Markets Update - 7/2/26
A look at what happened today impacting US equity, Treasury, and selected commodity markets, and what to watch for next week.
Quick Summary:
US equity indices opened the Thursday session modestly higher with some bounceback after Wednesday’s selloff in memory names as discussed in last night’s update.
Markets were also this morning digesting the marquee event of the day in the June Employment situation report which showed about half the expected increase in employer payrolls. The companion household report though showed a large -507k drop in the number of employed persons. The unemployment rate nevertheless fell a tenth for the “wrong reasons” as the labor force plummeted by an even larger -720k, the second largest decline since April 2020 (see full details in the blog post).
The weaker than expected report would soften slightly Fed hike expectations, pressuring short-dated Treasury yields (even as longer duration remained firm), and saw the dollar lower against developed-market currencies. More details on all of those items in the subscriber section.
The index reaction was mixed as that early strength in growth names turned to more selling sending the Nasdaq Composite lower to finish -0.8%. Softness in megacaps would also pressure the S&P 500 which finished flat despite 8 of 11 sectors finishing higher (and six with over 1% in gains). In that regard, the Equal-Weight S&P would finish up 0.8% at an all time high, as would the Dow Jones Industrial Average which rose +1.1%. Despite pairing many of the largest growth names last week in its rebalance, the Russell 2000 slipped 0.6%.
Semiconductors remained the biggest drag, with the PHLX Semiconductor Index falling 5.4% (after -6.3% Wednesday). Weakness was broad across the group, including memory names (Micron, Sandisk, etc.), chip (AMD, Intel, etc.), chip equipment (Lam Research, KLAC, etc.), and components (Corning, etc.), seeing the technology sector finish at the bottom of the sector scorecard for a second day.
Instead leadership continued to rotate, Thursday pushing Health Care, Consumer Staples, Utilities, and Materials all up over 2%.
For the holiday-shortened week, the major indices still finished with solid gains, with the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average all up between 1.8% and 2.1%. Bond and equity markets are closed Friday and return Monday. More on all of the above in the subscriber section.
Some market commentary:
The data comes after the major U.S. averages ended Wednesday’s session lower, as investors pared positions in chipmakers. While the decline in the chip sector weighed on the broader market, Ned Davis Research strategist Rob Anderson thinks the rotation out of semiconductors is healthy. “One of the characteristics of the bull market has been rotation. The attribute has been on full display in 2026,” he wrote. “A passing of the baton to a non-commodity cyclical sector would be further evidence that the stock market is entering the second half of the year in a position of strength and that the bull market can continue deep into the second half of the year.”
“This is a rotation potentially out of a sector that’s been red hot for the last few months and into other areas, but I also do think that there’s a little bit of a revaluation of the AI trade in itself,” said Anshul Sharma, chief investment officer at Savvy Wealth. “If companies are more sensitive to the cost of compute, is that going to be the next area that they’re going to focus on?”
Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America Securities, said the U.S. economy looks healthy and investors may need to look beyond the market’s biggest tech stocks for the next leg of gains.
“I think the index itself looks a little bit fraught in terms of just supply coming online, demand maybe kind of pausing for a moment, but I think the economy is really the bright spot, and corporate earnings are actually gangbusters this year,” Subramanian told ‘Squawk Box’. Pointing to the strong economic growth, she said, “It’s hard to be bearish on America right now.” She added that hyperscalers are providing a sort of stability when it comes to capex.
“Just when investors thought they had the labor market figured out, the June jobs report threw them a curveball,” said Bret Kenwell at eToro. “A disappointing jobs report isn’t exactly good news, but it may give risk-on assets a silver lining: Less pressure on the Fed to take a hawkish stance.”
“A labor market that is still expanding, but no longer overheating, allows the Fed to remain patient while assessing price pressures,” said Andrew Dubinsky at UBS Chief Investment Office. “If disinflation continues as expected, policymakers will have little reason to move away from a holding pattern in the second half of the year.”
There are some on Wall Street that worry that while jobs growth was slower than expected, the big drop in labor force participation could lead to higher labor costs, and inflation. “[A]s the labor force continues to contract, businesses will begin noticing increasing labor-supply bottlenecks,” said Bill Adams, Fifth Third’s chief U.S. economist.
“Warsh can wipe his brow,” said Brian Jacobsen at Annex Wealth Management. “The labor market isn’t overheating. Inflation expectations are moderating. It means the Fed can take the whole summer off if it wants as it won’t have to hike or cut.”
“As we are learning how the Fed reaction function will form under [Fed Chairman Kevin] Warsh, this print takes some of the pressure off of the inflation fighting institution to hike near term,” said Bradford Smith, portfolio manager at Janus Henderson Investors. “That said, Warsh commented at his first presser that jobs data only becomes meaningful after the third revision and by then becomes ‘echoes of history,’” he continued. “With oil price inflation moderating, some softness on the jobs front likely keeps the Fed on hold at least for the next meeting.”
In today’s Markets Update:
A deeper look at Thursday’s stock and sector breakdown, including the continued pullback in semiconductors and many megacap technology names, and the continued rotation into other areas of the market.
A closer look at key company movers and corporate developments.
Updated technical charts across the SPX, Nasdaq, Russell 2000, and equal-weighted SPX.
A look at the rates and Fed backdrop, including the reaction to the June Employment Situation report and the divergence between 2-year yields and longer-duration yields.
A review of market breadth and participation including the increase in large individual winners and losers.
A look at volatility and market structure, including VIX, VVIX, 1-day VIX, and Tier1Alpha’s comments on implied correlation and semiconductor concentration.
A review of cross-asset trends, including WTI crude, the dollar, gold, copper, natural gas, and bitcoin.
A look ahead to next week’s calendar, including the US economic schedule, Fed calendar, Treasury auctions, and the final week before Q2 earnings season begins to pick up.
