Welcome back to your weekly edition of the 7AM Research Market Intelligence Report. Whether you're reading this with your morning coffee or squeezing it in between meetings, we're glad you're here.

This week, the market sent us a confusing message. Earnings are coming in strong. Inflation is cooling. And yet stocks sold off. So what's actually going on?

By the end of this issue, we think you'll have a much clearer picture. Here's what we're digging into:

There's a lot to unpack. Let's get into it.

The S&P 500 closed the week 1.38% lower at 6,836, as investors opted to take profits despite a backdrop that, on paper, looked quite supportive. Strong earnings reports and a softer-than-expected inflation reading were not enough to overcome the broader sense of caution that has settled over markets in recent weeks.

From a technical standpoint, the index has spent the past four weeks trading in a relatively tight range between 6,800 and 7,000. Last week illustrated this perfectly: the S&P 500 climbed to a high of 6,993 on February 11th, only to pull back sharply to 6,795 by February 13th. That kind of reversal from the top of the range to the bottom within the same week tells us the market is in a genuine period of indecision.

During the pullback, the daily RSI retested and held around the 40 support level, and the daily bottom Bollinger Band was briefly crossed at 6,801. These are key technical observations. When these levels hold during a pullback, it tends to suggest the broader uptrend remains intact. We believe the wider picture still supports higher prices, with the longer-term trend continuing to show consistent higher highs and higher lows.

Earnings season continues to be one of the brightest spots in the current environment. With 74% of S&P 500 companies now reported, 74% have beaten earnings per share expectations and 73% have surpassed revenue forecasts. The blended earnings growth rate for the quarter currently stands at 13.2%, well ahead of the initial expectation of 8.3%.

For the quarter ahead, the guidance picture is mixed. At this stage, 31 S&P 500 companies have issued negative earnings guidance for Q1 2026, while 38 have issued positive guidance. That slight tilt toward optimism is encouraging, though we expect some caution to persist given the uncertain macro backdrop.

On the sector level, there is a clear divide between what is working and what is not. Gold miners, energy, materials, homebuilders, and utilities have all been standout performers this quarter. On the other hand, software, fintech, AI-related names, clean tech, and electric vehicle stocks have been under pressure. This rotation pattern is worth watching closely, as it may be signaling a broader shift in how investors are positioning themselves.

Friday's inflation report was the week's biggest data point. The US Labor Department reported that January CPI inflation came in at 2.4% on an annualized basis, below the expected 2.5%. Core CPI, which strips out food and energy, fell to 2.5%, its lowest level since March 2021.

The immediate market reaction was a shift in rate cut expectations. The probability of another interest rate cut by the June 17th Federal Reserve meeting ticked up to around 67%. We believe this is meaningful because it reflects a growing recognition that the labor market, not inflation, is the Fed's more pressing concern right now. With weakness in employment data outweighing the strength in prices, we believe the Fed will continue to lean toward supporting jobs rather than fighting inflation.

This dovish lean, in our view, is being underpriced by markets. Combined with the expectation that the incoming Fed Chair will likely resume rate cuts in the coming months, we think the rate environment remains broadly supportive for equities over the medium term.

One of the more interesting dynamics playing out right now is the divergence between overall market breadth and the flow of money into and out of the market. Breadth has remained reasonably strong, meaning a wide range of stocks across various sectors have been participating in price gains. This is generally a healthy sign.

However beneath the surface, since the middle of earnings season last October, more money has been leaving the market than entering it. This net outflow indicator has now fallen below its November lows, even while overall price levels remain well above those same lows. When you have fewer dollars supporting the same or higher prices, it creates a fragile situation.

A big part of the explanation is sector rotation. Investors have been pulling money out of the large technology companies known as the Magnificent 7 and reallocating into other areas including smaller-cap stocks, materials, energy, and even emerging markets. When the biggest names in the market start losing ground, it typically weighs on the overall index, even if other sectors are holding up.

The software sector in particular has been at the center of this rotation. Software stocks have sold off significantly in recent weeks. Based on market analysis going back fifteen years, periods when software stocks decline sharply while the broader technology index holds up have shown mixed outcomes. Sometimes they represent a buying opportunity. Other times, they mark the beginning of a more significant pullback. How software companies perform in their earnings reports this week could be a critical factor in determining which scenario we are in.

Upcoming Week

We believe the S&P 500 is approaching a decision point. The index has been largely stuck between 6,800 and 7,000 for four weeks, and the weight of evidence suggests this consolidation phase is drawing to a close. The question is which direction the break comes.

On the technical side, the daily RSI holding around 40 support during last week's pullback is an encouraging sign for bulls. The broader uptrend, defined by a consistent pattern of higher highs and higher lows over the past several months, remains intact. We believe the path of least resistance ultimately points higher. Our current target on the S&P 500 is 7,150, with a stop-loss level at 6,600.

That said, we are not dismissing the risks. Market sentiment indicators have dropped to levels that have historically been associated with softer near-term performance. More money is leaving the market than entering it. And software stocks, which have been among the market's leaders, are under meaningful pressure.

If the stock market is going to stabilize and break higher, we believe it will need to be led by a recovery in software and technology names. There is a reasonable case that the selloff in that group has been overdone. Sentiment in the software sector is at its most bearish reading among any group we follow, and earnings results from that sector have actually been quite strong relative to expectations.

Several important data releases are scheduled for the week ahead that could influence market direction:

The PCE inflation reading and Q4 GDP will be particularly important. PCE is the Federal Reserve's preferred inflation measure, and any further softening there could reinforce rate cut expectations. Q4 GDP will give us the most complete picture yet of how the economy performed through the end of 2025.

The Materials sector has the highest number of earnings releases this week. This group has been the standout performer of the current earnings season, with 96% of large-cap Materials stocks outperforming the S&P 500. We believe the primary driver of this strength is the weakening US Dollar, which has lifted the prices of raw materials. As long as the Dollar continues under pressure, we expect pullbacks in Materials stocks to find buyers.

Energy stocks also remain in focus. The group has seen very strong earnings reactions this season. However, we note that by this point in earnings season, much of the good news may already be priced in. When many Energy companies have already reported strong results ahead of the remaining reporters, the latecomers tend to have a harder time generating positive price reactions. We will be watching this closely.

Utilities have quietly become one of the more interesting sectors to watch. The group moved from laggard to leader last week, which could signal further gains to come. Combined with ongoing investor appetite for defensive positioning, Utilities may continue to attract interest regardless of how the broader market performs.

WTI crude oil closed the week 1.04% lower at $62.84 per barrel. The price continues to face headwinds from multiple directions, and we believe the path of least resistance remains to the downside.

Geopolitics have been a central driver of oil price action in recent weeks. Ongoing diplomatic efforts around a potential deal with Iran have weighed on prices, as any successful agreement would likely reduce the geopolitical risk premium that has been supporting crude. The view from Washington appears to strongly favor a negotiated outcome rather than military conflict. If a deal were reached, or even if no military action is taken, a meaningful portion of the risk premium currently embedded in oil prices could be priced out fairly quickly.

Separate from Iran, the policy backdrop continues to favor lower energy prices. The current administration has made affordable energy a central component of its economic agenda. This creates something of a structural ceiling on oil prices, as there is clear political incentive to encourage production increases rather than allow a sustained rally in crude.

On the supply side, OPEC+ continues to add production. The group is expected to raise output again in the coming months, adding further pressure to prices that are already struggling against soft demand signals from major consuming nations.

Meanwhile, energy stocks themselves have become somewhat overbought following a strong start to 2026. While the longer-term chart still shows room to the upside, particularly if the US Dollar continues to weaken, we believe a period of consolidation or modest pullback is likely in the near term.

From a technical perspective, oil prices tested the $65.00 to $66.00 resistance zone on both February 11th and 12th, only to be rejected both times. This rejection confirmed a lower high in the current downtrend. The daily RSI has extended its decline below around the 55 support level, and the daily top Bollinger Band has begun to shift lower.

We believe the next meaningful test is a move back down toward the February 3rd low of $61.12. From there, we see limited technical support before the $60.00 level. We remain bearish on WTI crude with a target of $60.00 and a stop-loss at $70.00.

Natural gas prices fell sharply last week, declining 5.84% to close at $3.22. Warmer than expected weather forecasts reduced near-term demand expectations, and the EIA reported a significant drawdown from inventories that highlighted how much the market had consumed during the recent cold snap.

Looking ahead, production is forecast to grow approximately 2% in 2026 to an average of 120.8 billion cubic feet per day, with a further increase projected for 2027. This structural supply growth creates a ceiling on any sustained price recovery. Prices briefly fell to $3.06 on February 11th before bouncing to $3.32 on February 12th. We believe this rebound is a technical correction within a broader downtrend, and we expect prices to break below the $3.06 low in the coming week. We are bearish on natural gas with a target of $2.90 and a stop-loss at $3.50.

Gold crossed a historic threshold last week, surpassing $5,000 per ounce and closing at $5,051 for April 2026 futures, a gain of 1.43% for the week. The primary catalyst was the softer CPI reading, which revived expectations for Federal Reserve rate cuts later in the year. Gold markets have also been reflecting broader uncertainty, including geopolitical tensions and concerns about AI-related market volatility.

However, despite the impressive headline number, we want to be clear that we currently hold a cautious near-term view on gold. The same inflation data that lifted gold on Friday also helped push the US Dollar higher, and a stronger Dollar tends to create headwinds for commodities priced in that currency. The Dollar Index formed a higher low of 96.49 on February 11th, and we believe a further near-term recovery in the Dollar is possible.

The technical setup for gold is showing some warning signs. Gold's recent bounce reached a high of $5,145 on February 11th before turning lower on February 12th. In our view, this appears to have formed the most recent lower high in the short-term price pattern. This was accompanied by a rejection of around the 60 level in the daily RSI, suggesting momentum is fading.

The daily top Bollinger Band has also begun to shift slightly lower, which is its first downward movement since late December. When a trend that has been strengthening starts to see its upper boundary decline, it is often a sign that the near-term upside is becoming more limited.

We believe the market needs to digest the recent gains before the next significant move higher can occur. A pullback toward the lower end of gold's long-term uptrend channel, around the $4,700 level, is what we expect to see next. This would allow technical indicators to reset to healthier levels and set up a stronger foundation for the next leg higher. We are currently bearish on gold in the near term with a target of $4,700 and a stop-loss at $5,300.

One of the clearest technical breakouts of the week came in the iShares 20+ Year Treasury Bond ETF. TLT had been rangebound between $86.00 and $88.50 for several months, with multiple rejections at both the upper and lower ends of that range. The softer CPI data and the shift toward more dovish rate expectations finally provided the catalyst for a decisive break higher.

TLT moved above the $88.50 resistance level and extended its gains toward $90.00 by the end of the week. The daily RSI broke above the 60 level, and the ETF crossed above its daily top Bollinger Band. We acknowledge that these conditions can appear overbought in the short term, but we see this as consistent with a breakout following an extended consolidation rather than a sign of exhaustion.

Support has shifted higher to the $88.00 to $89.00 area. We believe TLT is positioned to push above $90.00 in the coming weeks. The combination of an improving inflation picture and a labor market that continues to show signs of softening supports the case for lower long-term yields and higher bond prices. We remain bullish on TLT with a target of $93.00 and a stop-loss at $85.00.

Reporting Wednesday, February 18th after market close

This week's featured earnings release is Avis Budget Group (CAR), the car rental company reporting fourth quarter 2025 results on Wednesday, February 18th. Consensus estimates call for EPS of negative $0.29, while a more cautious internal estimate suggests a loss of $0.45 per share. Revenue expectations sit at $2.75 billion. The sentiment picture going into this report is decidedly negative, with investor sentiment registering at approximately negative 31%.

Industry Headwinds

The car rental industry uses Revenue Per Day (RPD) as its key performance metric, the equivalent of revenue per available room in hotels. Right now, that metric is under significant pressure from multiple directions.

New car prices are rising while used car prices remain flat, which squeezes the economics of fleet management for rental companies. At the same time, consumers have become increasingly price sensitive, limiting the industry's ability to raise rental rates. The result is a double-sided squeeze: lower rental revenue coming in, combined with weaker resale values on fleet vehicles going out.

Industry checks suggest downside risks to RPD expectations remain, and current estimates for 2026 may need to be revised lower following this earnings release. This backdrop creates a challenging environment for Avis Budget specifically, as the company has been navigating these pressures while trying to right-size its fleet.

Technical Setup and Entry Considerations

From a technical standpoint, the stock has been in a prolonged downtrend. It staged a modest recovery in late 2025 but has been trading in a declining channel since then. The stock carries a negative earnings sentiment score, which is among the lowest readings we track.

We would suggest watching the $677 SPY level (equivalent to approximately 6,795 on the S&P 500) as an important near-term indicator for the broader market. A break below this level could create additional selling pressure across more speculative names like CAR.

For those considering positioning around this earnings release, we note that when similar conditions (negative sentiment combined with a very negative earnings score) have aligned in the past, the stock has tended to decline in the days leading up to earnings and then gap lower on the report itself. The average gap lower on a miss has been around 2.6% from the open price on the day of the report. We want to be clear this is our assessment of the current environment and not a specific investment recommendation.

The Wider Consumer Picture

The story playing out at Avis Budget is part of a broader theme we are watching closely across consumer-facing industries. The high end of the market continues to perform well. Luxury travel, premium hospitality, and high-income consumer spending remain healthy. But the lower end is showing clear signs of stress.

This bifurcation is showing up across multiple sectors. In hotels, luxury RevPAR is up meaningfully while the broader industry is under pressure. In car rentals, the mass market is under pressure from cost-sensitive consumers pulling back. We believe this divide will be a defining theme for the remainder of the first half of 2026, and it is worth keeping in mind when assessing any consumer-facing company heading into earnings.

Our overall portfolio positioning remains modestly net long the stock market. We continue to believe the longer-term fundamental backdrop supports equities, even as we acknowledge the near-term uncertainty that has been creating volatility.

In equities, we have not made changes to our core long positions during the past week. We are watching the software sector closely, as we believe a recovery in this group is likely needed for the broader market to break decisively higher out of its current range.

In commodities, we hold a short position in Avis Budget Group (CAR), reflecting our cautious view on the car rental sector given the challenging revenue dynamics described in the stock pick section. We continue to monitor this position actively heading into Wednesday's earnings release.

Our positioning across asset classes reflects the following views:

We view the current environment as one requiring patience. The fundamental picture remains supportive. Earnings are strong. Inflation is moving in the right direction. And monetary policy is likely to become more accommodative as the year progresses. In our assessment, the noise around geopolitics and short-term market dynamics should not be mistaken for a change in the underlying trend. We expect the path ahead to ultimately point higher, and we are positioned accordingly.

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^{This report represents analysis and opinion rather than investment advice or recommendations. All views expressed reflect our current thinking and may change as new information becomes available. Past performance does not guarantee future results.}

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