• Stocks: The S&P 500, Nasdaq, and Dow Jones all fell into the red today, following a tech sell-off (more on that below) and oil prices spiking.
• Commodities: Brent crude broke $100 after Iran-backed Houthi rebels attacked two Saudi oil tankers, and President Trump said the US would hold Iran responsible for any Houthi attacks.
• Bonds: The 10-year Treasury rose to its highest level since January 2025 as higher oil prices triggered further inflation fears.

AI

Francis Scialabba

Alphabet and Tesla shares tumbled 6.89% and 14.52% today, respectively, helping drag the Magnificent Seven to a combined $767 billion loss in market value—the group’s biggest one-day wipeout since the tariff-driven selloff in April 2025.

Alphabet reported EPS of $9.11 on $119.8 billion in revenue, comfortably topping expectations of $2.95 and $116.9 billion, while extending its streak of double-digit revenue growth to 12 consecutive quarters. But investors were more focused on the company’s ballooning capex forecast of up to $205 billion this year (up from $180–$190 billion), with even higher spending expected in 2027. At that level, Alphabet could become tech’s biggest spender.

Meanwhile, Tesla saw revenue jump 26% from a year ago and beat expectations, despite earnings missing estimates. And like Alphabet, Tesla reaffirmed plans to spend more than $25 billion on capital expenditures this year—roughly triple last year’s level.

“We should be spending on capex as fast as we can spend, as fast as we can without it being too wasteful,” Elon Musk said on the earnings call.

The AI rotation

Alphabet and Tesla’s results offer an early read on how investors may react to the rest of Magnificent Seven earnings, and by extension, the broader AI trade.

So far, money has been rotating away from AI’s biggest consumer-facing winners, like Alphabet, and into the companies building the industry’s backbone—think utilities, power, or cooling. That’s not necessarily a bad thing. It suggests investors are still bullish on AI, just through a different part of the ecosystem.

The concern, according to JPMorgan strategist Jason Hunter, is what happens if that rotation loses steam. He points to the late 1990s, when infrastructure stocks kept climbing even as actual internet companies’ stocks stalled out. JPMorgan Asset Management’s Michael Cembalest called that divergence a market “head fake.”

There are similar dynamics at play today: Chip and infrastructure stocks have rallied more than the AI companies they’re supposed to be supplying.

So if Big Tech keeps stumbling and infrastructure names stop carrying the baton, investors could start exiting the AI trade altogether, turning into a broader selloff.—SY

      

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Stocks

🟢 What’s up

• Lockheed Martin gained 10.37% after beating earnings expectations, raising its full-year outlook, and growing its backlog to a record $230 billion.
• Security company Allegion popped 10.45% after beating second-quarter earnings estimates and raising its full-year profit forecast.
• Hims & Hers Health jumped 3.35% after an FDA advisory panel backed broader pharmacy compounding of peptide BPC-157.
• United Rentals rose 10.11% on an earnings beat and stronger-than-expected full-year revenue guidance.
• Honeywell advanced 5.7% after lifting its 2026 earnings and margin outlook.
• Cleveland-Cliffs climbed 15.98% as investors cheered the company’s stronger third-quarter profit outlook.

🔴 What’s down

• American Airlines declined 8.35% after cutting its full-year earnings outlook thanks to higher fuel costs.
• Albertsons declined 21.64% after warning that cautious consumers are weighing on sales and near-term earnings.
• Texas Instruments slipped 3.13% despite delivering record quarterly revenue and beating earnings expectations.
• Southwest Airlines fell 6.13% after issuing weaker-than-expected third-quarter guidance.
• Nestlé lost 7.27% as higher restructuring costs weighed on first-half profit.
• Comcast dipped 6.80% as continued broadband subscriber losses overshadowed an earnings and revenue beat.

Stat of the day

The Walking Dead, but make it private equity

Morning Brew Inc., Photos: Adobe Stock

Somewhere in the US, a private equity fund is moaning and refusing to die. According to Pitchbook data, almost $350 billion of private equity assets are stuck in “zombie funds.” And that stat is probably haunting PE fund managers right now: That’s more than triple 2015 levels, and over 100 times more than in 2005, per the Wall Street Journal. Plus, the sequel’s already filming: A wave of 7-to-9-year-old funds is right behind them, sitting on over $500 billion.

These zombies aren’t able to acquire any new assets or raise fresh capital because they can’t sell off what’s in their portfolio, which annoys impatient investors. The bodies started piling up after 2020 and into 2021, when managers scooped up companies at rates near zero. Buyers today won’t pay those prices, so those undead assets…just. sit. there. One CIO said of the current skeleton-crew situation, “In some cases, it’s three guys and a Labrador running the last few assets of the fund.”

But prepare for a reckoning in this zombie apocalypse: As one investor put it to the WSJ, a “cleansing” is coming, and some funds won’t survive it. –AC

Asset management

Morning Brew Inc., Adobe Stock

These days, it’s considered standard investment advice to tell retirement-savers to throw money into a passive index fund and call it a day. But new research suggests passive investing isn’t just outperforming active managers—it could be stacking the deck against them.

Passive investing has become the new norm for good reason: For the average person saving for retirement or creating a financial cushion, picking stocks and trying to time the market is futile. Plus, time and time again, we see that most actively managed funds underperform the S&P 500.

Actively trading, actively struggling

Mutual fund managers, to be fair, don’t have an easy job. They not only have to pick undervalued stocks, but convince investors that paying management fees is worth it.

A new paper by Hannah Unterberg, a PhD candidate at the University of California Irvine, finds that active managers aren’t just imagining it: The rise of passive investing is, in fact, making their jobs harder.

Unterberg’s research shows that when investors pull money out of active funds and put it into passive indexes, that flow gives an automatic price boost to companies in the index. Meanwhile, stocks outside the index—that an active manager picked—get no such boost, and can even get penalized as money moves away from them.

“A flow-driven framework shows that capital reallocations toward passive funds generate asymmetric price pressure, penalizing funds’ active tilts,” explained Unterberg in the paper. And she ties this dynamic to part of the decline in active-fund performance since 2010.

The passive investing white wale

Some experts, the most vocal being hedge fund manager David Einhorn, have long argued that passive investing is distorting the entire market, and that large-cap stocks are getting bought up not because investors believe in the businesses, but because passive funds buy them automatically. This, according to Einhorn, distorts pricing and overvalues large companies, leading to a “broken” market. This is a hot take for a reason—many analysts disagree with this characterization—but Unterberg’s research gives the milder version of Einhorn’s argument some support.

The bottom line: When it comes to funds of all kinds, the competition to have the lowest fees is cutthroat. And in that category, passive funds really can’t be beat. —LB

      

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News

• US initial jobless claims unexpectedly dropped again, hitting their lowest level since 1969.
• New York City mayor Zohran Mamdani appointed former FTC commissioner Lina Khan to a key economic position—and it’s rattling the business community.
• Amazon announced it’s launching games in Prime Video.
• This morning, Mark Zuckerberg kicked off an “AI optimism” ad campaign. It features images of Jalen Brunson, Kylie Jenner, and a whole lot of (dare we say) AI-written slogans.
• Meet Gen Z’s “retirement-maxxers,” who’ve saved hundreds of thousands of dollars but rarely leave the house.

Calendar

A wild week concludes with earnings reports from American Express, NextEra Energy, Verizon Communications, HCA Healthcare, and SLB. And we’ve got both the US flash manufacturing and services PMI reports, as well as a look at new home sales.

recs

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☀️ Attention, parents: There’s a right way and a wrong way for your teen to spend their summer job money.

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