The short-term market's volatility risks have not yet subsided.

Despite lingering uncertainty in the US-Iran geopolitical situation, SK Hynix's listing has reignited a wave of AI investment fervor in the market, with tech stocks propelling the S&P 500 index close to its historical high.

As the new earnings season commences, the market's volatility risks appear unresolved, with attention focused on whether artificial intelligence can deliver sufficient profit growth. The impact of several key economic data points on Federal Reserve rate hike expectations is also crucial, potentially unsettling risk appetite and capital flows.

Heightened Expectations for Fed Rate Hikes

This week's economic data calendar was relatively light overall, with multiple US service sector sentiment indicators remaining in expansion territory and the job market staying stable.

The US ISM Non-Manufacturing Index for June came in at 54.0, slightly lower than May's 54.5, meeting market expectations. The modest decline stemmed from slower growth in the business activity and new orders components. A positive sign was the prices component hitting a four-month low, potentially indicating inflation pressures have peaked. The S&P Global US Services PMI for June rose to 51.2 from 50.7 in May, remaining in expansion territory.

Regarding the labor market, US initial jobless claims for last week were 215,000, a decrease of 2,000 from the previously revised 217,000 and below the expected 220,000. Continuing claims increased by 8,000 week-on-week, reaching 1.81 million after seasonal adjustment, continuing to hover near historical lows. The Atlanta Fed's GDPNow real-time estimate for Q2 GDP has been slightly revised up by 0.1 percentage points to 1.3%.

The Federal Reserve meeting minutes revealed diverging views among committee members: some officials advocated for keeping the federal funds rate unchanged, while others believed at least one rate hike within the year is necessary. Additionally, a "few participants" indicated that at the June meeting, there was already sufficient evidence to support an immediate rate hike.

Senior economist Bob Schwartz at Oxford Economics commented that inflation remains the primary concern for Fed policymakers. Concerns about a downturn in the labor market have eased, leading some officials to see justification for rate hikes. With the labor market remaining stable, if factors such as geopolitical conflicts, AI-driven demand, and tariffs continue to push inflation higher, nearly all Federal Open Market Committee (FOMC) members would support tightening monetary policy.

This week, US Treasury yields across maturities moved higher in sync, primarily driven by the breakdown of the US-Iran ceasefire and rising oil prices. The 2-year Treasury yield, closely linked to rate expectations, rose about 7 basis points to 4.204%, while the benchmark 10-year yield climbed about 8 basis points to 4.561%. Market expectations for a Fed rate hike have intensified. Bloomberg's interest rate probability model now forecasts an 84% chance of a rate hike at the September policy meeting. Previously, the market had fully priced in the first hike for December, but this expectation has now been pulled forward to the October meeting.

Schwartz further noted that while the labor market is roughly in balance, the probability of it overheating further is low. He reiterated his inclination that the Fed will maintain a prolonged wait-and-see stance on rates rather than hiking. Overall inflation may have peaked in May and is expected to gradually decline thereafter; however, inflation-disrupting variables such as US-Iran conflict and overheated AI demand could derail this expected disinflationary path.

Earnings Season Arrives

US major stock indices diverged this week; Middle East conflicts weighed on the Dow Jones, while growth sectors led the Nasdaq and S&P 500 to close higher, with the S&P 500 now less than 1% away from its all-time high.

Sector performance was mixed. According to Dow Jones Market Data, the technology sector surged 3.4%, leading the gains; the energy sector rose 3.2%; the communication services sector increased 2.3%; the consumer discretionary and financial sectors posted modest gains. The materials sector plunged 2.2%; healthcare, consumer staples, and industrial sectors fell over 1%; utilities and real estate sectors weakened slightly.

Among the "Magnificent Seven" tech stocks, five closed higher for the week, with Meta Platforms Inc (NASDAQ: META) gaining nearly 15%, marking its best weekly performance since early 2024. Bank of America maintained its "Buy" rating on Meta. An internal memo from Meta indicated the company is poised to optimize the cost structure of its AI business, benefiting long-term profitability. Simultaneously, the company plans to lease out its own AI computing resources, opening a new growth avenue.

The earnings season officially kicks off next week, with six major Wall Street banks leading the way: JPMorgan Chase & Co (NYSE: JPM), Bank of America Corp (NYSE: BAC), The Goldman Sachs Group Inc (NYSE: GS), Wells Fargo & Company (NYSE: WFC), Citigroup Inc (NYSE: C), and Morgan Stanley (NYSE: MS). Many investors are particularly focused on Taiwan Semiconductor Manufacturing Company Ltd (NYSE: TSM) and ASML Holding NV (NASDAQ: ASML), whose results could influence whether chip stocks resume their upward trajectory.

Charles Schwab noted in a market commentary that the rekindling of conflict in the Strait of Hormuz this week, coupled with the announcement of the US-Iran ceasefire agreement's failure, caused significant market turbulence. As long as oil prices remain within a moderate range, the short-term market focus will shift entirely to US economic fundamentals and the Q2 earnings season starting next week. Conversely, the longer the US-Iran conflict persists, the higher the probability of rising oil prices, which theoretically increases the likelihood of Fed rate hikes.

In the coming week, regarding the earnings focus, the six major Wall Street banks will report results concentrated on the 14th and 15th. Semiconductor equipment leader ASML and TSMC will also release their earnings reports. On the macroeconomic data front, June's Consumer Price Index (CPI), Producer Price Index (PPI), and Retail Sales month-over-month figures will be released. Additionally, Federal Reserve Chair Kevin Warsh will deliver his first semi-annual congressional testimony after taking office.

The firm believes the Philadelphia Semiconductor Index still needs to verify the validity of its support level next week. If the chip sector fails to hold support, market funds may merely rotate internally to other sectors. However, if chip stocks weaken significantly, it could also severely dampen overall market risk appetite. Beyond this, July itself possesses seasonal bullish characteristics, and strong earnings expectations during the reporting season could further reinforce the logic of improving economic fundamentals. Considering all factors, investors still need to guard against an escalation in market volatility.