Weekly Investment Update (07/17/2026)

One of the more notable shifts in markets lately is that the selloff in some of the most crowded trades is beginning to prompt a broader reassessment of the AI story. What initially looked like a technical pullback is now being accompanied by a wider set of questions around the durability of hyperscaler spending, rising open-source competition, growing memory supply, and whether the returns on this capital investment will ultimately justify the enthusiasm. None of that means the AI opportunity is going away. It does suggest, however, that investors are becoming more selective about which businesses have genuine staying power and which may have benefited from a period of unusually concentrated optimism.

At the same time, the broader backdrop has improved in a way that may support that shift in leadership. June inflation came in materially softer than expected, with headline prices down 0.4% on the month and core inflation flat, reinforcing the view that broad disinflation may be resuming even if some pockets of price pressure remain. Earnings season has also started on a strong note, with major banks delivering better-than-expected results and offering generally constructive commentary on consumer credit, loan growth, and the overall economy. Taken together, softer inflation and a resilient earnings backdrop create more room for markets to broaden beyond the narrow set of recent AI winners. For long-term investors, that is precisely why diversified, thoughtfully built portfolios remain so important: not because they always keep up in the narrowest phases of a rally, but because they are better positioned as leadership expands and the market becomes more discriminating.

June CPI: Disinflation Begins

What is happening: The June CPI report came in sharply below consensus expectations, with headline prices falling 0.4% month over month and the core (excluding food and energy) index recording a flat print. That left headline inflation lower at 3.5% year over year, down from 4.2%, while core inflation slowed to 2.6% from 2.9%. Gasoline prices weighed heavily, as expected, falling 9.7% on the month, and should fall again in next month’s release. 

The report saw broad-based price declines, with weakness most pronounced within services, particularly hotel, auto insurance, and wireless phone services prices. Shelter price increases were modest and in line with their pre-pandemic pace. We expect this category to continue to slow given the trend in new tenant rents (currently running below 2% year over year, according to Zillow data). 

Goods prices fell on balance for the second month, reflecting widespread declines. With tariff passthrough largely complete and ongoing tariff rebates that help cushion profitability, core goods inflation has room to slow further toward pre-Liberation Day pace. Section 301 tariffs, which are expected to replace the Section 122 tariffs when they expire on July 24,  could result in an average tariff rate of 12.5%, up from 10% under Section 122 but below last year's levels. 

Regarding AI-related inflation, computer hardware prices fell in June while software and accessories continued to climb, reaching its historical high of17% year over year. The latter receives a much larger weight in core PCE, the Federal Reserve’s (Fed’s) preferred target, than core CPI and is a key source of the current gap between the two indexes. The June CPI data pointed to a slightly stronger, albeit modest, 0.2% month-over-month rise in core PCE, translating to a 3.3% year-over-year pace. 

Why it matters: The inflation miss in June is a welcome development for Fed officials, who have become increasingly concerned over persistent price pressures.

The report supports the view that inflation peaked in May and is on track to fall back below 3% by September, barring another rise in energy prices. We continue to believe price pressures will prove more benign in the second half, particularly if oil prices normalize back to the $60-$70 range. 

The question is whether this trajectory justifies keeping Fed policy on hold in the coming months. A hike as early as next month is likely off the table, with the June data suggesting disinflation is off to a strong start. But further out, if that process proves to be uneven, rate hikes cannot be ruled out. Fortunately, this is priced into markets, with a full hike priced before yearend. That is, should policy firming materialize, it should not be disruptive to financial markets.

Moreover, we do not expect the start of an extended hiking cycle. The Fed remains most focused on broadening price pressures. We expect evidence to build in the coming months that AI, tariffs, and energy prices — key sources of reflation fear — are not leading to a generalized change in prices, given powerful underlying trends linked to slowing rental inflation, benign wage growth, and rising productivity. 

Bank Earnings Set a Strong Tone for Second-Quarter Earnings Season

What is happening: Second-quarter earnings season began this week with major U.S. banks reporting broadly strong results, delivering a 13.1% earnings-per-share beat. The collective strength was driven by robust trading revenues and capital markets activity, while resilient economic growth supported overall credit conditions. JPMorgan reported its highest-ever quarterly profit as full-year trading revenue hit a record high and investment banking fees came in well above expectations, up 30% year over year, ahead of management guidance of 11%. Similarly, Bank of America’s investment banking fees rose 50% year over year, while equities trading revenue surged by 70%.

Robust capital markets activity coincided with healthy consumer credit trends despite recent volatility in energy prices. The major banks reported healthy loan and deposit growth, while provisions and nonperforming loans generally declined, underscoring still-supportive credit conditions in the U.S. Management teams also offered constructive commentary on the U.S. economy, which is notable because banks provide a useful window into underlying economic conditions.

Why it matters: Bank earnings provided an encouraging start to what is expected to be another strong quarter for U.S. companies. Financial sector earnings are expected to grow 6.6% year over  year in the second quarter, with stronger growth expected from banks and capital markets, at 11% and 15%, respectively. Second-quarter earnings growth for the S&P 500 is expected to be 23%, which would mark the second consecutive quarter of growth above 20%. Technology and energy remain the drivers of expected earnings growth, but market performance has recently shifted. Through the first half of the year, financials were the worst-performing sector in the S&P 500 as valuations reached a three-year low in March. Over the last month, however, financials have rebounded, becoming the second-best performer. The market’s willingness to rotate back into the cyclically sensitive financials sector suggests a healthier rotation rather than concern about the broader market environment. 

The sustainability of the financial sector’s recent strength will depend on the fundamental backdrop. Our base case is that growth will remain resilient, which should keep credit conditions and consumer balance sheets stable and capital markets activity intact. While interest rates are likely to remain higher for longer, the U.S. economy has been broadly resilient at these levels, and we do not expect an extended hiking cycle that would derail economic activity. Bessemer portfolios remain overweight select banks, including JPMorgan, Bank of America, and others.