US Strategy Weekly: A Week of Cursor and Warsh

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

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