S&P 500 Caps Strongest Quarter in Six Years as Soft Payrolls Ease Rate Hike Fears and AI Bubble Debate Intensifies
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Weekly Market Commentary | Week of Jul 6th, 2026
A Recap of Economic and Financial Trends from the Prior Week
By: Michael Horvath, The Quinnipiac University Global Economics Research Team
Last Week in Review
June nonfarm payrolls missed estimates at 57,000, the softest reading since February, reducing the probability of a July Fed rate hike while Treasury yields climbed modestly higher
The S&P 500 capped its strongest quarterly gain in six years in the holiday-shortened week, with large-cap and communication services shares leading as small-caps declined and European markets advanced on easing inflation data
BlackRock argues the AI bubble debate hinges on earnings durability rather than elevated valuations, favoring scarce AI inputs including chips, power, and data center infrastructure
Economic Recap
U.S. economic data last week pointed to a cooling labor market alongside continued but moderating price pressures. The Bureau of Labor Statistics reported that nonfarm payrolls increased by just 57,000 in June, missing a consensus estimate for around 110,000 and marking the softest reading since February, while prior months were revised lower, with May cut to 129,000 from 172,000 and April revised to 148,000 from 179,000. The unemployment rate ticked down to 4.2%, and the probability of a July rate hike fell from approximately 29% to 18% following the report. ADP reported private employers added 98,000 jobs in June, down from 122,000 in May, while JOLTS data showed job openings rose to 7.594 million in May, the highest since May 2024. The Conference Board's consumer confidence index improved slightly to 91.2 in June from May's revised 90.6, though the share of respondents saying jobs were hard to get rose to its highest level in more than five years. The ISM Manufacturing PMI fell 0.7 points to 53.3 in June, its sixth consecutive month of expansion, with the prices paid index falling sharply to 73.0 from 82.1, though prices have now risen for 21 consecutive months.
Internationally, eurozone inflation fell to 2.8% in June, below both May's 3.2% and expectations for 3.0%, with price growth slowing across Germany, France, and Italy, potentially easing urgency for further ECB rate hikes. German retail sales rose 1.1% in May, above expectations for a decline, and the eurozone unemployment rate held at 6.2%. Final UK Q1 2026 GDP was confirmed at 0.6% growth. In Japan, the Bank of Japan's Tankan survey showed large manufacturer sentiment improved for a fifth consecutive quarter, rising to 22 from 17, its strongest reading since 2018, driven by AI semiconductor demand and robust capital spending plans. The 10-year JGB yield rose to 2.78% from 2.60%, and the yen weakened to approximately JPY 162.5 against the U.S. dollar, its weakest level in nearly 40 years. In China, the official manufacturing PMI rose to 50.3 from 50.0 in May, and the PBOC conducted inaugural overnight reverse repo operations totaling CNY 900 billion across two days at a rate of 1.25%, refining its liquidity framework without signaling broad easing.
Market Recap
Source: JPMorgan Asset Management, “Weekly Market Recap” (July 6th, 2026). (Chart © JPMorgan Asset Management. Chart used under fair use for educational commentary by The Quinnipiac Global Economics Research Team.)
Major U.S. stock indexes finished the holiday-shortened week mixed, with large-cap indexes advancing while small-caps declined. The Dow Jones Industrial Average led gains, rising 1.99% to 52,900 and now up 10.99% year to date, while the S&P 500 gained 1.78% to 7,483 and is up 9.98% year to date. The Nasdaq Composite advanced 2.12% and is up 11.49% year to date. The Russell 2000 declined 0.42% on the week but remains up 21.43% year to date, the Russell 1000 Growth gained 1.85% and is up 2.81% year to date, while the Russell 1000 Value rose 1.72% and is up 18.38% year to date. Communication services, financials, and consumer discretionary led S&P 500 sector gains, while real estate, utilities, and energy finished lower. U.S. 10-year Treasury yields climbed to approximately 4.49% from 4.37%, generating negative returns for Treasuries and investment-grade corporate bonds. The S&P 500 capped its strongest quarterly gain in six years.
Internationally, the MSCI EAFE gained 2.77% on the week and is up 11.71% year to date, while MSCI EM advanced 1.04% and is up 24.06% year to date. The pan-European STOXX Europe 600 rose 1.96% in local currency terms, with Germany's DAX leading at 3.69%, Italy's FTSE MIB gaining 2.27%, the UK's FTSE 100 adding 1.38%, and France's CAC 40 rising 1.07%, as lower-than-expected eurozone inflation supported the view that the energy shock may prove less persistent than feared. Japan's Nikkei 225 fell 0.91% amid profit taking in technology shares, while the broader TOPIX gained 1.30% as financials and cyclicals benefited from the strong Tankan reading.
Market Themes
Beyond the AI Bubble Debate: Earnings Durability Is the Real Question
BlackRock Investment Institute argues that the AI bubble debate is less about whether today's valuations are elevated relative to history than whether AI can generate a lasting breakout in productivity and growth that sustains extraordinary earnings. The Shiller P/E ratio has climbed to 39.6, approaching levels last seen during the dot-com bubble, yet the 12-month forward P/E of approximately 21.1 looks less stretched because earnings expectations have risen sharply alongside share prices. S&P 500 earnings are expected to grow 23% year over year in Q2 2026, marking a seventh consecutive quarter of double-digit growth, and median external forecasts point to U.S. economic growth of approximately 3.5%, roughly 1.7 times its historical trend. Crucially, incremental margins remain above operating margins across most AI value-chain baskets, suggesting AI-related revenues are still translating into unusually strong profits. BlackRock maintains its overweight to U.S. equities and prefers to express the AI theme through scarcity, focusing on chips, memory, power, and data center infrastructure that every AI system requires regardless of which model or application ultimately prevails.
Physical AI and Tactical EM Shift Reflect the Buildout's Broadening Opportunity Set
As the AI buildout moves beyond data centers and chips into physical applications, BlackRock identifies a broadening opportunity set spanning robotics, sensors, and industrial automation. China has structural advantages in portions of this value chain, including manufacturing and batteries, though BlackRock cautions that manufacturing strength alone does not guarantee attractive equity returns, reinforcing its preference for active security selection over broad regional calls. BlackRock also made a notable tactical shift this week, upgrading EM local currency debt to overweight from neutral while moving EM equities and EM hard-currency debt to neutral, reflecting a view that improving fundamentals and attractive yields relative to volatility now favor local debt over equity exposure at the aggregate EM level. Select small-cap companies and EM infrastructure providers also represent potential exposure to the scarce inputs powering the next phase of AI, offering alternatives to mega-cap technology for investors seeking AI-related earnings growth beyond today's largest names.
Chart of the Week
Source: BlackRock Investment Institute with data from LSEG Datastream, "Parting Ways? Shiller CAPE Ratio and S&P 500 Forward Earnings Ratio, 1985-2026," July 2026. Notes: Shiller P/E is based on the ten-year average of inflation-adjusted earnings. The 12-month forward P/E is based on future 12-month earnings estimates. Historical averages: 1900-2026 for Shiller CAPE and 1985-2026 for the S&P 12-month forward P/E. (Chart © BlackRock Investment Institute. Used under fair use for educational commentary by The Quinnipiac Global Economics Research Team.)
The chart plots both the Shiller CAPE ratio and the 12-month forward P/E ratio for U.S. equities from 1985 through 2026, alongside their respective historical averages shown as dashed lines. The Shiller P/E currently stands at 39.6, well above its long-run historical average of approximately 17 and approaching dot-com era peaks. The 12-month forward P/E stands at 21.1, above its historical average of approximately 16 but materially lower than the Shiller ratio, reflecting sharply higher consensus earnings expectations. BlackRock uses this divergence to frame the central question in the AI bubble debate: while the backward-looking Shiller ratio signals historical excess, the forward P/E reflects market confidence that AI-driven earnings growth will persist at extraordinary levels. The chart illustrates why valuation comparisons alone cannot resolve the debate, and why earnings durability is the more useful lens for assessing whether today's equity prices are justified.
Market Outlook
BlackRock will focus this week on the minutes from the Federal Reserve's June policy meeting for signals on whether policymakers struck a less hawkish tone than markets inferred from the dot plot, which would support the view that current rate hike pricing is overdone. China's June CPI and PPI data will offer a read on whether falling oil prices are beginning to ease domestic inflationary pressures. The S&P Global final PMI readings will provide a complete picture of June business activity. Q2 2026 earnings season begins in earnest next week with major financial sector reports, and investor focus will center on whether AI-driven margin expansion is broadening across the S&P 500 in a manner consistent with the seventh consecutive quarter of double-digit earnings growth that consensus currently projects.
Calendar Events
Economic Data:
Jul. 6 (Mon): S&P Global PMI final (Jun)Jul. 7 (Tue): U.S. trade balance (May)Jul. 8 (Wed): Fed June meeting minutesJul. 9 (Thu): China CPI and PPI (Jun)
Major Corporate Earnings:
Jul. 9 (Thu): PepsiCo Inc. (Q2 2026)
Jul. 10 (Fri): Delta Air Lines (Q2 2026)
Sources
J.P. Morgan Asset Management. "Weekly Market Recap PDF." J.P. Morgan Asset Management.
J.P. Morgan Asset Management. "Economic Update." J.P. Morgan Asset Management. https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/market-updates/economic-update/
T. Rowe Price. "Global Markets Weekly Update." T. Rowe Price Insights. https://www.troweprice.com/personal-investing/resources/insights/global-markets-weekly-update.html
BlackRock Investment Institute. "Weekly Investment Commentary: Beyond the AI Bubble Debate." BlackRock, July 6, 2026. https://www.blackrock.com/us/individual/literature/market-commentary/weekly-investment-commentary-en-us-20260706-beyond-the-ai-bubble-debate.pdf
BlackRock Investment Institute. "Weekly Commentary Archives." BlackRock. https://www.blackrock.com/corporate/insights/blackrock-investment-institute/archives
Apollo. "The Daily Spark." Apollo. https://www.apollo.com/wealth/insights-news/insights/daily-spark
MarketWatch. "Economic Calendar." MarketWatch. https://www.marketwatch.com/economy-politics/calendar
Yahoo Finance. "Earnings Calendar." Yahoo Finance. https://finance.yahoo.com/calendar/earnings/
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