Weekly Market Update: Hot Inflation Sidelines Rate Cuts

Markets traded lower this week, though there was relative strength beneath the major equity indexes. The S&P 500 and Nasdaq both ended the week lower as the largest technology stocks sold off, while the Russell 2000 small-cap index, along with the value and equal-weight factors, posted modest gains.

Technology, Communication Services, and Consumer Discretionary were the worst-performing sectors as mega-cap names like Apple and Microsoft declined.

The eight remaining sectors finished higher, led by defensive areas of the market. Bonds gained as Treasury yields fell despite a hot inflation report, with investors expecting inflation to ease following the recent drop in oil prices.

Oil fell nearly 5% as shipping traffic through the Strait of Hormuz increased, while the VIX, a measure of expected market volatility, drifted higher as stocks declined.

Key Takeaways

Semiconductors Remain Volatile as a Crowded Trade Unwinds

The group sold off sharply Monday and Tuesday as investors unwound leverage that had built in the industry. Semiconductors have significantly outperformed the broader market this year, but the popularity cuts both ways: when sentiment turns, the moves are large in both directions. The mood shifted again Wednesday evening, when Micron, a leading memory-chip maker, reported record quarterly revenue and its shares jumped more than 15% overnight into Thursday morning.

Why it matters: AI infrastructure spending is the engine behind semiconductor companies’ profits and share-price gains, and the industry has benefited from hundreds of billions of dollars in capital spending. The trade has become popular and heavily leveraged, which is why it has become so volatile.

Inflation Ran Hot in May

The Federal Reserve’s preferred inflation measure rose 4.1% from a year earlier, its highest level in nearly three years. Higher energy prices tied to the conflict in the Middle East were the main driver, though many economists believe May may mark the peak before inflation eases over the summer. Even so, the Fed has shifted its stance with inflation still above its 2% target. After signaling earlier this year that rate cuts were likely, officials have taken cuts off the table for 2026, and markets now see a possible rate increase later this year.

Why it matters: The Fed’s rate-cutting cycle looks likely to stay on pause. With the Fed now placing more weight on inflation than on growth or the job market, interest rates could stay elevated, and may even move higher, before any cuts arrive.

Energy Prices Return to Pre-Conflict Levels

Oil has now given back the entire increase tied to the Middle East conflict. U.S. crude fell to around $70 a barrel this week, its lowest level since the conflict began in late February, as tankers resume moving through the Strait of Hormuz and shipping normalizes.

Why it matters: Lower energy prices ease pressure on household budgets. They are also the main reason inflation is expected to cool in the months ahead, since the same energy spike that drove inflation to a three-year high is now reversing.

First-Quarter GDP Revised Higher

The government’s final estimate of growth for the first quarter came in at 2.1%, up from an earlier reading of 1.6%. The figure covers January through March, so it predates most of the energy shock from the conflict and reflects where the economy stood earlier in the year.

Why it matters: The economy entered 2026 on firmer footing than many economists previously thought, an encouraging data point even though it measures activity before the oil supply disruption.

Business Investment Held Up in May

Orders for long-lasting manufactured goods fell 4.5% for the month, but nearly all the decline came from a drop in volatile aircraft orders following an unusually strong April. A broader measure of business investment, which strips out aircraft and defense, rose more than expected.

Why it matters: The headline looks worse than the reality. Underneath the noise, businesses continued to invest, a quietly encouraging sign for the economy and for corporate profits.