Market Matters – Good Fundamentals Meet Bad Geopolitics

• Markets were split rather than broadly risk-off. Better US inflation and earnings data were overshadowed by a sharp semiconductor sell-off. Asia and emerging markets suffered the largest falls, while the FTSE 100 benefited from its energy, commodity and defensive exposure.
• US inflation improved, but the problem has not disappeared. June CPI and PPI fell on the month, with shelter costs particularly subdued. However, annual inflation remained above target, and higher oil prices could reduce the Federal Reserve’s room to cut rates.
• The US earnings season has started strongly. Most companies reporting so far have beaten profit and revenue expectations, with growth extending beyond the largest technology firms. However, valuations and forecasts are already high, so investors are demanding strong guidance as well as good results.
• The AI trade is becoming more selective. Moonshot AI’s Kimi K3 model renewed concerns that advanced AI may be delivered at lower cost than markets had assumed. Demand for chips and data-centre investment remains strong, but investors are now focusing more closely on pricing power, profits and returns on capital.
• The Gulf conflict is now the main new risk to the outlook (again). Renewed US-Iran hostilities and disruption around the Strait of Hormuz could keep oil prices elevated and weaken the soft-landing case. This supports maintaining diversified exposure across energy, financials, industrials and less crowded international markets.