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Good Morning!
Before we jump in, a quick reminder that we have new stock alerts coming next week. Keep an eye on your inbox.
Now let’s break down what actually moved markets this past week and what to watch next.
Market Recap
This was a tale of two markets. The economic news was excellent, with inflation cooling far more than anyone expected and bank earnings coming in strong. Yet the stock market struggled, dragged down by a brutal selloff in semiconductors that pushed the group toward a bear market. Beneath that split, the rotation we have been tracking accelerated sharply, and it is the single most important development for the kind of smaller companies our readers focus on.
Start with the great news, because it was genuinely a big deal. Tuesday's June inflation report came in dramatically softer than expected. Consumer prices fell 0.4% for the month, the biggest one-month decline since 2020, which pulled the annual inflation rate down to 3.5% from 4.2% in May and well below the 3.8% economists had forecast. Core inflation, which strips out food and energy, was flat on the month. The relief was driven by a sharp drop in energy and gasoline prices, but the improvement was broad-based, extending into housing and services. This took real pressure off the Federal Reserve, and markets immediately dialed back their expectations for a rate hike, with the odds of a September move falling meaningfully. After months of the inflation story getting worse, this was the first clear sign it is turning.
Bank earnings reinforced the healthy backdrop. The big banks kicked off second-quarter earnings season on Tuesday and largely beat expectations across the board, delivering strong results on trading, lending, and investment banking. That is an encouraging early read on the economy, since banks sit at the center of consumer and business activity. It suggests that despite all the geopolitical noise, the underlying economy is holding up well.
So why did the market struggle? The answer is semiconductors. The chip sector, which has led this entire year's rally, cracked hard this week. An industry gauge fell roughly 20% from its recent record, tipping the group toward bear-market territory in what is shaping up to be its worst stretch since the tariff turmoil of April 2025. The selling was driven by growing worries that the enormous spending spree on AI infrastructure is becoming harder to justify, compounded by a competitive breakthrough from a Chinese AI startup that rattled confidence in the sector's dominance. Because these chip names carry so much weight, their decline pulled the Nasdaq lower even as the broader economic picture brightened.
Here is the part that matters most for our universe. The money leaving semiconductors is rotating into economically sensitive and cyclical shares, exactly the kind of broadening that tends to benefit the smaller and mid-sized companies that get overlooked when the market is narrowly led by a handful of tech giants. For most of 2026, this market has been dangerously concentrated. This week's action shows that concentration finally breaking down, with investors testing whether the broader economy can carry the market. That is a healthier setup for small caps than the top-heavy market we have had all year, even if the transition is bumpy.
The one cloud remained the Middle East. The Iran ceasefire stayed broken, with the U.S. conducting several consecutive nights of strikes early in the week and President Trump signaling a possible fresh blockade. Oil climbed back above $80 per barrel by week's end as tensions escalated. This matters because the June inflation relief predates this renewed oil spike, so economists are cautioning that the disinflation we just celebrated could prove short-lived if the war intensifies and energy prices climb again.
The bottom line on the week: inflation cooled sharply, banks delivered, and the market broadened out beyond big tech, but a severe chip selloff and rising oil kept a lid on the indexes. The rotation into the broader market is the trend to watch, and it is a constructive one for smaller companies.
What's Coming Next Week
Second-quarter earnings season shifts into full gear, with a heavy slate of reports across financials, industrials, healthcare, consumer, and technology. Analysts are expecting very strong profit growth of over 23% for the broad market, one of the fastest rates in years. With the chip trade wobbling, the breadth of these results matters more than ever. If companies outside of big tech deliver solid numbers, it would validate the rotation into the broader market and support the smaller, economically sensitive names that stand to benefit most from that shift.
Next week is also the run-up to the Federal Reserve's July 28-29 meeting, which falls the following week. After this week's soft inflation report, the pressure on the Fed to hike has eased considerably, and investors will be recalibrating their expectations heading into that decision. With the Fed in its pre-meeting quiet period, earnings and economic data will drive most of the action.
On the data front, watch for the flash business activity surveys, housing figures, and weekly jobless claims, all of which will offer a read on whether the economy is holding up as the labor market cools. A resilient but not overheating economy is the ideal backdrop for the rotation we have been describing.
Finally, oil and the Iran conflict remain the biggest wildcard. Crude climbing back above $80 is a warning sign that the war premium is creeping back in. If tensions escalate further and energy prices keep rising, the inflation relief from June could reverse quickly, which would complicate the Fed's path and pressure the market. If the situation cools and oil stabilizes, the disinflation story stays intact and the broadening rally has room to continue.
The bottom line heading into next week: earnings breadth and the direction of oil are the two things to watch. The inflation picture just improved dramatically, the market is broadening in a way that favors smaller companies, but the chip selloff and the fragile Iran situation are the risks that could disrupt an otherwise constructive setup.
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SmallCapStocks Team
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