Rising bond yields and oil prices put stocks under pressure this week, while another bout of volatility in the AI trade tested investors' conviction in the market's biggest growth theme. The S & P 500 and tech-heavy Nasdaq Composite snapped their three-week winning streaks, down roughly 1.43% and 2.05%, respectively. Meanwhile, the Dow Jones Industrial Average slipped 0.85%.
Much of the pressure came from the bond market, where long-term yields surged to levels not seen in nearly two decades as tensions with Iran pushed oil prices higher and revived concerns about persistent inflation. The Treasury Department stepped in Wednesday morning with an unusual announcement, saying it would more than double the size of its buybacks of longer-dated government debt. Yields initially fell and stocks rallied on the disclosure, which Jim characterized as an effort to preserve the stock market rally. But the relief proved short-lived, with yields climbing again Thursday and Friday as higher oil prices kept inflation worries alive.
The AI trade also had a rocky week, and a series of headlines on political backlash to data centers may have played a role. That includes Pennsylvania Gov. Josh Shapiro's executive order on Tuesday, which imposes tough standards on any developments in his state. On Friday, Jim questioned whether these restrictions on data center development would materially slow the buildout, or amount mostly to election-year rhetoric. The uncertainty hit infrastructure names particularly hard, with GE Vernova and Eaton down 10% and 7.2%, respectively, for the week. We used the weakness to buy more GE Vernova on Tuesday, though shares continued to drift lower from there.
Broadcom shares fell 4% Wednesday after its chief rival, Marvell Technology, announced an expansive partnership with Alphabet's Google, its flagship custom-chip customer. Broadcom has long co-designed Google's tensor processing unit (TPU). Now, Marvell has a deal to supply a variety of technology tied to Google's TPU ecosystem. The deal validated concerns that Google will increasingly diversify its suppliers. We would have preferred Broadcom to win the business, but we're not abandoning the stock. It does, however, reinforce why Jim ranked Nvidia, Intel, and Micron ahead of Broadcom among our chip holdings at last week's Monthly Meeting. Broadcom was in the news again Friday, with Bloomberg reporting the company is in talks to raise more than $60 billion in debt for an AI financing deal. The arrangement would involve the creation of a special-purpose vehicle that uses the borrowed money to buy Broadcom chips, which are then leased out to a tenant, such as Anthropic, according to Bloomberg. The increased reliance on debt financing to fund the AI buildout warrants scrutiny, but the enormous sum also speaks to the level of demand for AI infrastructure. Broadcom shares rose Friday, but remained on track for a roughly 6.2% weekly decline.
Elsewhere in semiconductors, on Thursday we added Cadence Design Systems to the Bullpen following CEO Anirudh Devgan's appearance on "Mad Money." Cadence provides software and other tools used to design semiconductors. The company works closely with Club holdings Nvidia and Broadcom, while its relationship with Intel is expanding under CEO Lip-Bu Tan, who previously led Cadence. In June, Cadence and Intel Foundry announced a multiyear agreement combining Cadence's AI-powered design tools with Intel's manufacturing technology. Cadence shares have fallen roughly 23% from their early June high, partly on concerns that AI could disrupt traditional chip-design software. Cadence sees the opposite: agentic AI could increase demand by driving greater use of its tools. Whether AI ultimately disrupts or accelerates Cadence's business is a key reason we're watching the stock in the Bullpen.
Memory stocks sold off sharply Tuesday, continuing a stretch of volatile trading for some of the market's biggest AI winners this year. We initiated Micron on Aug. 11, and the stock remains one of our highest-conviction AI plays, as we prefer it to Sandisk, Seagate and Western Digital. Jim got a firsthand look at the opportunity Thursday during a visit to Micron's massive new semiconductor fab site in Boise, Idaho. CEO Sanjay Mehrotra reinforced Jim's view that this memory cycle could be different from the boom-and-bust periods that historically defined the industry. AI is making memory increasingly critical to overall system performance, meaning customers are working with suppliers earlier in the design process rather than simply buying from the lowest bidder. At the same time, long-term agreements with customers are giving Micron greater visibility into future demand, including 16 deals disclosed in June and more signed since. With customers committing to supply years in advance and memory makers remaining disciplined about adding capacity, we think this cycle has the potential to be more durable than those of the past.
It was a busy week of retail earnings, both inside the portfolio and across the rest of the market. Home Depot kicked it off Tuesday, delivering what Jim called its "best quarter in five years." Earnings and revenue topped estimates, while same-store sales rose 1.7%, nearly double expectations. The quarter was especially "terrific," Jim said, considering management described as U.S. housing market as being "frozen." Elevated Treasury yields are keeping mortgage rates high and housing activity subdued, but Home Depot continues to execute on what it can control, leaving it well positioned for an eventual recovery. Home Depot's results also were superior to main rival Lowe's, which reported a day later, benefiting from its bigger business serving professional contractors.
TJX Companies on Wednesday was more complicated. Overall revenue, earnings, and same-store sales beat expectations, but comps at Marmaxx — its largest division and home to T.J. Maxx and Marshalls — rose just 1% versus the 3% expected. CEO Ernie Herrman called the merchandising problems "self-inflicted and within our control," and said trends are already improving. We think the issue is fixable rather than structural and used Friday's weakness to add to our position. Herrman's strong track record also gives us confidence to stick with the stock.
Results elsewhere painted a mixed picture of the consumer. Walmart plunged 9% Thursday after U.S. comparable sales and earnings guidance disappointed, though Jim argued higher gasoline prices and the company's decision to prioritize low prices and market-share gains made the quarter more nuanced than the headline numbers suggested. Target's results also highlighted pressure on discretionary spending, though the company's turnaround under CEO Michael Fiddelke still showed considerable progress in the quarter. There were other bright spots: Ross Stores rallied after beating expectations and issuing strong guidance, while BJ's Wholesale topped estimates and raised its full-year earnings outlook.
