The Federal Reserve held rates steady at its July meeting, but the decision was anything but unanimous. Coming into the meeting, the question was no longer when the Fed would cut, but whether it might surprise markets with an increase. Chair Warsh’s first meetings have made clear that this is a different Federal Reserve. He has deliberately pared back forward guidance, shortened the committee’s communications, and reiterated that the inflation target is absolute, stressing that the past several years of above-target inflation should not be mistaken for tolerance. Whether or not you agree with the approach, markets now have less visibility into the Fed’s next move than they have had in years, and that uncertainty itself is being priced into longer-term rates.
The conflict with Iran continued its on-again, off-again pattern throughout July. The ceasefire was declared over early in the month, oil spiked, and energy stocks rallied. Then a pause in hostilities late in the month sent crude sharply lower and reversed those same moves within days. This is exactly why we have resisted investing around these headlines. The futures market continues to tell us that oil is not expected to stay elevated for the long run, and the whipsaw we saw this month is a good reminder that positioning a portfolio around geopolitical news flow is a losing game.
We have discussed the parallels between today’s AI buildout and earlier cycles: the streaming wars, past semiconductor booms and busts, and the telecom buildout of the internet era. A genuinely transformative technology emerges, a race begins to build capacity at any cost, and then a moment arrives when the market stops rewarding growth for its own sake and starts demanding profitability. July may have marked the beginning of that shift. Semiconductor and AI infrastructure stocks sold off, and notably, the selling came despite strong earnings. Companies beat expectations and their stocks fell anyway, because investors are beginning to question whether the extraordinary sums being spent on AI capacity will ever generate a commensurate return. Add in signs of increased competition and the prospect of higher rates, and you have a market rethinking what it is willing to pay for the picks-and-shovels side of this trade. To be clear: we do not believe the AI story is over. We believe the dispersion within it is just beginning. The biggest long-term winners may not be the companies supplying the models and the chips, but the businesses across every industry that use these tools to improve margins and productivity. That is the lens we are applying to our portfolios: less about the buildout, more about the beneficiaries.
We remain focused on the things we can control; diversification, disciplined rebalancing, and keeping portfolios positioned for a world where returns may be harder to come by than they have been over the past decade.
As always, please do not hesitate to reach out with any questions about your portfolio or the themes discussed here.
Information in this commentary is gleaned from third-party sources, and while believed to be reliable, is not independently verified. This content is not intended to be tax, legal, investment, or fiduciary advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this material may not be suitable for all investors. Bernardo Wealth Planning recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial advisor. Past performance does not guarantee future results.