MS Nick Savone Global Reflections Aug 1

SALES COMMENTARY ONLY (NOT A PRODUCT OF RESEARCH) FOR INSTITUTIONAL CLIENT USE ONLY

There are weeks when the market feels almost effortless, and then there are weeks that remind you this has never been about comfort...no more summer dog days! The last several sessions have delivered one of the sharpest Momentum unwinds on record, turning many of this year's favorite trades into this week's biggest sources of pain. Yet beneath the volatility, it doesn't feel like the broader story has changed nearly as much as the price action might suggest. Earnings continue to surprise to the upside, AI investment remains firmly intact, and macro data continues to paint a picture of an economy that's slowing only at the margins rather than breaking beneath the surface. Markets have a habit of testing conviction before rewarding it, and perhaps that's exactly what this week has been about. As one of the busiest stretches of earnings season unfolds, investors may find that perseverance (not perfection) has always been the more valuable edge.

This week reminded investors that strong fundamentals and strong stock performance are rarely the same thing. Halfway through earnings season, roughly 86% of S&P 500 companies have exceeded EPS expectations, putting this on pace for the broadest earnings beat rate in five years, while aggregate earnings growth expectations have continued to move higher. Yet elevated expectations have made the market increasingly selective. Microsoft (MSFT) reaffirmed the AI investment cycle with stronger Azure growth and accelerating cloud demand, while Amazon (AMZN) followed by delivering another decisive cloud beat, raising its long-term capex outlook as management described demand extending well into 2028. Those results reinforced the durability of the compute buildout and sparked renewed optimism across semis and networking. At the same time, Apple (AAPL) beat revenue but disappointed on Services growth, while Meta Platforms (META), Reddit (RDDT), and Vertiv (VRT) reminded investors how little room remains for even modest disappointments. It increasingly feels like this earnings season is rewarding execution while punishing anything short of certainty – a high bar, but perhaps an understandable one after another year of exceptional AI-driven gains.

The macro backdrop was also firmly in focus this week as it offered just enough clarity to keep everyone guessing. The Fed held rates steady, but three dissents in favor of a hike and Warsh's reluctance to provide meaningful forward guidance left many of us with more questions than answers. Nevertheless, saying less created more volatility, as investors attempted to interpret a reaction function that appears intentionally opaque. Softer than expected core PCE inflation, resilient labor data, and solid private domestic demand continue to support the view that disinflation remains intact, even if headline GDP modestly undershot expectations. Markets are still assigning meaningful odds to a September hike, but it increasingly feels as though the bar has shifted higher than initially feared. The challenge going forward may not be inflation itself but navigating a policy framework where uncertainty has become a feature rather than a flaw.

Asia provided perhaps the clearest example this week of how quickly sentiment can shift once technical pressure begins to fade. Following one of the sharpest AI-driven selloffs in recent memory, investors rushed back into semis leaders as stronger than expected US cloud earnings reaffirmed the long-term demand outlook. South Korea staged a remarkable recovery, with SK Hynix (000660 KS) and Samsung Electronics (005930 KS) delivering record-breaking gains as memory stocks erased much of the prior

week's damage. Japan followed closely behind, where semi equipment makers, SoftBank (9984 JP), and broader AI beneficiaries led an aggressive rotation back into cyclicals despite a more hawkish Bank of Japan and continued yen strength. Meanwhile, China participated in the broader risk-on move, though its lighter semis exposure kept gains somewhat more measured as investors rotated toward domestic technology, AI infrastructure, and semi localization themes.…