Warnings Sometimes Come In Threes

Scott Poore, AIF^®, AWMA^®, APMA^®

July 17, 2026

The market is facing some headwinds, but that doesn't mean investors should be without hope. Whether it's anticipated rate action by the Fed, conflict in the Middle East, or AI equity valuations, it seems there's much to cause the wringing one's hands. However, if some things were to shift in a different direction, it's likely markets will turn. This week's musings are inspired by the 1994 movie "The Shawshank Redemption". Here is some trivia about the movie:

This movie was an absolute flop at the box office. It was filmed on a budget of $25 million and made only $29 million in theaters. However, the movie was "redeemed" in the after-market. It was the most rented VHS in 1995. The movie generated more than $100 million in video rentals and sales. Thank goodness for Blockbuster.
This film was nominated for 7 Oscars in 1995, including Best Actor (Morgan Freeman) and Best Picture. It won zero Oscars!
The opening chat between Andy and Red, in which Red is throwing a baseball, took 9 hours to shoot because the director wanted to get it right. Morgan Freeman never complained after throwing the baseball for all 9 hours, but did show up for work the next day in a sling.
Upon reading the script, Morgan Freeman told his agent he didn't care which part they wanted him to play, he just wanted to be in it. He said it was his favorite movie in which he has acted.
To prepare for his role as Andy Dufresne, Tim Robbins actually spent time locked in a prison in solitary confinement. The prison crew recommended only 3 hours instead of Robbins wanted to endure 3 days. After 3 hours, Robbins requested his release.
Stephen King's story, "Rita Heyworth and Shawshank Redemption," upon which this film is based, is only about 110 pages long (depending upon which printed version you read). Director Frank Darabout, who also helped write the screenplay with Stephen King, had to fill in some pieces in order to get the film to over 2 hours long. This is Stephen King's favorite film adaptation of all his novels.

Here's what we've seen so far this week...

Oppression vs Freedom. There are several themes that run through this movie, but the most obvious is oppression versus freedom. After all, it's set in a prison. Andy (sorry, spoiler alert) is wrongfully accused of the crime for which he is incarcerated. Markets are similarly oppressed by interpretations of what now appear to be temporary inflation. Unlike the "transitory" inflation that spiked for 15 months in 2021-22, the current scenario looks to be a temporary 3-month rise in inflation. June's CPI report came in much lower than expected at -0.4%, bringing the year-over-year number down to 3.5% (equal to the historical average).^{1 2} It is the largest one-month drop in inflation since COVID. The primary agent of higher inflation - gasoline - declined more than 9% in June relative to rising 7% in May. The Cleveland Federal Reserve is expecting a flat-to-slightly lower CPI reading for July, which if true, would bring the year-over-year number to 3.3%, below the historical average.³ Unfortunately, someone at the Fed didn't get the memo when Chairman Warsh indicated that there would be fewer guidance moving forward. On Monday, Fed governor Waller stated, "Markets should have as much information as possible. You're not making people better off by surprising them."⁴ His comments were considered "hawkish" as he advocated for hiking rates if the CPI reading came out hot. Those comments didn't age well. In reality, the Fed's primary mandate to maintain full employment, stable prices, and moderate long-term interest rates is on solid footing based on the data.⁵ The Unemployment Rate, GDP, 10-year Treasury Yield, and Inflation are currently near or at their relative historical averages. So, the question seems to be why the Fed isn't cutting, not why isn't the Fed hiking interest rates?

Friendship vs Redemption. The 2nd theme running through "The Shawshank Redemption" is the friendship that Andy and Red share in prison in contrast to finally getting their freedom and redemption. Consumers are looking for redemption from higher gas prices, while war rages in the Middle East. While bombs fly in Iran, equities are getting pushed around by the headlines. However, the clock is ticking on how long the conflict can last. Iran has essentially lost its navy during this conflict and their air force is weak and outdated.⁶ Iran still has a considerable missile and drone arsenal.⁷ However, their army has been decimated from a leadership standpoint, as more than 50 Iranian military leaders have been killed in the conflict.⁸ From an economic standpoint, time is running out as the U.S. employs another export blockade on Iran. Iran is losing approximately $200-250 million per day as their major resource -oil - cannot be exported.⁹ The IMF estimates that this could cause Iranian GDP to drop from an already concerning -0.7% to as low as -5.4% to -6.1%.¹⁰ What's worse for Iran, since the conflict began, new pipelines are proposed or are being constructed to essentially make the Strait of Hormuz irrelevant from a global oil flow perspective. So, the question becomes how much longer can Iran remain in the conflict? While there are still days that the conflict will cause equities to drop, the overall effect of the conflict is slowly diminishing. Stocks on the New York Stock Exchange making new lows daily spiked in the initial days of the conflict and peaked on March 27th at 219.¹¹ However, new lows have been far fewer since March 27th with current readings below the "low risk" barrier and far less than the daily historical average of 61. In addition, the VIX volatility index has returned to a more normal pattern, remaining below it's historical average of 19.5. The current reading on the VIX is 16.7, meaning there is little panic in the market.¹² If the conflict boils over into full scale war, the risk to equities would be noticeable. However, the cooperation of Middle Eastern countries with the U.S. could keep it contained for now.

Hope vs Fear. Perhaps the most prevalent and important theme in the film is the concept of hope as opposed to fear. In fact, in Andy's letter to Red he states, "Hope is good thing, maybe the best of things, and, no good thing ever dies." Momentum and "growth" stocks had their worst month since the Financial Crisis in 2009. Much of this has to do with pullback in Mag 7 names and the change in AI themes. There have been key efficiency gains in AI hardware and software leading to the changing themes. Newer generation data chips are delivering 10-20x higher performance than previous versions.¹³ Revised and improved AI models are providing 8-20x reduction in energy consumption levels.¹⁴ This is causing previous expectations on AI data center buildouts to decline. At least $156 billion in data center projects were cancelled in 2025 and another $130 billion in projects were cancelled in the first quarter of 2026.¹⁵ This is affecting other industries such as rare earth minerals and nuclear energy, both were once expected to boom with the AI buildout. On the positive side, this is causing once-forgotten sectors to emerge as leaders among S&P 500 industries. Sectors such as Healthcare, Financials, Real Estate, and Consumer Staples are positive over the last 30 days while Technology is down considerably.¹⁶ All-in-all this is a good thing. When one sector, namely Technology, leads the index as other sectors flounder, markets are weak. When the majority of sectors help push the index higher, markets are stronger and more diverse. At least 70% of S&P 500 stocks are trading above their respective 200-day moving averages.¹⁷ The last time that many stocks were trading above the 200-day mark was early January of this year. Technology is likely correcting due to over-valued prices, which was due to happen at some point. If the Tech sector can find a bottom here soon while these once-forgotten sectors continue to show strength, the bull market could march higher from current levels.

Click here to watch the scene when Red finds Andy's letter.....

_________________________________________________________________________________________

Disclosures

The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.

Forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.

Any market indexes discussed are unmanaged, and generally, considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes. The S&P 500 Composite Index is an unmanaged group of securities that are considered to be representative of the stock market in general.

Past Performance does not guarantee future results.