The US equity market sold off dramatically on June 23^rd led by weakness in technology stocks. The Nasdaq Composite index tumbled 2.2% and Reuters News wrote that the selloff was due to worries about debt-funded spending for AI, coupled with concerns about a hawkish Federal Reserve. The characterization of the Fed as “hawkish” is a direct reference to the Fed’s June dot-plot that indicated nine of 19 Fed Board members had penciled in a rate hike for this year. In March, no officials expected a rate hike in 2026. This was a definite change, but in our view it is a ruse to use the dot-plot as a reason for the market’s selloff. Even former Fed Chair Jerome Powell has stated that “The dots are not a great forecaster of future rate moves,” and there is actually “no great forecaster.” We agree. Moreover, the Fed has never been a good predictor of rates, inflation or the economy. To us, this explanation for the June 23^rd selloff is nonsensical. More importantly, neither the debt-funded AI spending nor the dot-plot were new developments.   

Look Eastward

But there was something that happened on June 23^rd and it happened in South Korea. After soaring past the historic 9,100 level a day earlier, the South Korean SE KOSPI index plummeted 901.71 points, or nearly 10%, on June 23^rd. The KOSPI index is unique since it is dominated by two semiconductor stocks, Samsung Electronics Co. LTD. (005930.KS – 310000) and SK Hynix Inc. (000660.KS – 2555000), that together make up more than 50% of the index. Each of these stocks fell 12% or more for the day, wiping out billions in market value and triggering an automatic 20-minute bourse-wide trading halt during the trading session. That is drama. The trigger for this selloff appears to have been the Governor of South Korea’s Financial Supervisory Service, Lee Chan-jin, who said the government was too hasty in approving leveraged funds tied to some of the country’s semiconductor stocks. In May, South Korea introduced 16 domestic products, which aim to deliver 2x the daily performance of the underlying chipmakers. These highly leveraged products exploded in popularity and grew to over $9 billion shortly after their launch. Margin debt also rose to a record high in June and with the KOSPI up over 100% year-to-date, the leveraged South Korean equity market was an accident waiting to happen. And note, even after this week’s decline, the iShares MSCI South Korea ETF (EWY – $192.20) is up 90% YTD. See page 14.

This was not the first time semiconductor stocks have come under pressure, but the combination of huge price gains, soaring margin debt, and new highly leveraged ETF vehicles, made the KOSPI index vulnerable to any hint of bad news. And remember, money is fungible. The loss of billions of dollars in South Korea is a liquidity event that would certainly trigger selling in the US.

We think this is a better explanation for Tuesday’s selloff in the US equity market. And while concern regarding debt-funded AI spending is warranted, the KOSPI decline is what most likely caused that concern. Nevertheless, a correction and a little bit of fear is good for equity markets. It is not fear, but mania that worries us, and that does not describe the current US market.

Fundamentally Sound

In fact, the good news keeps on rolling on in terms of earnings forecasts. This week the LSEG IBES consensus earnings estimate for 2026 rose $0.43 to $340.82, the 2027 forecast rose $1.38 to $399.25 and the 2028 forecast rose $0.50 to $447.06. The S&P Dow Jones consensus earnings estimate increased $0.34 for 2026 to $336.97 and rose $1.03 to $395.02 for 2027. The market is now trading at 21.6 times the IBES 2026 estimate and 18.4 times the 2027 estimate. A blended 2026-2027 PE ratio for the US market is currently 20 times. That multiple coupled with the current CPI of 4.3% YOY sums to 24.3. This is an important statistic because market peaks tend to appear when this sum is substantially higher than 24.4. See page 7. And with the price of crude oil falling, we expect inflation will also decline in coming months and bring this ratio down. In short, fundamentals continue to support the equity market.

Good News in Economic Data

Recent economic news was surprisingly positive. Advance estimates for retail and food services sales were $763.7 billion, up 0.9% for the month and up 6.9% YOY. This was a big increase from April’s sales, which were up 4.8% YOY. May was also the highest year-over-year growth rate in total retail sales since January 2023. Motor vehicles and parts sales were $140.3 billion, up 4.4% YOY, the largest YOY pace since September 2025. US census data showed real retail sales for May were up 1.0% YOY, the best since December 2025. See page 3.

May retail sales excluding motor vehicles and parts grew 7.5% YOY, the best since January 2023. But more importantly in this period of high gasoline prices, retail sales excluding motor vehicles and parts and gasoline station sales, were a record $559.8 billion, up 5.6% YOY. This was the best YOY pace since December 2023. May’s record sales were led by miscellaneous stores, nonstore retailers, and furniture. See page 4.

The pending home sales index increased by 3.8% in May due to an increase in the number of properties under contract. The index was up 4.8% YOY with positive data across all four regions of the US but the Midwest led all regions with a stellar 9.3% YOY increase. In the first quarter of the year, the debt service ratio fell 16 basis points to 11.16%, which is 43 basis points below the first quarter 2020 level, i.e., before the pandemic began to negatively impact consumer finances. The mortgage component fell from 5.92% to 5.88% and the consumer component fell from 5.40% to 5.29%. Consumers continue to hold onto low-rate loans obtained during the pandemic and personal income is slowly growing. Personal income for May will be released later this week. See page 5.

Technical Indicators are Neutral or Positive

The 25-day up/down volume oscillator is 0.52, relatively unchanged from last week and still neutral. This indicator nearly registered a confirming overbought reading of 3.0 or greater in April but failed to do so. This was a sign of weakness in an otherwise bullish collection of technical data. In short, corrections are not surprising, but the long-term trend remains favorable. See page 7. The NYSE cumulative advance/decline line made a confirming all-time high on June 16, 2026 which is positive. New highs are averaging 288 a day and new lows are averaging 141. Again, with both averages above 100, this indicator is neutral but tilts bullish. See page 9. Individual investor sentiment has been on a roller coaster in recent weeks, and last week’s AAII survey showed bullishness rose 6.2% to 36.6% and bearishness fell 8.3% to 39.4%. Bullishness is now below average for the fifth time in eight weeks, while bearishness is above average for the 19th week in a row. The 36.6/39.4 split between bull and bears is neutral but is actually a significant positive since sentiment is far from displaying mania for equities! All in all, we continue to be a buyer of equities on weakness. And there is more good news. Argentina, France, Germany, Mexico, Norway and the United States have secured their spots in the knockout rounds in the 2026 World Cup. Go USA!

Gail Dudack

Click to Download

As noted last week, some strategists feel that last week’s historic SpaceX (Space Exploration Technologies Corp. – SPCX – $201.80) IPO could mark the last hurrah of an equity bubble. In our view, the SPCX IPO may actually mark the initiation or the earliest phase of an equity bubble. If we are right, equities could continue to rise for several more years before a decline of 20% or more appears. And SPCX did not fail to impress. After its second day of trading the new stock closed nearly 50% above its offering price.

Cursor

In addition, SpaceX announced a $60 billion deal to acquire Anysphere, the parent company of AI coding agent Cursor. What makes this combination interesting is that Cursor, which according to recent financial reports generates $2.6 billion in annualized B2B business, allows developers to use AI to automate coding. This means Cursor competes directly with companies like OpenAI and Anthropic. Keep in mind that analysts who believe SpaceX is overvalued admit that the primary problem is the difficulty in valuing the xAI division of SpaceX. However, this week’s deal to acquire Cursor is a sign that Musk intends to develop SpaceX’s xAI division and compete directly with OpenAI and others. Acquiring Cursor is a boon for SpaceX, but it could make OpenAI’s filing for an IPO this week more interesting and challenging than it was a week ago.

Warsh

This week also marks Kevin Warsh’s first meeting as Chair of the Federal Reserve. The financial press has finally focused on what Warsh has been saying in all his interviews, that the Fed’s balance sheet is too large, it distorts markets and is harmful to the US economy. He plans to fix this. It has been well documented that quantitative easing, or an expanding Fed balance sheet, is a boost for the stock market. On the other hand, the impact of reducing the Fed’s balance sheet is more ambiguous. Even so, less liquidity in the banking system means less money is in the financial system, which means quantitative tightening could be detrimental to the economy and the stock market. We believe this is particularly true in a sluggish or weak economy; but quantitative tightening in a robust economy is apt to have less of an impact since velocity, or the turnover of money is high. We expect the new Fed Chair to understand this. It is likely he will be asked to comment on the Fed’s balance sheet during his first press conference on Wednesday, if he gives a press conference. Fewer press conferences are also apt to be part of the new Warsh Fed.

A week ago, Warsh would have been asked many questions about inflation, but things have changed recently. In particular, we are referring to the 14.8% decline in WTI crude oil futures (CLc1 – $76.68), that appeared in the last five trading sessions. Crude oil still remains above February 2026’s level of $67 a barrel, but the opening of the Strait of Hormuz could result in prices falling to that level, or even lower. Some energy analysts believe the end of the war could result in an oversupply of energy. The reason is that the end of the conflict would release oil sitting in tankers in the Strait of Hormuz at the same time that producers are close to full production. For example, the US exported a record 10.5 million barrels per day of crude and fuel in May, becoming the world’s largest oil exporter, surpassing Russian exports of 7 million barrels per day and Saudi Arabian exports of 5.9 million barrels per day. According to Vortexa Ltd., in 2025, the US exported only 6.6 million barrels per day, Russia exported 5.8 million barrels per day, and Saudi exports were 8.1 million barrels per day. Plus, the closing of the Strait of Hormuz has forced many energy consumers to find new suppliers and new sources of energy or to become more energy efficient. Demand for heavy crude may have peaked.

Inflation, Rates, and Earnings

This would be good news since May data was disturbing. Headline CPI rose from 3.8% YOY to 4.25% YOY. Core CPI was less affected by energy prices and increased from 2.75% YOY to 2.85% YOY. However, motor fuel soared, up nearly 41% YOY, and transportation sector inflation increased to 9.3% YOY. On the other hand, housing inflation was unchanged at 3.6% YOY and service-sector pricing was up a mere 0.1% to 3.5% YOY. See page 3. The special CPI indices that excluded energy were relatively unchanged in May. For example, all items less energy increased 2.9% YOY in May, up from 2.8% YOY. All items excluding food, shelter, energy and used cars and trucks were up 2.7% YOY versus 2.6% YOY in April. The index excluding food, shelter, and energy was 2.4% YOY versus 2.3% YOY. But all items excluding just food and shelter rose to 5.2% YOY, up from 4.3% and all items less medical care increased to 4.4% YOY from 3.9% YOY.

The heavily weighted owners’ equivalent rent index was 3.3% YOY and unchanged in May. This component has been below the fed funds rate for 14 consecutive months. (Until March, headline CPI had been below the Fed funds rate for 36 consecutive months. See page 4.) Since crude oil is now at $77 a barrel, and potentially moving lower, we believe there is a possibility that both the CPI and interest rates could decline later in the year.

Lower interest rates are what the housing market needs. Housing construction data for May was disappointing. Total housing starts were 1.177 million (SAAR) in May, down 8.7% YOY and the lowest level in six years. Housing starts for single-family homes were 882,000, the lowest since September 2025, and down 6.7% YOY. Housing permits were also weak, but not as severe. Total permits were 1.4 million (SAAR), down fractionally from April and down 0.2% YOY. Single-family permits were 886,000, up from April, but down 1.8% YOY. Unfortunately, homeownership is out of reach for many households. See page 5.

The NAHB/Wells Fargo housing market index fell from 37 to 35 in June, remaining well below the 50-point threshold, a sign of poor building conditions over the next six months. All three subcomponents of the index (current sales, expected sales and customer traffic) declined or held steady in June. Builders are facing cost pressure from higher input prices while demand remains soft due to weak affordability. The NAR housing affordability index fell from 108 to 105.6 in May which was the result of mortgage rates rising from 6.4% to 6.5% and the price of a median existing single-family home increasing from $421,900 to $434,300. Median family income rose from $109,547 to $111,513 in May, but this means the price of an existing home rose from 3.85 times median income to 3.89 times median income. See page 6. Our technical indicators are mostly positive, but our 25-day up/down volume oscillator is neutral. This is a concern since it means buying and selling pressure is equal, which is a sign of weakness at all-time highs. However, consensus earnings estimates continue to rise which means even as the broad market indices record new highs the market is still trading at 22.1 times the IBES 2026 estimate and 18.9 times the 2027 estimate. See pages 7-8. In sum, we remain bullish for the longer term and would be a buyer on weakness.

Gail Dudack

Click to Download

SpaceX is scheduled to hold its initial public offering of 555.6 million shares on Friday, June 12, 2026, with final pricing set for the close on June 11, 2026. However, this is not a normal IPO by many measures since the price has already been set at $135 a share (take it or leave it), the offering targets a retail allocation of 30% (whereas 5% to 10% is typical) and is said to be four-times oversubscribed. Keep in mind that many institutions will submit bids late in the process, and there are reports that several big institutions have already placed individual orders as large as $10 billion, but in this case, underwriters will stop accepting institutional orders on Wednesday at 4pm. Retail bids will be accepted after the Wednesday deadline, but in the end, the offering is expected to raise $75 billion. This would be more than 2.5 times the record $29.4 billion Saudi Aramco (TADAWUL: 2222 – $7.24 USD) IPO in 2019. SpaceX will be listed on the Nasdaq Exchange under the ticker symbol SPCX, and the anticipated $1.77 trillion valuation would make SPCX the eighth largest company in the world.

Experts such as Aswath Damodaran, NYU’s Dean of Valuation, as well as the research firm, Morningstar, have written that the SpaceX offering is significantly overvalued. Others say much of this valuation gap is due to the inability to price the artificial intelligence and social media assets of xAI, a subsidiary of SpaceX. However, nothing seems to dampen the enthusiasm for this IPO even the fact that xAI and SpaceX are being sued by Mississippi residents for the “omnipresent and inescapable” noise from a power plant fueling data centers. Nor does it seem dampened by the fact that the US is currently launching new strikes on Iran in response to Tehran shooting down a US Apache helicopter in the Strait of Hormuz. Nor by the US Energy Information Administration announcement that the oil stockpiles of the world’s largest economies are close to the lowest levels seen since at least 2003. In addition, CPI data for the month of May will be reported prior to the IPO, and since WTI crude futures (CLc1 – $88.20) were up 46% YOY in the month of May, this release could be negative for financial markets. All in all, it would not be surprising if the market was wobbly ahead of Friday’s debut of SPCX.

Many experts are turning bearish on the equity market and feel that the SpaceX IPO represents a classic bubble ending. We do not think so. In our opinion, the SpaceX IPO could be just the beginning of the final stage of a bubble, but with a dramatic finale yet to be seen. By that we mean the enthusiasm for AI and semiconductors could now begin to shift from the nuts and bolts of producing AI to AI implementation and the opportunities of space. Elon Musk has been years ahead of most mortals and the value of the Starlink global satellite constellation and orbital rocket transportation is obvious, but what plans Musk has for xAI and communication infrastructure and managing space-to-ground data traffic will be fascinating to see.

In short, this IPO is not just about SpaceX but also about the “Musk mystique” which translates into Elon’s genius and vision. Keep in mind that Tesla Inc.’s (TSLA – $396.68) amazing performance since its 2010 IPO or since the early years of 2011 to 2012, has created an estimated 3,000 to 5,000 millionaires. We expect many of them will be active investors in SpaceX, a company already more “established” than Tesla was in 2010.

Although it is encouraging to see that crude oil prices are down from April’s levels, we are worried about May’s inflation report. On the other hand, recent reports had encouraging news about employment. The May employment report was a big positive surprise with a gain of 172,000 new jobs, but equally important, another 93,000 jobs were added due to positive revisions to March and April. The unemployment rate was unchanged at 4.3%. (Without rounding, the unemployment rate actually declined 0.4%.) The majority of job growth was in the leisure and hospitality sector, where hiring had been weaker in 2025. Other sectors with job gains were government and healthcare. Nonetheless, the disparity between the two BLS surveys continued in May with the establishment survey showing job growth of 0.3% YOY and the household survey showing a job loss of 0.3% YOY. This is disturbing because job losses are characteristic of recessions. See page 3.

In the establishment survey, the 6-month average of job gains rose from 70,170 to 92,000 in May, which is the highest level since February 2025. The household survey showed a 6-month average of job losses of 164,830 in May and has been in negative territory for five consecutive months. The difference is that the establishment survey includes all employees issued a W-2, whereas the household survey also includes legal and illegal employees, unpaid home workers, and/or any working person not receiving a W-2. In short, it is a broader survey of employment. This could help explain the disconnect between the two surveys and the disconnect with sentiment indicators. See page 4. However, sentiment indicators have been warning of a recession for the last six years, not just the last six months.

May’s data on earnings was a highlight. Average weekly earnings grew from $1089.37 in April to $1092.08 in May, representing a 4.2% YOY increase. This 4.2% gain is important since inflation in May will be reported later this week, but in April it was running at 3.8% YOY. In short, real earnings are growing, but modestly, which reveals why inflation is a tax on households. The current inflation driver is energy prices, which makes the current price of WTI, down from $103.34 at the end of April, a hopeful sign for consumers. See page 5.

May’s ISM nonmanufacturing index was less positive than the ISM manufacturing survey since only four of the nine components rise in the month, one of which was prices paid. However, all but one component, employment, remained above the 50 benchmark indicating expansion for the sector. The combined ISM manufacturing/nonmanufacturing employment index rose from 94.4 to 96.5 in May, which is a good sign for the US economy. See page 6.

The NFIB small business optimism index fell 0.6 points to 95.3 in May, its lowest level since October 2024, and it was the third consecutive reading below the long-term average of 98. The employment index was essentially flat at 100.3, above the long-term average of 100, but below the 2025 average of 101.2. Net respondents planning to increase employment fell to 9%, the lowest since May 2020. A net 34% plan to raise prices, the highest since July 2022. Actual earnings and actual sales improved to -15 and -5, respectively. The -15 reading in actual earnings is the second-best result since December 2021. See page 7.

The LSEG IBES and S&P Dow Jones consensus earnings estimates for 2026 are $340.07 and $336.27, respectively. For 2027, earnings forecasts are $395.95 and $392.41, respectively. This means the S&P 500 is trading at 21.7 times 2026 and 18.7 times 2027 estimates. These multiples are not indicative of an overvalued market, particularly if inflation trends lower later this year. In short, we expect upcoming equity offerings could generate volatility in the near term, but we remain a long-term buyer of equities on weakness.

Gail Dudack

Click to Download

We are more perplexed by the equity market than we have been in a long time. On one hand, the fundamental underpinnings for equities, boosted by sterling first quarter earnings reports, continue to support this bull market. And in our Outlook for 2026 we indicated that it would be a year of positive earnings surprises. This has come to pass, and it remains core to our bullish outlook. Yet even though we expect earnings to remain strong this year, strong earnings have become the consensus view. In short, fewer positive surprises are likely in upcoming quarters. Plus, earnings forecasts are rising exponentially at a time when quarterly earnings comparisons will become more difficult. Nevertheless, with the S&P 500 up 11.2% year-to-date, and up 28% since June of 2025, the S&P 500 12-month trailing operating earnings growth rate is a stunning 22%. In short, valuations have not been stretched this year. More importantly, strong earnings growth is not a characteristic of mania, or a bubble.

On the negative side, the outsized gains in many semiconductor and AI-related stocks make us dizzy and remind us of other over-extended markets. Equally important, a number of impressive IPO offerings are on the horizon. The combination of SpaceX, OpenAI, and Anthropic is expected to raise a total of $4 trillion.

The IPO marketplace has been relatively consistent over the last 25 years, and according to the Securities Exchange Commission, there has been an average of 280 offerings a year which raised an average of $66 billion per year. The exception was 2021 which saw a 120% increase in offerings. A total of 1,078 IPOs raised over $302.7 billion in total proceeds. Some of this IPO excitement was fueled by low interest rates, but new companies were in demand, and the average first-day gain of an IPO was 34%, nearly double the long-term average. Healthcare companies dominated the traditional offerings, but special purpose acquisition companies (SPACs) were the hot item of the year and represented 611 of the year’s listings. See page 3. Sadly, two-thirds of the IPOs that went public in 2021 were trading below their original prices by the end of December.

What makes us think about the 2021 IPO market is that in the next twelve months the combined offerings of three stocks — SpaceX, OpenAI, and Anthropic — are expected to raise a total of $160 billion in proceeds, with a target valuation of $4 trillion. This would be more than 2.25 times the proceeds raised in 2025 and more than half of what was raised in 2021. More importantly, the IPO proceeds raised in 2021 represented a mere 0.6% of total market capitalization. This year is on a path to exceed that. According to the World Federation of Exchanges, total US market capitalization was $82.2 trillion in March 2026. In other words, the $4 trillion in valuation from just these three companies could represent nearly 5% of today’s total market capitalization. That may not sound like a lot, but it would be historic. Moreover, the current IPO pipeline represents a big increase in the supply of stock which should alter the supply/demand balance for equities. And we should remind everyone that active IPO offerings are a characteristic of a market top.

When we get perplexed, we turn to fundamental data. Most major market peaks occur when the trailing S&P PE reaches 29 times or more. But this is not an exact science, and history shows that each successive major top reaches successively higher valuations. Moreover, the S&P PE exceeded 29 times in April and June of 1999, many months before the peak in March 2000. But to ease our mind, we applied a 29 multiple to the IBES 2026 earnings estimate of $339.51. This equates to 9845 in the S&P 500 index. All in all, there are excesses in the current equity environment, but in our view, while it is prudent to be vigilant it is too early to be bearish.

Economic data was mixed this week. First quarter GDP grew 1.6% (SAAR) after a weak 0.5% in the fourth quarter. There was solid contribution from nonresidential private investment, particularly in intellectual property products and equipment and software. Personal consumption was concentrated in nondurable goods and services. Net trade subtracted from growth. See page 4.

Personal income rose 2.5% YOY in April, but real personal disposable income declined 1.1%, the first monthly decline since December 2022. This is a concern. Personal consumption expenditures rose nearly 6% YOY, but the saving rate fell from 3.2% to 2.6%. Consumers are stretched and inflation is taking a toll on households. See page 5.

Our data shows that the steady deceleration seen in income growth matches the trend in adjusted proprietors’ income which declined 1.1% YOY in April. This points to pressure in the small business sector. Both of these trends align with employment growth, which grew a mere 0.2% YOY according to the BLS establishment survey and decreased 0.8% according to the household survey. May’s employment data will be reported Friday. See page 6.

The ISM manufacturing index rose from 52.7 in April to 54.0 in May. All components, with the exception of prices paid, rose for the month. (The decline in prices paid is positive!). The ISM manufacturing survey has been in expansion mode this year after being below 50 for all but three months between November 2022 and December 2025. In other words, the manufacturing sector is emerging from a long period of contraction. This shift should provide a nice boost to the economy. See page 7.

Although 68% of US GDP is tied to personal consumption and 47% is service-driven, the ISM manufacturing index has had a long history of correlating well with both the S&P 500 index and S&P operating earnings. However, the ISM manufacturing index was in recessionary mode from 2022 to 2025 which was a drag on and a risk to the economy. This revival in the ISM manufacturing index should bode well for both corporate earnings and equities. See page 8.

Inflation is the biggest problem the economy faces, and crude oil futures prices are up 41.5% YOY in June. And while this is down from the 84% YOY gain seen two months ago, consumers need to see more improvement. Inflation is what turned real personal disposable income negative in April, a trend that concerns us. Producer price indices for finished goods jumped from 4.3% in March to 6.4% in April and final demand PPI rose from 4.3% to 6.0%. Core PPI for finished goods was relatively unchanged and rose from 3.7% to 3.8%. Ex-Fed Chair Jerome Powell’s favorite inflation benchmark, the PCE deflator, was 3.5% in March and 3.8% in April while the core PCE deflator was essentially unchanged at just under 3.3% in April (i.e., relatively unchanged but up 0.1% after rounding). See page 9. Crude oil prices move relatively quickly through the economy which is why April’s spike in PPI indices suggests higher consumer prices are ahead. And since real personal disposable income is already showing negative growth, this is a major risk. To date, the core PCE deflator at 3.3% and core CPI at 2.8% are not at critical levels. But as seen in the Biden administration, the longer crude oil prices remain high, the greater the risk that this is not a short-term spike in prices, but the start of another inflationary cycle. See page 10.

Gail Dudack

Click to Download