Inflation Cooled. AI Expectations Didn't.
GOOD MORNING, Wednesday gave markets exactly the kind of macro relief growth stocks usually want. U.S. producer prices fell 0.3% in June, Treasury yields eased and the S&P 500 climbed back within 0.5% of its record. AI fundamentals looked strong too: ASML raised its sales outlook and said it would expand capacity by 30% in each of the next two years. Yet memory-chip stocks still sold off. The tension is getting sharper — inflation is cooling enough to help valuations, but expectations inside the AI trade have risen so far that even stronger demand no longer lifts every supplier. MARKETS | TLDR
ASMLASML Raised Its Forecast. The Chip Trade Still Looked Uneasy.ASML beat second-quarter expectations Wednesday and raised its 2026 sales outlook for the second time this year, citing what CEO Christophe Fouquet called “extremely strong” demand for the lithography equipment needed to make advanced AI chips. The company said it plans to increase production capacity by about 30% in both 2027 and 2028, and its shares rose nearly 4%. That should have been an uncomplicated bullish signal for the AI infrastructure trade. Instead, the reaction across semiconductors was mixed. Memory-chip names including Micron and SK Hynix fell sharply even as ASML rallied. The market is beginning to distinguish between proof that AI demand is strong and proof that every part of the chip supply chain can keep delivering the growth already embedded in valuations. The bigger signal is that bottlenecks are moving. ASML said it was close to fully booking 2027 EUV capacity and had already secured substantial 2028 orders. Expanding tool capacity can ease one constraint on AI chip production — but it also means the supply chain is investing aggressively to meet demand several years out. The AI boom is still accelerating physically. Investors are simply becoming more selective about who gets paid for that acceleration. INFLATIONThe Fed Finally Got a Cleaner Inflation PrintThe Producer Price Index for final demand fell 0.3% in June, a much softer result than markets had feared after several months of elevated inflation. Goods prices dropped 1.4%, while services prices increased 0.2%. On a year-over-year basis, producer prices were still up 5.5%, but the monthly decline reinforced Tuesday’s cooler CPI signal and gave bond investors another reason to ease back from the most aggressive tightening expectations. That matters because the market had spent July repricing the possibility that the Fed might need to hike again. A softer inflation pipeline reduces that pressure and lowers the discount-rate threat to long-duration equities. Wednesday’s decline in yields helped the S&P 500 move back within half a percent of its record and supported gains in Big Tech. The caveat is energy. The June PPI was collected before the latest escalation in the U.S.-Iran conflict pushed Brent back toward $85 and disrupted shipping through Hormuz. Producer inflation can cool on backward-looking data while the next inflation impulse is already forming in oil, freight and insurance costs. The Fed got better news Wednesday. It did not get an all-clear. HEADLINES
UPCOMING
DEEP INSIGTHSASML Helps Keep the AI Capex Snowball RollingRead this for the infrastructure view beneath ASML’s quarter. The important point is that the company is not merely benefiting from current AI demand; it is committing to materially higher capacity in 2027 and potentially 2028. That suggests the capital cycle still has momentum, while also raising the longer-term question of whether demand can remain strong enough to absorb all the capacity now being built. Producer Price Index — June 2026The primary data are worth reading because the headline 0.3% decline hides an important split: final-demand goods prices fell sharply while services prices still rose. That distinction matters for the Fed. Goods disinflation can provide near-term relief, but persistent services inflation — plus a fresh oil shock — leaves plenty of room for the broader inflation picture to turn again. |