Good News and Bad News

What Is Driving the Recent Pullback?

After a strong rally in equities, markets have experienced a meaningful pullback since last Friday, led by technology, AI, and semiconductor stocks. There are a few possible explanations for this, but the primary reason appears to be a shift in interest rate expectations rather than a sign that the broader economy is falling apart.

Good News Became Bad News

The initial catalyst was Friday’s stronger-than-expected jobs report. On the surface, a healthy labor market is good news. It implies the economy is holding up and companies aren’t yet feeling major pressure from weakening demand.

But as we always say, the economy is not the market. And for the market, good news was bad news.

A surprisingly strong jobs report typically tells the Federal Reserve they don’t need to rush to cut rates, but investors quickly realized the same thing. The result was higher bond yields, lower equity valuations, and a sharp pullback in many of the market’s hottest technology and AI names.

This matters because higher yields essentially reduce what investors are willing to pay now for earnings that won’t show up for years. The more a stock’s value is based on future potential, the more this matters. Since many AI and semiconductor-related stocks fall into this category, that explains why they were hit hardest.

Inflation Report Helped, But Did Not Fully Change the Narrative

While Wednesday’s inflation report was the highest in 3 years, it was not the worst-case scenario.

Core inflation (meaning inflation for everything except food and fuel costs, which can be volatile) was in line with expectations. That helped ease concerns that inflation is rising sharply again. If Friday’s jobs report was “good news that became bad news,” Wednesday’s inflation report would just be described as “expected news.”

Still, the bigger question hasn’t gone away: can the Fed begin easing policy if the labor market remains strong and inflation stays above target? Or will the next cut actually be a rate increase to curb inflation? Until we get more clarity on that, Treasury yields are likely to stay a big topic of conversation.

AI and Semiconductor Profit-Taking

The selloff was also motivated by how well AI and semiconductor stocks have performed. These areas have been some of the biggest winners in the market, and many investors were sitting on significant gains.

When yields moved higher, some investors decided to take some of these off the table. This doesn’t seem like a loss of faith in AI, just a natural reset after a hot run.

Is SpaceX or IPO Liquidity a Factor?

There has been a lot of talk that investors are raising cash ahead of large upcoming IPOs, including a potential SpaceX offering.

There’s probably something to this, but I’d say it’s more of a contributing factor than a leading one. Large institutions often sell some winners to raise funds they can invest in high-profile private-company listings. However, the timing of the selloff lines up more closely with the jobs report, the move in Treasury yields, and the repricing of Fed expectations.

Something to Think About: Is AI Adoption Matching Expectations?

One longer-term question I’ve been thinking about is whether the pace of AI adoption is matching the market’s lofty expectations.

The labor market remains surprisingly resilient despite unprecedented investment in artificial intelligence. If AI is truly as transformative as many expect, some investors may begin asking when those productivity gains will show up more clearly in employment data, margins, and corporate cost structures.

To be clear, this was not a main driver of the recent pullback. Labor market data is a lagging indicator, and many companies are still in the early stages of AI implementation. Most management teams are focused on using AI to enhance productivity rather than replace workers.

But it’s worth watching. Current AI valuations have basically already priced in expectations for significant productivity gains. If adoption occurs more gradually than expected, the market may start to get impatient or start wondering if they’ve been too optimistic.

Bottom Line

The recent pullback looks primarily like a result of changing interest rate expectations following Friday’s jobs report. Wednesday’s inflation did not really alleviate or increase the concern regarding rates, but investors are still waiting to see what the Fed will actually do long-term, how Treasury yields will be impacted, and whether the economy can remain strong without higher inflation.

The “selling to buy SpaceX” narrative is fun but probably overblown. The more important story is that strong economic data pushed investors to rethink the timing of future Fed rate cuts, leading to a valuation reset in the market’s most crowded sectors.

For now, this looks more like a healthy pause than a true cause for concern.

But What About Will?

You didn’t think I would write an entire commentary without including a personal and/or sports update, did you?

I am writing this from a hotel room in Chicago while meeting with clients on a Midwest swing. One of the benefits of having an older child –my son is now 16 – is being able to bring him along on a work trip. I work during the day while he explores the city, and in the evenings, we head to the ballpark. This week that meant watching the Braves take on the White Sox (and, as I write this, we’ve lost the first two games).

He was lobbying hard for us to extend the trip to Omaha to watch the Georgia Bulldogs in the College World Series. Unfortunately, I had to remind him that I still have work to do and that Dad needs to get back to the office. Maybe next time.

This was a lot to cover in one note. As always, if you have any questions or would like to discuss any of these topics in more detail, please reach out to your advisor.

Will

P.S. – Since I wrote this and it worked its way through our necessary compliance review, President Trump has promised and then walked back a promise to “hit Iran very hard tonight.” On Thursday, markets were up significantly after Trump suggested a peace deal may be close, along with excitement around the expected SpaceX IPO. By the time you read this, things have probably changed again. It is becoming more difficult to make investment decisions based on the situation in the Middle East. While we continue to monitor the situation, bear in mind that investment decisions must be made with a long-term view and not based on the next social media post.

Disclosure: The views and opinions expressed are of Persium Advisors, LLC as of the date of publication and are subject to change. This commentary is provided for educational purposes only and should not be construed as investment advice. Persium Advisors, LLC is a SEC-registered investment adviser located in Atlanta, GA.