After posting the strongest gains of the entire cycle, semiconductor stocks sold off anyway. That’s what the tape tells you.
Listen to the audio version of this article (generated by artificial intelligence).
Garry Kasparov, the greatest chess player of all time, found his match not in a flesh-and-blood opponent, but in a machine.
Kasparov has built his career on carefully reading intentions. But that’s a much longer question when the intentions you’re reading are completely futile.
Under the watch of a large audience and the blinding hot television lights of a Manhattan office tower, the machine slid its shaft into the corner square. Kasparov could not read the move. Kasparov believed that the machine was seeing too far down the board to keep up with it.
As a result, Kasparov was defeated.
Years later, one of Deep Blue’s designers explained that the machine was not actually looking to the future. Instead, something went wrong, research time was exhausted, and a random legal step was made. There was no genius internal plan. The only noise is what Kasparov, the greatest human chess player, mistook for a signal.
Wall Street is in Kasparov’s shoes now.
The AI complex has just delivered the best fundamental results of this entire cycle. Alphabet Company (Google) Its cloud business grew 82% year over year and increased capital spending guidance. Tesla company (TSLA) It reaffirmed its spending and promised more for three consecutive years. and Semiconductor stocks Sitting in a 25% bear market.
The move that surprised everyone? The yield on 10-year Treasury bonds rose by about 20 basis points.
In other words, he is the proverbial rook in the corner.
Let me explain to you why the intent Wall Street sees behind this move is hype, but also, where the bear case should command your respect:
What the big spenders said
The alphabet broke it.
Cloud revenue rose 82%. Record operating margins. The research came with a light touch, and I don’t care about that at all.
What matters is the capital spending guide, which rose to roughly $185 billion to $200 billion at the midpoints, with 2027 rising significantly from there.
The Tesla quarter was a mess, but the reading was clean anyway.
The image repeats outwards with Taiwan Semiconductor Manufacturing Company (TSM)which raised its 2026 capital budget from $54 billion to $62 billion and raised its revenue growth target from more than 30% to more than 40%.
ASML Holdings NV (ASML)For its part, it raised guidance for the second quarter in a row. Meanwhile, Morgan Stanley raised its superspending forecast by nearly 10%, to $1.2 trillion in 2027, and OpenAI raised its computing budget through 2030 to $750 billion.
Six data points show movements in one direction: up and to the right.
Twenty key points don’t move Mark Zuckerberg
So why were stocks hurt?
Because Wall Street stopped worrying about demand and started worrying about durability.
Alphabet’s free cash flow (FCF) became negative this quarter. So did Tesla… and Amazon, Microsoft, and Meta will likely follow. Construction financed by corporate money must now rely on debt, and debt is interest rate sensitive. So the morning after those results, when the 10-year yield rose to 4.71%, a trade that had previously carried zero interest rate sensitivity suddenly became burdened by it.
I understand the fear. However, the mathematics behind it breaks down on contact.
4.7% for 10 years versus 4.5% for 10 years changes nothing about what Meta spends over the next three years. Nothing for Satya Nadella at Microsoft. Nothing for Elon Musk at Tesla or SpaceX. These guys aren’t losing their horses by 20 basis points, and they’re probably not down at 100. Because they think the AI race is existential, and I think they’re right.
Alphabet is scared to death that a year of restraint has handed ChatGPT the search business, given Amazon Web Services and Microsoft Azure the cloud business, and left nothing standing. You can’t slow a race like this with bond yields. You can slow it down with a recession, 20% unemployment, and burning down buildings.
Although, price sensitivity is present here. Call it 2%, concentrated at the leverage end of the new cloud pool. The other 98% passes without a hitch.
Evaluations: Why not add math
The S&P 500 trades at about 21 times forward earnings versus a contract average of nearly 22 times, and the Nasdaq 100 trades at about 24 times forward earnings versus an average of nearly 26 times. the Philadelphia Semiconductor Index (Sox) is trading near 25 times forward semiconductor earnings per share (Earnings per shareIt is expected to grow by more than 100% this year and another 42% next year. Paying 25 times compound growth in the 40s is a deal that carries a warning sign.
The most strident argument attacks estimates rather than multiples. fine. These estimates are supported by capital spending on AI, and spenders have just gone up.
Moreover, the “where are the profits” complaint stopped at Alphabet’s earnings call, as Google Cloud has grown 25% to 35% in the post-pandemic years. This growth has been slowing. It has just printed 82% of a business with an annual value of about $100 billion, and carries a backlog of more than $500 billion.
Fifty points of acceleration on this scale is as cut and dry as the evidence shows.
The bear issue I’m afraid of
Two words: tape.
The SOX is down 25% from its highs. Since the global financial crisis, semiconductor bear markets have come in three flavors: those that bottom out in a 20% to 25% drawdown zone, such as late 2018 and summer 2024; those that will lead to long-term declines, such as 2022; And those led by black swans, such as Covid-19 and Liberation Day. There is no black swan here, so history says we will hit bottom near here or this will get ugly and slow. The dot-com years also call for caution: between 1995 and 2000, SOX entered three bear markets and never stopped at 20%.
Here is the line I’m watching. SMH, SOXX and SOX all fell to their 100-day moving averages. Every AI Boom sell-off since late 2022, excluding release day, has reached or just below this line.
One thing inclines me constructively. When the dot-com boom effectively ended, the collapse of infrastructure names dragged the entire market with it: by early 2000, the SOX was down about 25% and the S&P 500 was down 10%. Today the S&P 500 is down 2%. The hot trade takes a beating while the rest of the market expands underneath it. This looks like it happened in late 1995, and is seen as a recalibration.
Stocks I buy
Includes the settings I’m viewing Broadcom Company (Afgo), Intel Corporation (Intech)and Advanced Micro Devices Company (AMD). Down the market value chain, Amcor Technology Company (AMKR) The company has real leverage on Alphabet’s advanced packaging and processing unit tensor slope, although a break below the 200-day moving average calls for patience. Comfort Systems USA (It works) and GE Vernova (Jeff) Attacking the power bottleneck, memory looks convincing, led Micron Technology Company (in).
Profits and stock prices go hand in hand, and this relationship has persisted as long as markets have existed. It breaks down every now and then, and it always gets right. Currently, earnings trends are pointing up and price trends are pointing down. This solves one of two ways: prices correct sharply upward to meet earnings, or earnings correct sharply to meet prices. After what Alphabet, Tesla, TSMC, and ASML have told us, I don’t see any path to the latter, except a black swan.
When in doubt, follow the profits. And the profits are still continuing (say it with me) up and to the right.
Notably, while chip stocks were sitting in a 25% bear market this week, Apple Inc. (Apple) Its market value reached $5 trillion, becoming the second company in history to reach this milestone.
What is Apple doing differently?
Apple doesn’t outspend Alphabet, Microsoft, and Amazon on data centers. Its capital budget is a small fraction of theirs. What Apple is doing instead is shifting money into a completely different set of assets, the same assets I’ll be reviewing live on Thursday.
Apple has made 124 recorded acquisitions, some worth as much as $3 billion at a time. Apple has spent more than $206 billion on mergers and acquisitions in total. This playbook is not new. It’s the playbook that built the company. In 1996, struggling Apple paid $429 million to buy a small, unprofitable company called NeXT. This acquisition brought Steve Jobs back to Cupertino and with it the operating system that eventually became the basis for the iPhone, iPad, and Mac as you know them today. Small purchase. Buy early. Buy before the world understands why.
Apple is looking to invest heavily again this year, and I think this decision tells you more about where AI money is actually being made than any capitalist scheme with a super-sized earnings call.
this Thursday, July 30 at 1pm ESTI’m walking through the exact framework that Apple works on, the same framework I use to find AI opportunities before the big checks arrive. I call it PPT – People, Product and Timing. Instead of talking about it in the abstract, I apply it directly, in real time One specific AI company I recommend is free.
You will see how this framework works on a real deal. You’ll also see the answer to the people question, product question, and timing question versus real facts, with a real chance of acting on the same day, if you decide it’s right for you.
Setup here is not complicated. The company with the most money on Earth has spent decades and $206 billion proving where the real AI money is made: in deals that happen before the rest of Wall Street notices.
I want to show you How to get a seat at that table.
Reserve your spot for the AI Megadeal event on July 30th now!
