AI Trade Dominates Market Amid Earnings Season and Geopolitical Tensions

The AI trade dominated the market once again this week, upstaging an impressive start to the second-quarter earnings season. Cooler-than-expected June reports on consumer and producer prices offered encouraging signs that inflation continued to ease, while earnings from the nation's largest banks reinforced the strength of capital markets. At the same time, investors kept one eye on the Middle East as the U.S. and Iran traded airstrikes again, adding to uncertainty around the Strait of Hormuz. West Texas Intermediate crude spiked 15.5% last week to above $82 per barrel, while international benchmark Brent crude jumped nearly 16% to just above $88. While those are big one-week moves, they finished well off their peaks at the height of the war as hopes for diplomacy persisted. We'll have to watch future economic reports to see if the renewed rise in oil prices stokes inflation. Beneath the surface last week, however, there was another sharp rotation within the artificial intelligence trade. Investors shifted away from many semiconductor names and toward hyperscalers. Friday's market downturn left the S & P 500 off nearly 1.6% for the week, while the tech-heavy Nasdaq fared worse, losing almost 3% last week.

IBM warning ripples

IBM shocked Wall Street on Tuesday by pre-announcing disappointing second-quarter results, sending the stock down 25% for its worst day on record. CEO Arvind Krishna chalked up the softness to customers increasingly redirecting technology budgets toward cybersecurity, hardware, and AI tokens. That left less money for traditional software and consulting projects and pushed several large deals into future quarters. Jim didn't recommend buying the massive dip. No real recovery materialized. IBM stock lost more than 26% for the week. The market quickly rewarded the beneficiaries of that shift in corporate spending. Club stocks CrowdStrike and Palo Alto Networks rallied roughly 12% and 7%, respectively, on Tuesday — and so did hardware and memory names such as Dell and Micron. Earlier this year, cybersecurity stocks came under pressure due to concerns that AI would disrupt the industry. IBM's commentary reinforced our view that the opposite is happening: AI is driving incremental demand for cybersecurity as companies work to secure increasingly complex AI infrastructure and applications. Palo Alto and CrowdStrike were our two best performers in the Club portfolio this week. On the flip side, Club name Salesforce dipped 2% on Tuesday, and fellow software-as-a-service (SaaS) name ServiceNow slid nearly 6% as the news showed more traditional software spending is increasingly being pushed aside. While Salesforce did manage to gain nearly 4.6% for the week, the stock is still down 35.5% year to date.

The great AI rotation

Investors spent the week moving money from the AI builders to the buyers. The selling started Monday following SK Hynix's blockbuster U.S. debut on Friday, July 10. The South Korean memory giant fell 9%, sparking a broad sell-off across the AI infrastructure trade. Sandisk tumbled 12%, Intel lost 6%, and AMD declined 4% to start the week. The pressure persisted throughout the week, easing only briefly on Tuesday after IBM's preannouncement highlighted where enterprise technology dollars are flowing. Even bullish updates from AI infrastructure leaders failed to reverse the trend. ASML raised its full-year sales outlook for the second time this year on Wednesday, and Taiwan Semiconductor boosted its capital spending forecast Thursday. Investors, however, largely looked past those demand signals. Instead, the focus shifted to the soaring cost of the AI buildout and whether semiconductor stocks had climbed too far, too fast. Adding to the cautious sentiment, Chinese startup Moonshot AI unveiled a new model Friday that it said narrows the gap with leading U.S. offerings. For the week, the VanEck Semiconductor ETF (SMH) dropped nearly 9%, extending its recent pullback with a third weekly decline in the past four. Much of that capital flowed back into the hyperscalers. Alphabet rallied 3% Wednesday after Warren Buffett revealed to CNBC's Becky Quick that he personally approved Berkshire Hathaway's investment in the Club stock. The disclosure eased concerns that Buffett might be worried about Alphabet's heavy AI spending and related debt financing. The stock later surrendered those gains after Bloomberg reported Google is months behind in delivering its latest Gemini AI model. Alphabet shares lost almost 3% last week. Apple was one of the Club's biggest winners this week, climbing to record highs after receiving approval to bring Apple Intelligence to China. CNBC confirmed the company will use Alibaba's AI models to power the features on Chinese devices. The rollout gives consumers another reason to upgrade because older iPhone models lack the processing power to run Apple Intelligence. On Friday, Apple also briefly surpassed Nvidia to reclaim the title of the world's most valuable company by market capitalization. Despite a late-week pullback across much of Big Tech, Apple, Amazon, and Microsoft all finished the week higher. Jim said this week's rotation doesn't change the AI story. Unlike prior boom-and-bust semiconductor cycles, today's AI buildout continues to be defined by supply constraints, long-term customer commitments, and relentless demand for compute. We view the pullback as largely a function of profit-taking after many AI infrastructure names went parabolic, following enormous gains this year. That's why the Club recently exited its remaining Arm position on July 8, locking in roughly a 75% gain, and trimmed 150 shares of Corning in June at prices well above current levels. On Thursday, during our July Monthly Meeting for Club members, Jim said he would have bought back some 25 of those shares if not restricted.

Wall Street's biggest banks deliver

Banks kicked off a strong start to the second-quarter earnings season. Five of the six major U.S. banks reported on Tuesday. Club holding Goldman Sachs led the group, delivering standout results fueled by strength across investment banking and trading. Jim called it the best quarter of the bunch and said the firm's business appears more durable than in prior dealmaking cycles. Shares closed at a record high Tuesday and finished the week up nearly 1%. Club name Wells Fargo exceeded earnings and revenue expectations as CEO Charlie Scharf continued to shift the bank beyond its traditional lending roots toward underwriting and M & A advisory. While the quarter was strong enough to keep us invested, we want to see more consistency from the management team before making any moves to upgrade the stock or boost our price target. Shares initially dropped 2.7% after earnings as investors focused on weaker net interest income, but rebounded in subsequent sessions and finished up 0.4% for the week. Looking ahead, Club stock Capital One reports earnings after Tuesday's close. We will be watching to see whether the company can deliver its first earnings beat in three quarters and begin showing the benefits of its Discover acquisition. For the week, Capital One rose more than 3%.