Summary of Key Points
In July 2026, the global financial markets are at a critical juncture where "short-term positives and medium-term risks are in conflict": Inflation data from the United States in June came in lower than expected, leading some to believe that the Federal Reserve (Fed) would not raise interest rates in July. However, the hawkish stance of Fed Chairman Jerome Powell, the escalation of geopolitical conflicts in the Middle East, and a collective pullback in AI technology stocks have reignited concerns about inflation rebounding and asset bubbles. The core issue is that although inflation has temporarily improved, policymakers are hesitant to relax their measures. How should markets balance short-term optimism with medium-term risks?
1. Inflation in the U.S. Has Declined, but Not Completely Gone
The June CPI data was quite encouraging: it fell by 0.4% compared to the previous month (the largest decline since April 2020) and to 3.5% year-on-year (lower than expected), with the core CPI (excluding energy and food) also showing little increase. However, this decline is mainly due to declines in energy and housing prices—gasoline prices fell by 9.7%, and housing price increases were reduced to 0.1%.
However, there are still significant concerns: Energy prices have risen by 15.7% year-on-year (with gasoline prices up by 26.7%), indicating that these prices can fluctuate significantly and could rise again at any time; food prices continue to increase (especially for meat and dairy products), and service sectors such as entertainment and furniture have not seen a cooling. Therefore, this is a "temporary improvement" in inflation, not a complete resolution of the issue.
2. Why Is the Fed Chairman Still Hawkish? Fear of Inflation Returning
Despite the decline in inflation, Powell has not eased his stance, stating during a congressional hearing that "the task is not yet completed." His reasoning is straightforward: The Fed's failure to keep inflation below the 2% target for the past five years is a failure on its part; the current Middle East conflicts could lead to higher energy prices and potentially cause inflation to rebound.
Other Fed officials have echoed these concerns: Vice Chairman Richard Jefferson mentioned that if inflation does not continue to decline, policy may need to be tightened again; Dallas Fed President Robert Kaplan explicitly called for interest rate hikes, arguing that inflation will not return to 2%; and Kansas City Fed President Esther Lopinow also noted that inflation has been "too hot for too long." The market currently believes there is a 53% chance of a rate hike in September, mainly due to concerns that the Middle East situation could drive up oil prices and reinflate inflation.
3. A Chilly and Hot Market: Gold Falls, Tech Stocks Cool
A decline in inflation would normally lead to an increase in gold (an anti-inflation asset), but instead, gold prices have fallen. After the CPI announcement, they briefly rose to $4,100 per ounce before dropping below $4,000. This is because geopolitical conflicts could lead to higher oil prices, which in turn could trigger inflation and raise expectations of Fed rate hikes, increasing real interest rates (interest rates after adjusting for inflation). Since gold does not generate income, higher real interest rates reduce demand for it.
Tech stocks, especially those related to AI, have performed even worse: The Nasdaq and the Philadelphia Semiconductor Index have both tumbled. Although TSMC's financial results were strong, its stock price fell—this is what is known as the "earnings magic curse": markets have already priced in good earnings, so when actual earnings are better than expected, some investors sell their shares to profit. Additionally, the semiconductor sector accounts for 20% of the S&P 500 (compared to just 8% during the Internet bubble in 2000), making it highly sensitive to negative news. The South Korean stock market has been even more volatile, with chip stocks leading the decline and entering a "technical bear market" (down 20% from its peak).
4. The AI Bubble Has Bursted, and Your Retirement Savings Could Be Affected
A senator asked Powell, "Many Americans have their retirement savings invested in AI stocks. If the bubble bursts, will they still be able to retire?" This question hits a critical point: The "Big Seven Tech" companies on the S&P 500 account for 33% of its weight and are all tied to AI, with their valuations based on market optimism about future AI-related profits.
Morgan Stanley suggests that funds are moving away from semiconductor stocks and towards sectors such as cloud computing and consumer goods. If the commercialization of AI does not progress as expected (e.g., if technology implementation is slow or fails to generate profits), these stocks could decline, potentially reducing many people's retirement savings, as many have invested their retirement money in these popular tech stocks.
5. The Current Market's Critical Point: Don't Focus Only on the Short Term; Pay Attention to Changing Underlying Logics
In the short term, the chances of the Fed not raising interest rates in July are high, but it is uncertain for September. For ordinary investors, now is not the time to predict the outcome of a single meeting; instead, they need to pay attention to several long-term changes:
1. The relationship between gold and real interest rates has become more closely linked; do not focus solely on inflation.
2. Tech stocks account for too large a proportion of market indices, leading to greater volatility.
3. Fed policy is no longer solely focused on short-term inflation but also takes into account medium-term risks (such as geopolitics and asset bubbles).
In summary, the market in July 2026 is a mix of contradictions: short-term data is positive, but there are many medium-term risks. The key for investors is not to bet on price movements but to understand the underlying logic behind these contradictions and adjust their asset allocation to avoid falling into bubbles or inflation rebounds.