US Strategy Weekly: A Buyer on Weakness

Second Quarter Earnings Season

Second quarter earnings season is having a stellar start with bank earnings beating most analysts’ expectations. However, an announcement from JPMorgan Chase & Co. (JPM – $342.89) indicating it was raising expense forecasts for 2026 was greeted by heavy selling. Conversely, Goldman Sachs Group Inc. (GS – $1140.00) reported huge earnings gains as a result of corporate mergers, AI-driven capital raising, and active financial markets. The 94-point gain in Goldman’s stock was a boon to the Dow Jones Industrial Average. But International Business Machines Corp. (IBM – $217.07), also a DJIA stock, suffered a record one-day drop of 73 points, or 25%, as a result of pre-announcing lower-than-expected second quarter revenues and earnings. The explanation for this revision was that the tight inventories and expected price increases in semiconductors resulted in clients “temporarily” shifting capital expenditures toward servers, storage, cybersecurity, and memory purchases and away from mainframe and software investment. The fact that IBM was experiencing canceled or postponed contracts triggered selling in many mainframe and software stocks. In short, disappointments are being punished and good news is being celebrated. In our view, this is because investors are nervous that earnings growth may be decelerating and equity valuations may be deteriorating. It is a justifiable concern. So, right from the start this earnings season is markedly different from previous quarters and the environment is becoming a market of stocks rather than a stock or sector-driven market. We see this as a healthy shift; more importantly, it is not the behavior of a late-stage stock market bubble.

Oil and Inflation

We remain a buyer on weakness, but we are concerned that the rise in crude oil prices could reignite inflation. The recent cease fire with Iran may have seemed like a waste of time but it was a valuable pause. It allowed the oil trapped in the Strait of Hormuz to be shipped and it triggered a concentrated effort by oil producing countries to bypass the Strait by rerouting oil pipelines or to build new ones. Many countries began increasing investment in non-fossil fuels. Plus, countries like Venezuela and the US boosted production and found new markets for their oil. In time, we believe the Strait of Hormuz will be far less relevant than it is today. But today, crude oil prices are rising and that is a negative. However, even after renewed bombing and a war of words between Iran and the US, the August WTI light crude oil future (CLc1 – $79.93) remains well below the peak prices seen in April. This is important both for inflation and market sentiment.

What helped the stock and bond markets this week was June’s CPI report. Headline CPI was better than expected at 3.5% YOY, down from May’s 4.2% YOY. Core CPI was also surprisingly favorable at 2.6% YOY, down from May’s 2.9% YOY. This headline inflation number was the best since March and the core CPI pace was the lowest since February, before the Iran conflict began. See page 3. However, the report shows how sensitive the CPI is to the price of oil. In the month of June, the energy index fell 4.9% and this resulted in a 0.35% month-to-month decline in the CPI headline index. Nonetheless, this eased the fears of a fed funds rate hike in July.

Of the four major heavyweight components of the CPI — transportation, food and beverages, housing, and medical care — transportation is the area most directly impacted by the price of oil. The CPI’s transportation index was up 6.5% YOY in June, down from 9.3% YOY in May, but still high, which is a concern since transportation impacts so many areas of the economy. For perspective, the average closing price for the August WTI crude oil future was $98 in April, $99 in May, and $81.80 in June. In other words, oil is unlikely to trigger higher inflation in the CPI unless the price of oil rises well above $80 a barrel. This is something we will be monitoring.

Meanwhile, all other heavyweight indices show inflation is trending below 3.7%, or the long-term average. Housing inflation was 3.3%, food and beverages inflation was 2.99%, medical care was 2.0%. Service inflation has been the stickiest part of the CPI for the last two years, but it fell to 3.2% YOY in June, with services less rent of shelter at 3.15% YOY. The impact of energy is seen in the nondurable goods which rose nearly 6% YOY (down from 8.0% YOY). Meanwhile, durable goods prices rose a modest 2.5% YOY. See page 4.

There were signs of improvement in the small business sector in June. The NFIB small business optimism index was 97.4, up 2.1 points from May and moving back toward its 52-year average of 98.0. June was the fourth consecutive reading below 98. Of the 10 index components, seven increased and three decreased. Most importantly, plans to raise prices fell while hiring plans rose. Expectations for both better business conditions and real sales improved substantially and primarily drove the rise in the Index. See page 5.

Tariffs, Trade, Deficits

But recent reports on the budget deficit were not so good. The Treasury’s deficit for June was $120.3 billion, down from $292.7 billion in May, but up substantially from the $27.0 billion surplus reported in June 2025. As a result, the 12-month deficit is now $1.8 trillion, up from $1.66 trillion seen in May. This means that total deficits over the last twelve months ending in June were 5.7% of GDP (1Q26), up from 5.2% in May. This is the first time there has been a monthly increase in the debt-to-GDP ratio of more than 0.1% since Scott Bessent became Treasury Secretary. Most months have seen steady declines in the debt-to-GDP ratio.

This 0.5% increase was largely due to the fact that the government issued tariff refunds of more than $49.2 billion in June, dragging custom duties down to a monthly net loss of $25.5 billion in the federal accounts. Tariff refunds totaled $22 billion in May 2026, when refunds began. A year ago, the June 2025 net customs collections were $26.6 billion and reduced the federal deficit by that amount. Net custom collections exceeded $100 billion for the first time in any fiscal year. In sum, tariffs, which were blocked by the Supreme Court, helped our trade balance, deficit, and GDP. The Supreme Court ruling was based on a technicality, and we expect the Trump administration will be able to reinstate targeted tariffs in the future. See page 6.

Technical Indicators

In general, our collection of indicators continues to display a bullish bias. But for example, the 10-day average of new daily highs is currently at 240 and the 10-day average of new lows is a 122. Typically, a 10-day average greater than 100 in new highs defines a bullish trend and vice versa. In this case, daily new highs are greater than new lows, but both are above 100. This is the definition of a neutral trend, but with a bullish bias. Our 25-day up/down volume oscillator is at 0.43, which means that over the last 25 trading sessions the volume in stocks advancing barely exceeded the volume in declining shares. A strong bull market typically sees this oscillator move over 3.0 on each new high because volume in advancing stocks is strong. This neutral reading in the volume oscillator reveals the fact that there has been persistent selling into strength. All in all, it means the market is at risk of having its first 10% pullback. But as we noted last week, even without any multiple expansion, current earnings suggest a target of roughly 8350 in the S&P 500 by year end, so we remain a buyer on weakness.

Gail Dudack

Click to Download