Stagflation Fears Return as AI Earnings Keep Markets Moving
Wall Street moved through the shortened week with a more complicated message. The AI trade is still alive, but the macro backdrop became less friendly. Through Thursday’s close, stocks pushed toward a potential ninth straight weekly advance as rates and the dollar pulled back, small caps shined, and cyclicals joined technology in the leadership column. However, economic updates delivered a slightly stagflationary data mix, with growth revised lower and inflation moving higher.
The biggest economic event came yesterday when investors received both the second estimate of first-quarter GDP and April PCE inflation. Real GDP was revised down to a 1.6% annualized pace from the prior 2.0% estimate, below consensus expectations near 2.1%. The main culprit was a larger-than-expected drag from inventory liquidations, which offset stronger areas of the economy. At the same time, headline PCE rose 3.8% year over year in April, up from 3.5% in March, driven heavily by gasoline and energy costs. Core PCE ticked up to 3.3%, matching expectations but remaining firmly above the Federal Reserve’s 2% target.
The internal GDP details show a clear divergence between consumption and investment. Business investment remained the bright spot, with nonresidential fixed investment growing at a robust 10.1% annualized rate and adding meaningfully to GDP. Spending on equipment, structures, and intellectual property helped pick up the slack from other cooling areas. Residential investment remained negative but improved slightly from the advance estimate. That business-spending strength fits the broader AI capex theme still driving the market. But the consumer engine is showing cracks. Real consumer spending nearly stalled at 0.1%, while the personal savings rate dropped to a nearly four-year low, suggesting households are absorbing persistent inflation with less cushion.
Because inflation remains sticky while growth softens, the Fed has less room to cut rates defensively. That explains why long-duration Treasuries caught a strong defensive bid after the data. The 10-year Treasury yields pulled back, the dollar weakened, and that combination supported small caps, growth stocks, and rate-sensitive areas of the market. Bitcoin futures moved the other way, falling roughly 3% on the week as crypto lagged the broader risk-on rotation.
Sector performance reflected a broader, healthier tape than the narrow mega-cap technology leadership seen earlier this year. The Philly Semiconductor index (SOX) has risen over 5% in the week as of Thursday’s close, while software also participated, creating an interesting positive correlation between semiconductor hardware and application software. Technology, consumer discretionary, materials, and industrials were among the stronger groups, with transports helping cyclicals. Energy lagged as crude cooled, while steel was a bright spot inside materials and even outpaced broader technology strength.
Earnings supported the same AI-versus-macro divide. Snowflake delivered strong fiscal first-quarter results, reinforcing enterprise data, cloud migration, and AI workloads remain robust. Salesforce (CRM) helped revive confidence in software, with investors focusing on improving margins, AI monetization, and Agentforce momentum. Dell (DELL) was the hardware standout, as AI server demand drove stronger results and a sharply higher outlook. Together, Snowflake (SNOW), Salesforce, and Dell showed that the AI theme is spreading across software, infrastructure, and enterprise hardware: not just semiconductor leaders.
As major news events remain centered on energy and geopolitics, markets continue watching conflicting headlines around U.S.-Iran diplomacy because any renewed oil spike would feed directly into inflation expectations and Fed policy risk. Overall, the week was bullish on market breadth and AI earnings, but more cautious on the economy. The market can still advance, especially if rates and the dollar continue to ease, but the margin for error is narrowing as investors balance AI optimism against sticky inflation and slowing growth.
