WS #16552

The dominant market narrative has shifted from geopolitical escalation to a severe tech correction, anchored by Alphabet's 13% drop on an earnings miss and significant capex cuts. This selloff has dragged the broader Nasdaq lower, despite the US economy reporting a stronger-than-expected 3.4% GDP growth and the Fed signaling no rate hikes. The divergence between macro resilience and tech valuation compression suggests a rotation out of high-multiple AI plays, though Broadcom and other AI infrastructure names are providing a floor for the broader market. Simultaneously, Middle East tensions are escalating, with reports of explosions on Iran's Qeshm Island and Houthi attacks on Aramco. This has triggered a classic supply shock dynamic: energy beneficiaries are rallying while shipping and consumer discretionary faces headwinds. However, the ECB's Lagarde stepping down has introduced a liquidity/monetary policy wildcard, with European markets closing higher on the news, potentially offsetting some geopolitical risk aversion in the Eurozone. Corporate earnings are mixed, with a notable divergence in the AI/tech sector. While Alphabet stumbled, Microsoft is ramping capex to over $50 billion, and Eli Lilly hit all-time highs on GLP-1 demand. The defense sector remains supported by the ongoing escalation theme, with L3Harris providing solid guidance. The market is currently pricing in a 'soft landing' for the macro economy but a 'hard reset' for AI valuation multiples.