Inflation Edges Lower, Markets Move Higher

Markets were positive last week as investors digested the latest round of inflation data. There was no major movement in a ceasefire in the Middle East, pushing oil higher by

more than 5% last week.1 The Consumer Price Index for July came in as expected +0.1%, dropping the year-over-year reading to 3.4% (below the historical average of 3.5%).2 Declines in fuel and gas were the primary contributors to the low CPI reading.3 The prices for key items such has dairy, fruits, vegetables, meats, poultry, fish, & eggs all declined in July.3 Just one month ago, Fed Funds futures showed a 24% probability of a 50 basis point rate hike and a 51% probability of at least a 25 basis point rate hike.4 After last week's CPI and PPI reports, the probability of no rate hike has jumped from just a 25% probability one month ago to a 66% probability.4 If that comes to fruition, a stable rate environment could provide some help for equities.

According to J.P. Morgan, the largest companies involved in AI are investing in one another at an alarming amount.5 This form of investing draws into question the

diversity and independence of each company's earnings and revenues related to AI. Should an event call into question the revenue growth of AI as a whole or the future growth of that industry, there is a possibility each of the companies on this graphic could be affected. The type of "circular financing" going on in the AI space comes under even more scrutiny when looking at the current composition of the market in terms of size and concentration. Currently, 5 of the eleven companies in the graphic above - Nvidia, Microsoft, Amazon, Google, & Meta - are among the top 10 names in the S&P 500 Index by market capitalization.6 Because of the concentration in the S&P 500 top 10 names - currently more than 37% - any event or catalyst that were to call into question the prospects for growth in AI could pull the price of one of the largest indices in the world down with it.6

Investor behavior has become problematic and it somewhat reminiscent of the peak of the Dot.com era. Investor demand for AI-related investments and the use of investment

accounts should give investors pause. Assets in AI-related ETFs have growth to $19 billion over the last three years as at least 48 ETFs have been launched over that same time period.7 Back in 2000, 39 internet-related mutual funds had been launched in a short period of time garnering approximately $7 billion in assets.8 At the same time, as the market has appreciated, investors are utilizing accounts for withdrawals. Last year, a record 6% of retirement participants took hardship withdrawals from their accounts.9 That compares to 4% hardship withdrawals in 1998, which was elevated at that time.10 Consistent investing over the long-term based on risk tolerance could be a better approach compared to chasing after the returns of a concentrated index or benchmark.

1. $WTIC | SharpCharts | StockCharts.com

2. https://www.investing.com/economic-calendar/cpi-733

3. https://x.com/LizAnnSonders/status/2087521159784886568

4. FedWatch - CME Group

5. https://x.com/zerohedge/status/2087860996933091765?s=12&t=rL12aWyiinzSgh3poyqO0w

6. S&P 500® | S&P Dow Jones Indices

7. https://www.morningstar.com/funds/looking-an-ai-etf-you-might-need-an-llm-that

8. https://www.sfgate.com/business/article/The-RAGING-PARTY-Internet-funds-enjoy-explosive-2812343.php

9. https://www.investopedia.com/401-k-balances-hit-record-highs-in-2025-as-hardship-withdrawals-also-rise-11956540

10. https://www.gao.gov/assets/a294523.html

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