at BCA Research. "We have passed the peak of hawkish policy."

Dollar Stabilizes

The dollar was largely unchanged, after the dollar index fell 0.4% on Wednesday to its lowest level since June 18. This followed lower-than-expected U.S. wholesale inflation data, which added to signs that price pressures are easing. U.S. Producer Price Index (PPI) fell 0.3% in June, against market expectations for zero growth. This data, following Tuesday's consumer inflation figures, again showed June inflation cooling more than anticipated.

Meanwhile, Federal Reserve Chair Kevin Warsh, in his second day of congressional testimony on Wednesday, pushed back against the view that AI investment could lead to persistent inflation.

The pound retreated from a two-month high reached on Wednesday. Reports suggested that incoming UK Prime Minister Andy Burnham might appoint the fiscally conservative Shabana Mahmood as Chancellor of the Exchequer.

Data released on Thursday highlighted the challenges they will face. It showed the UK economy eked out only 0.1% growth in May, matching the average forecast from a Reuters poll of economists.

"In short, the Prime Minister is handing over the economy to his successor on a significantly improved economic foundation," said Sanjay Raja, Chief UK Economist at Deutsche Bank, noting the UK economy likely still ranks near the top of G7 growth rankings for the April-June period.

The yen hovered around 162.16 per dollar, not far from its 40-year low of 162.84. Speculators remained cautious on the yen's moves due to persistent concerns about potential currency intervention by Japanese authorities.

Bitcoin and Gold Both Fall

Bitcoin fell 0.4% to $64,667, after rising to $65,524 on Wednesday.

"The $65,000 to $66,000 zone remains a significant resistance area, meaning Bitcoin still needs sustained spot demand and stronger institutional inflows to turn a breakout into a sustained uptrend rather than a brief positioning squeeze," said Naeem Aslam, an analyst at Zaye Capital Markets.

Gold, meanwhile, was on track for its first decline in three sessions, again approaching the $4,000 mark. "The short-term path for gold will depend on one key factor: whether higher oil prices translate into U.S. inflation or if this is just a temporary geopolitical shock," said analysts at MUFG. "The market is watching the Fed's response closely."

Following two consecutive days of lower-than-expected inflation data that led traders to reduce bets on Fed rate hikes this year, June retail sales figures will be in focus to gauge the resilience of the U.S. consumer.

Has Extreme Optimism Become a Shackle? The Perfect 'Goldilocks' Scenario is Here, But U.S. Stocks Struggle to Rise

Bullish equity investors have become enamored with the "Goldilocks" narrative, and risk appetite has been pushed to such extreme highs that it has become increasingly difficult to discern where the next catalyst for market gains will come from.

"Whether the equity market can continue its advance ultimately depends on earnings guidance and positioning levels, not the headlines themselves," said Richard Privorotsky, a partner at Goldman Sachs. "Energy remains a key macro risk, but for now, the inflation backdrop is improving."

Privorotsky noted that this earnings season is likely to deliver solid results, with banks having largely cleared a hurdle and ASML's report showing healthy semiconductor capital expenditure demand. "As with most AI-related names, the question is no longer just about the data, but whether it is impressive enough relative to current positioning," he added. A Bank of America fund manager survey released this week showed professional investors' cash holdings have dropped to very low levels, while the bank's "Bull & Bear Indicator" also flashed a warning signal.

Furthermore, Deutsche Bank data suggests systematic strategies are currently positioned extremely long, leaving little room for incremental buying. Trend-following CTAs have pushed their equity exposure to the 72nd percentile of its historical range, while volatility control fund positioning is even more extreme, at the 91st percentile.

Stocks in Focus

Health insurance giant UnitedHealth (UNH) reported Q2 results that beat market expectations, with shares up over 7% in pre-market trading. Adjusted earnings per share were $6.38 on total revenue of $112.03 billion. Analysts polled by LSEG had expected EPS of $4.90 and revenue of $110.85 billion. UnitedHealth also raised its full-year profit guidance.

Taiwan Semiconductor Manufacturing (TSM) fell 4%. Despite reporting better-than-expected Q2 profit, the company raised its full-year capital expenditure range from a previous guidance of $52-$56 billion (upper end) to $60-$64 billion. The company also announced an additional $100 billion investment in Arizona.

Eli Lilly announced a $2.8 billion acquisition of psychedelic drug developer AtaiBeckley, sending AtaiBeckley's stock soaring 34.5%. The cash consideration is $6.75 per share, a 26% premium to Wednesday's closing price of $5.36. Lilly will pay up to an additional $2.50 per share if AtaiBeckley's drugs achieve certain development and regulatory milestones.

GE Aerospace (GE) reported Q2 profit and revenue that exceeded expectations, yet its shares fell 4%. Adjusted EPS was $2.02 on revenue of $12.63 billion; analysts polled by LSEG had expected EPS of $1.86 and revenue of $11.86 billion. The company also raised its full-year guidance.

United Airlines' profit beat expectations, but its shares fell over 3%. The company's Q3 guidance was weaker than market forecasts, projecting EPS of $2.50-$3.50, compared to a FactSet analyst consensus of $3.53. United also stated that fuel costs would be an additional $6 billion.

J.B. Hunt Transport Services surged nearly 7%. LSEG data showed EPS of $1.73, $0.18 above analyst expectations, on revenue of $3.5 billion, roughly in line with the market expectation of $3.25 billion. Management noted continued demand recovery in intermodal services this quarter.

Raymond James upgraded AeroVironment from "Neutral" to "Outperform," driving its shares up nearly 2%. The firm stated that AeroVironment's order intake is recovering, and its backlog is expected to continue growing.

Morgan Stanley raised its price target on Rocket Companies to $19 and maintained a "Buy" rating, sending shares of the fintech platform up 2%. The new target implies about 30% upside from Wednesday's closing price.