Earnings Season Kicks Off as Markets Weigh Rate Hikes and the AI Hardware Boom

A Calm Week With High Stakes

Coming off a holiday-shortened week filled with labor market data and a surprising jobs report, investors are now greeted with a relatively quiet stretch. But don't let the calm fool you. The market is sitting at a crossroads — balancing the prospect of rising interest rates against an AI hardware surge that has defined much of 2026 — and the weeks ahead could determine which force wins out.

Markets wrapped up the prior session on a mixed note, with the S&P 500 closing flat, the Nasdaq falling 0.8%, and the Dow gaining 1.1%. That kind of split reaction tells the story of a market that can't quite make up its mind, with rate-sensitive tech stocks pulling one direction and old-economy industrials pulling the other.

The Fed's Shadow Looms Large

In his first post-Fed decision press conference, Chairman Kevin Warsh focused heavily on inflation and his goal to get it back to the Fed's 2% target rate, which has remained elusive amid the energy shock of the Iran war. That war-driven inflation backdrop has fundamentally changed the calculus for investors who entered the year expecting rate cuts — not hikes.

While the market continued to fully price in one Fed rate hike this year following the latest report, conviction pulled back slightly. On Thursday, traders assigned roughly 75% odds that rates would end the year higher than they are now, per CME data — down from roughly 84% the day before. While June's employment data was weaker, many economists believe inflation and unemployment may not be particularly linked at the moment, keeping the pressure firmly on price data — something to keep in mind as earnings season approaches.

The Cleveland Fed estimates that the year-over-year pace of consumer inflation is running at close to 4%. That's double the Fed's target, and it means the central bank has little room to ease up — even if the jobs market shows signs of softening.

AI Hardware Steals the Show

Stocks staged a comeback in the second quarter of 2026, making for their best quarter since the spring of 2020. Investors looked past the dislocations from the Iran war and growing expectations of Federal Reserve rate hikes. The rally was led by a revival of the artificial intelligence trade, with hardware stocks posting massive gains. The names driving those gains read like a semiconductor hall of fame: SanDisk surged 258%, Micron Technology rose 241%, Intel climbed 216%, and Marvell Technology gained 200% in the second quarter alone.

The big question as earnings season looms is whether the rotation out of semiconductors — which took a 3% bite out of that sub-sector last week — continues. South Korea's Samsung Electronics reported an estimated 18-fold rise in operating profit from a year earlier in the second quarter, while South Korean chipmaker SK Hynix debuted a U.S. listing to raise approximately $28 billion. Both events could give chip stocks something new to trade on with U.S. earnings news slim this week.

What Earnings Reports Will Tell Us

In the corporate world, reports from PepsiCo on Thursday and Delta Air Lines on Friday should highlight the week. These two companies are bellwethers in very different ways — PepsiCo for consumer spending resilience under inflation, and Delta for the health of discretionary travel demand. Their results will offer an early read on how everyday Americans are holding up.

Second quarter S&P 500 earnings growth is seen at 23.3% year over year, according to FactSet. If companies can deliver on those lofty expectations, it could give the market the confidence it needs to push through rate-hike anxiety. Much of the past earnings growth and return-on-equity improvement was driven by technology and AI-related companies, so much of the forward outlook hinges on whether that positive trend continues. The next few weeks of earnings reports won't just be a scorecard — they'll be a referendum on whether the AI boom has real staying power or whether the market has gotten ahead of itself.