June and the first few days of July brought a meaningful shift in market leadership, interest-rate expectations, and a new Fed chair to interpret. Outside of the SpaceX post-IPO fireworks, the headlines made it feel like a difficult month for stocks, especially because the highest-profile weakness was concentrated in technology and AI-related names. Under the surface, however, markets were more balanced than the headlines suggested. The story was less about a broad risk-off move and more about rotation, a more hawkish Federal Reserve, and ongoing debate over how much investors should pay for the AI investment cycle.
We do not believe the AI theme has ended. It has simply let off some steam. There is a meaningful difference between a normal correction in a leadership group and the bursting of a bubble. The 2000 comparison remains overused. Technology valuations are elevated, but they are nowhere near the extremes reached during the dot-com peak. Current forward valuation levels for the S&P 500 technology sector are only modestly above the broader market, while in 2000 the gap was far more extreme. More importantly, many of today’s market leaders have real earnings, strong balance sheets, and substantial revenue growth. That does not mean they are immune to correction, but it does mean the setup is very different from the late-1990s internet bubble.
With oil prices subsiding to pre-Iran war levels, the most important macro development was the first Federal Reserve meeting under Chair Kevin Warsh in mid-June. Markets quickly interpreted the new Fed as less predictable, less inclined to provide detailed forward guidance, and more focused on restoring inflation credibility. Warsh’s approach has been described as “Greenspan-like,” as he appears more willing to let markets absorb uncertainty rather than relying on detailed rate forecasts or repeated guidance about the expected policy path.
That shift matters. For much of the post-financial-crisis period, markets became accustomed to a Fed that tried to guide expectations carefully. Under Warsh, the message appears to be that the market should take the lead in informing the Fed. At the same time, he made it clear that inflation, not the labor market, is the priority. With inflation still well above the Fed’s 2% target, and with the employment side of the mandate broadly intact, the market read the June meeting as hawkish. The latest CPI report showed headline CPI up 4.2% year-over-year in May, while core CPI was up 2.9%. The Fed’s preferred PCE measure rose 4.1% year-over-year in May, with core PCE up 3.4%.
The labor market softened but did not break. June payrolls increased by 57,000, and prior months were revised lower by a combined 74,000 jobs. The unemployment rate, however, fell slightly to 4.2%, while wage growth was still positive, with average hourly earnings up 3.5% from a year earlier. In short, the labor market is no longer accelerating, but it is not weak enough to give the Fed much cover to look past inflation.
That combination — inflation too high and employment still acceptable — pulled forward expectations for the next potential rate hike. Earlier in the year, markets were more focused on whether the Fed could eventually ease. By June, the discussion had shifted toward whether the Fed may need to tighten again, with September becoming a more likely window than December. Short- and intermediate-term Treasury yields moved higher as investors repriced the policy path.
The long end of the Treasury curve was more nuanced. Long-term nominal yields were little changed even as inflation expectations fell with oil prices and a hawkish Fed, implying higher term premia. Investors appear to be demanding more compensation for holding longer-term bonds amid less Fed guidance, balance-sheet runoff, fiscal deficit concerns, and uncertainty around Treasury issuance. That matters because higher real yields can weigh on valuations even when inflation expectations are improving.
Our view remains constructive, but more selective. Economic growth is still positive, earnings expectations are improving, and the AI capital cycle has real fundamental support. At the same time, the Fed is no longer a tailwind, real rates are higher, and parts of the equity market have already priced in a great deal of good news. That argues for staying invested, but with discipline: diversify beyond the most crowded trades, favor companies with durable earnings and cash flow, and be prepared for more volatility as markets adjust to a less predictable Fed.