The stock market continues to display the kind of constructive resilience that has defined this bull market for some time now. While the headlines may focus on the latest sector rotation and geopolitical noise, the bigger picture remains one of a fundamentally sound economy, strong corporate earnings, and an AI infrastructure tailwind that simply refuses to fade. Yes, valuations are stretched. And yes, the near-term action can feel choppy. But the underlying drivers continue to support the bullish case.

The Macro Backdrop: Still Positive, But Not Without Risks

Let’s start with the good news. The U.S. economy remains in solid shape. Corporate America is posting record earnings, inflation appears to be behaving itself, and interest rates have been relatively cooperative. The Fed continues its tough talk on inflation, but few expect meaningful tightening from here. In short, the macroeconomic environment is supportive of risk assets.

However, as veteran market watchers know all too well, nothing lasts forever without consequences. Valuations sit at extreme levels. The market has climbed the wall of worry (and the valuation ladder) for quite a while now, and the bar for positive surprises is set extremely high. Any slip in the earnings delivery or economic data could create meaningful volatility.

Near-Term Focus: Geopolitics and the Great Rotation

From a tactical standpoint, two stories are dominating the tape:

• Geopolitics: The situation with Iran remains in a state of flux. The latest ceasefire appears to be “over” (at least until the next round of negotiations), keeping energy prices and risk sentiment on edge.
• Sector Rotation and Momentum Unwind: Money has been moving out of the Mag7 and momentum names — particularly the chip stocks — and into areas like energy. This has left former high-flyers like NVDA and MSFT looking relatively “cheap” by recent standards.

Importantly, this momentum unwind (down sharply from its peak) appears to be largely technical in nature: crowded positioning, post-Q2 consolidation, seasonal tendencies, and supply pressure. The key point? This is NOT a fundamental breakdown. Earnings estimates continue to move higher, and the long-term narrative around AI infrastructure demand remains firmly intact.

A Healthy Broadening of the Advance

One of the more encouraging developments is how the market is interpreting this rotation. Rather than viewing the weakness in AI hardware as a bearish signal, many see it as a broadening of participation. Improving market breadth is a much healthier foundation for the bull case than a narrow advance driven solely by a handful of mega-cap tech leaders.

However, my view is the AI trade is far from dead. And history supports this. As Goldman Sachs recently noted, momentum stocks are down roughly 24% from their peak — which is the worst drawdown since Q1 2023. So, there has definitely been a "dip." And here is the punchline, Goldman reminds us that historically, buying the dip in momentum has been a winning strategy.

Earnings: The Fundamental Foundation Holds

Supporting the bullish view is another strong earnings season. We’re on track for the second consecutive quarter of 20%+ S&P 500 EPS growth. Bottom-up estimates have actually increased 3.4% during the quarter — a far cry from the typical downward revisions we’ve seen over the past 5, 10, and 20 years.

Investor positioning remains relatively balanced as well, with aggregate equity exposure hovering near neutral. This suggests there is still dry powder available should sentiment improve further.

Seasonality and the Road Ahead

That said, seasonality typically weakens into the fall, which warrants some caution. History, however, offers hope — especially when the fundamental backdrop remains as constructive as it is today. According to a recent stufy by Ryan Detrick, when the S&P 500 has been up between 5% and 10% at mid-year (SPY sported a gain of x.x% as of June 30th) the market has advanced over the next six months 87.5% of the time, with an average gain of 6.6% over the June-December period.

In addition, Deutsche Bank pointed out this week that the S&P has been higher nine months after EVERY SINGLE midterm election. So, if investors can hang in there during what could be a sloppy summer/fall, history suggest things may brighten up after the election.

Bottom Line

The bull market retains its foundation, now bolstered by healthier breadth and ongoing fundamental strength. Near-term rotations and geopolitical developments may create tactical volatility, but they do not appear to be derailing the larger uptrend. Opportunities exist in recently de-rated leaders, while other sectors benefit from the current shift in leadership.

As always, we’ll continue to monitor the key drivers on both a short- and intermediate-term basis. Risk management remains paramount given the elevated valuations, but the weight of the evidence continues to lean positive for patient, risk-managed investors.

Thought for the Day:

To wish you were someone else is to waste the person you are -Sven Goran Eriksson