Investing.com — Wall Street ended slightly lower on Friday, driving home a mostly steep decline for the week on the back of sliding technology stocks. With diplomatic efforts in the Middle East having taken a positive turn and oil prices continuing to slump, the geopolitical risk premium has been effectively removed and market participants have turned their attention squarely back to the high-flying artificial intelligence trade.
It was also a consequential week for the outlook of monetary policy, after key inflation and economic growth data was published on Thursday, followed by improving consumer sentiment indicators on Friday.
The benchmark S&P 500 index fell 0.3% to close at 7,338.39 points, the tech-heavy declined 0.2% to settle at 25,297.62 points, and the blue-chip lost 0.1% to conclude at 51,865.52 points.
For the week, the S&P was down 2.2% and the Nasdaq an even worse 4.6%. The Dow bucked the trend and eked out a gain of 0.6%.
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Tough week for AI trade as memory space takes spotlight
The S&P 500 Technology sector posted a weekly decline of more than 5%. The big theme over the last few days was the state of the memory market, amid major announcements and media reports centered on South Korean giants and , and blowout quarterly results from the world’s third-largest memory chipmaker, .
The memory market in general is suffering from a prolonged supply crunch as demand for AI processes continue to explode. Prices for standard and enterprise Dynamic Random-Access Memory (DRAM) and High Bandwidth Memory (HBM) products have shot up, especially for the latter which are used in AI hardware, graphics processing units (GPUs), and supercomputers. Against this backdrop, memory chipmakers such as the two South Korean majors and Micron have seen outsized gains in their stocks.
This week’s tech weakness began on Tuesday after a ChosunBiz report said SK Hynix was reallocating resources and shifting focus back to the mainstream DRAM market. The news sent both SK and peer Samsung sharply lower, which in turn weighed on the broader gauge and sent it tumbling to its second-biggest one-day decline in history.
The stocks rebounded over the next two days, helped by SK’s announcement of a planned $29.4 billion Nasdaq listing. But both tumbled again on Friday, triggering a third circuit breaker stop for the KOSPI and sending the average to a weekly loss of about 7%.
At home, Tuesday’s South Korean bloodbath weighed on the Nasdaq, sending it tumbling over 2% on that day. But on Wednesday evening, Micron delivered stellar quarterly results and issued strong guidance, with management indicating that memory supply constraints showed little signs of easing. Investors cheered the report as proof that memory demand could outpace supply for quite some time, and sent Micron’s shares up nearly 16% on Thursday.
“The AI narrative in markets right now is all over the place, shifting from questions about ROI from the AI spend, to exuberance about the AI spend, as seen in Micron’s gaudy numbers this week. These conflicting narratives suggest that the market is in the process of picking winners and losers in this space, and that is a process that will take time,” Richard Reyle, chief investment officer at Questar Capital Partners, said.
“The same hot money that chased Nvidia over the past few years has now discovered the memory stocks, and while there is a sound business model in the memory space, their valuations are over their skis. We believe it’s prudent for investors who are sitting on big gains in the memory space to take some profits, as the memory space is largely a commodity, and these companies can’t maintain this pricing power forever. Like gravity, the mean reversion is coming,” Reyle added.
Thursday’s Micron euphoria was sharply countered by a slide in after the iPhone-giant announced price increases for its MacBooks, iPads, and home devices in order to offset rising costs from the memory chip crunch. On Friday, tech received another blow after a New York Times report that Chat-GPT developer was considering postponing its highly-anticipated initial public offering to 2027. CNBC later said that OpenAI had yet to outline an official timeline for the listing, citing people familiar with the company’s plans.
Rate hike bets pared ever so slightly
Away from tech, the U.S. economic calendar grabbed some of the spotlight this week, highlighted by Thursday’s reading on the May core personal consumption expenditures (PCE) price index.
The Federal Reserve’s preferred inflation gauge ticked up slightly in May from April on both a M/M and Y/Y basis, matching economists’ and analysts’ expectations. The 3.4% Y/Y rise was the highest since October 2023. Meanwhile, increases in headline PCE on both a M/M and Y/Y basis also matched expectations, with the latter posting its highest increase since April 2023.
Despite the elevated annual readings, watchers of monetary policy reacted by marginally trimming their odds for Fed interest rate hikes this year and slightly adding to their bets for the central bank to keep rates steady. The move was driven by a belief that the May PCE report was a peak in terms of price pressures, as oil prices have rapidly declined this week to levels from just before the start of the Middle East conflict and have eased inflationary concerns.
“This is almost certainly the headline peak; possibly for core inflation too,” UBS analysts led by Alan Detmeister said on Thursday.
“With gasoline prices falling strongly (down 64 cent per gallon, 14%, since May 20 according to AAA) headline PCE prices are projected to see essentially no increase (+0.01%) in next month’s release of the June data. The weak June change would lead 12-month headline PCE price inflation to fall from the 4.07% in (the) May release to 3.79% in next month’s June data — almost exactly reversing this month’s jump,” they added.
The PCE data comes after a big repricing in the outlook for monetary policy last week following the Fed’s release of a much more hawkish dot plot than expected. At least half of the Federal Open Market Committee’s members now expect rate hikes this year, in part due to the inflationary impact of surging oil prices.
Minneapolis Fed President Neel Kashkari on Friday said he was one of the policymakers who now sees some tightening this year.
“In March, I had penciled in one rate cut by the end of the year. In June, I’ve changed that to one rate hike by the end of the year,” Kashkari said in a panel discussion in Colorado.
“I don’t trust Iran to honor whatever agreement has been made…so I certainly am not seeing all clear coming out of the Middle East, and that makes me cautious about feeling too good that the worst is behind us,” he added. Kashkari also cited other factors other than oil prices for inflation.
“The inflation is being driven by supply dynamics, so wether it’s tariffs pushing up the price of goods that we buy from abroad, it’s the fertilizer that’s been disrupted because of the Strait of Hormuz and energy and oil prices from the Strait of Hormuz,” the Minneapolis Fed President said.
“Then it’s also being driven by massive investment, hundreds of billions of dollars a year, in the data centers and all of the associated infrastructure that goes with that. Anything that touches those sectors, the prices are skyrocketing on those parts of the economy,” he added.
Separately on Friday, the University of Michigan’s final read on consumer sentiment for June showed an about 10% rise from May, helped by moderating gas prices. Consumers’ year-ahead inflation expectations inched down to 4.6% in June from 4.8% in May.
Trump says Iran violated ceasefire
Turning to the Middle East, President Donald Trump on Friday said Iran shot at least four drones at ships transiting the critical Strait of Hormuz and hit one cargo vessel, in what he called a “foolish violation” of the ceasefire agreement between Washington and Tehran.
Though the president did not provide any more details or name the ship that was hit, he was likely referring to the same vessel that was said to be attacked on Thursday. The United Kingdom Maritime Trade Operations received a report of an attack on a cargo vessel in the Strait of Hormuz near Oman, and the Wall Street Journal later said that the vessel was a Singapore-flagged cargo ship named the Ever Lovely that was attacked by Iran’s Islamic Revolutionary Guard Corps (IRGC).
Still, oil prices slid on Friday, as overall shipping traffic through the Hormuz strait remained resilient despite the attack on the ship and Trump’s assertion that it was a ceasefire violation.
Ambar Warrick and Pranav Kashyap contributed to this article