"Risk events" are everywhere! This week gathers the Fed's interest rate decision, tech giant earnings reports, and oil prices, significantly increasing market volatility

Summer leisure is no longer an option for equity investors. This week, a combination of risk events—including the Federal Reserve’s rate decision, a flood of tech giant earnings, and oil prices breaching $100 per barrel—are bringing increased volatility to the market.

Microsoft and Meta will be the first to release earnings on Wednesday, followed by Apple and Amazon on Thursday. Meanwhile, the Federal Reserve and Bank of England will announce their interest rate decisions in succession, and Europe’s inflation data as well as China’s PMI will also be released intensively. Goldman Sachs partner Richard Privorotsky pointed out that all of these are happening against a backdrop where Brent crude briefly broke above $100 per barrel, global bond yields remain high, and the stock market has seen two consecutive weeks of decline.

In terms of market pricing, the swaps market has fully priced in a Fed rate hike in September and is also implying the possibility of another hike this year. JPMorgan’s market intelligence team warns that if the 10-year U.S. Treasury yield further breaks above 4.8%, rate-sensitive stocks will face greater pressure.

Volatility Heats Up, Systematic Investors’ Positions Are Vulnerable

Geopolitical developments have already warmed up volatility, and this week’s earnings reports and economic data have the potential to trigger even greater market swings.

According to historical patterns, Goldman Sachs data shows that in U.S. midterm election years, index-level volatility usually starts to rise in August and continues to climb until October. Richard Privorotsky believes VIX call options are currently a good tail-risk hedging tool, and says the market is more likely to remain range-bound—implied correlations are still near multi-decade lows, and dispersion is suppressing overall market volatility.

Technical factors are also noteworthy. The MSCI World Index faces significant resistance around 4,885 points. Deutsche Bank strategists including Parag Thatte noted that current systematic investor positioning sits at the 70th percentile—a relatively high level—which means these positions are quite vulnerable once volatility rises or if the market breaks down.

In addition, last week saw clear deleveraging among active investors, with their risk exposure falling to the 17th percentile, close to the early April lows and far below what would be justified by earnings and macroeconomic growth.

‘Magnificent Seven’ Valuations Fall to Historic Lows, Disagreements Intensify

Tech giants’ earnings are the major focus for the market this week. The “Magnificent Seven” have been a key source of capital for AI-related stocks and semiconductor trades over the past several months, but have not benefited from the recent wave of profit-taking in these sectors. According to Deutsche Bank strategists’ analysis, allocations to major tech stocks have already completed about three-quarters of their earlier reduction from peak levels.

However, valuation metrics are now flashing noteworthy signals. The Magnificent Seven’s forward price-to-earnings ratios are at the bottom of their seven-year range, both in absolute and relative terms. Deutsche Bank believes that this round of valuation compression was mainly driven by falling stock prices rather than lowered earnings expectations, which may present a buying opportunity at lower levels.

Concerns over AI capex continue to escalate. Alphabet’s announcement last week fueled these worries, dampening investors' willingness to re-enter the market. Nevertheless, Morgan Stanley analysts Stephen Byrd and Michelle Weaver hold a different view—they remain optimistic about the ‘Smart Superhighway’ theme, recommending holdings in fuel cell and energy storage companies, computing power ecosystem builders, as well as hyperscale cloud providers with economies of scale and AI capex return potential—specifically naming Meta, Alphabet, Microsoft, and Amazon.

“Given the recent pullback has now impacted a wide array of AI infrastructure stocks, we believe this moment represents a rare and attractive buying opportunity,” wrote the Morgan Stanley team. “We have strong fundamental convictions in the pace of AI capability improvement, the revenue potential of AI applications, and the related capital expenditure.”

Fed Statement as Key Variable, Bond Yields Remain a Nerve Point for Equities

This week, beyond tech earnings, central bank actions pose the biggest threat to market calm. The swaps market has fully priced in a September rate hike by the Fed and is also implying a possible second hike this year. Any remarks from Fed Chair Kevin Warsh will be closely scrutinized by the market.

Warsh’s reservations about forward guidance mean that rate hike expectations will be even more data-dependent. If tensions in the Middle East ease and oil prices retreat, it would help central banks achieve their policy targets.

JPMorgan’s market intelligence team emphasized that, for equities, the pace of rate changes is more important than the absolute level. The bank noted the 10-year U.S. Treasury yield broke above its May high of 4.67% last week, with the next key level at the 4.79% high seen in January 2025. “If upcoming data or Fed communication support a further breakout above 4.8% in yields, rate-sensitive stocks will begin to face greater pressure.”