The Story to Watch as Lower Oil Drives Renewed Momentum in Chip Stocks
Investors are expecting a more dovish Fed, but the market strength is narrow.
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Following Monday’s strong action, the market is taking a brief pause Tuesday morning with the indexes largely flat. Lower oil prices are the main driving force. Supply-side inflation driven by concerns about oil has been weighing on the market for four months and is easing quickly as anticipation about a workable Iran deal takes hold.
Lower Oil Is Driving the Dovish Repricing
Interest-rate futures now show a 43% chance the Fed will not raise rates at all through the end of 2026, up from 29% a week ago. 10-year Treasury yields fell to 4.468% from 4.485% Friday and the dollar weakened.
Goldman Sachs cut its Brent forecast for the year to $85 a barrel from $90. Morgan Stanley sees Brent at $90 in the fourth quarter from $100 previously and at $80 next year. The combination of lower oil forecasts from the major banks and the rate-futures repricing is driving the appetite for more risk.
Investors are now trying to position in front of the Fed meeting on Wednesday. Odds of no change on rates are 98.6% per the FedWatch tool, so the rate decision itself is essentially priced. The key issue will be the tone of Kevin Warsh’s first press conference and what happens to the dot plot.
Warsh indicated he may scrap the dot plot as soon as this meeting, which would be a significant policy signal. Retail sales for May will be released at 8:30 a.m. Wednesday, giving us some fresh consumer data to also consider.
The dovish positioning that has built up over the past week creates an interesting asymmetry. If Warsh confirms the dovish view by signaling that rates will likely hold steady through year end, the rally has juice to extend but the easy gains have already been taken. If he pushes back with a hawkish read citing the still-hot CPI and PPI numbers, it will disappoint investors who have been counting on a dovish tone from the new Fed Chair. The risk going into the meeting actually favors a hawkish surprise more than a dovish one.
Chips and AI Are Back but the Action Is Narrow
Money is pouring back into semiconductors as risk appetite builds. The PHLX Semiconductor Index gained 5.5% Monday. Nvidia (NVDA) closed up 3.54% on news it will offer investment-grade corporate bonds for the first time in five years. Micron Technology (MU) gained almost 11%. Sandisk (SNDK) was up 6.45%. SpaceX (SPCX) closed up another 20% Monday and is up 11% in premarket ahead of its options debut Tuesday. The capex worries that drove the early-June selling are being forgotten.
The key issue to watch is a narrower market with more concentration. Monday looked broad on the surface with nine of 11 S&P sectors positive, but the close was mixed. The DJIA made a record intraday high then closed at its lows. Small-caps closed at their lows. Breadth was 51% positive. Leadership was in the same 30 to 50 names that have been carrying the indexes for two years.
This is the pattern that has historically preceded a shift in market character. Index records on the back of a narrow group of leaders. Weak closes after strong opens. Breadth slipping even on up days. The Fed repricing is a broad macro input that should be lifting rate-sensitive groups like small-caps, biotechs, regional banks, and homebuilders.
The fact that money is flowing back into AI infrastructure rather than rotating into the groups that would most directly benefit from a more dovish Fed is the story to watch closely.
Short seller Jim Chanos compared the SpaceX action and the broader IPO boom to “the Enron era” and warned that “investors rarely make money buying stocks valued at over 100x revenue.” SPCX is now around 110 times revenue.
Chanos was wrong on Tesla (TSLA) but his view has support and may create conditions for more upside in the near term. Valuation arguments often attract aggressive momentum buyers looking to crush the skeptics. SPCX is the key stock to watch for a shift in market mood.
Strategy
My approach to the market remains the same. My cash levels are high, my position sizing is incremental, and my stock picking is selective.
The narrowness is the issue I will be watching most closely. There is some euphoria in parts of the market, and I’ll be watching closely for an intraday reversal if things become more heated.
A market that hits records on declining participation has historically given back those gains within a few weeks. Stick with the strong momentum but be ready to lock in some gains at the first sign of weakness.
At the time of publication, Rev Shark had no positions in any securities mentioned.
