The AI rotation stole the spotlight from a strong start to the earnings season
AI trading once again dominated the market this week, fueling an impressive start to the second quarter earnings season. Cooler-than-expected June reports on consumer and producer prices provided encouraging signs that inflation is continuing to moderate, while earnings from the nation’s central banks bolstered strength in financial markets. At the same time, investors kept one eye on the Middle East as the US and Iran trade airspace again, adding to the uncertainty surrounding the Strait of Hormuz. West Texas Intermediate crude rose 15.5% last week to above $82 a barrel, while international Brent crude jumped nearly 16% to just over $88. While those are big steps in one week, they ended well at the height of the war as prospects for negotiations persisted. We will have to watch future economic reports to see if the renewed increase in oil prices will increase inflation. Less than a week ago, however, there was another sharp turn within the artificial intelligence trade. Investors are moving from many semiconductor names to hyperscalers. Friday’s market decline left the S&P 500 down about 1.6% for the week, while the tech-heavy Nasdaq fared worse, losing about 3% last week. Here’s a closer look at what drove the trading action. IBM warns IBM shocked Wall Street on Tuesday by announcing disappointing second-quarter results, sending the stock down 25% in its worst day on record. CEO Arvind Krishna has encouraged a softer approach to customers by increasingly redirecting technology budgets to cybersecurity, hardware, and AI tokens. That left less money for traditional software and consulting projects and pushed several big deals in the future. Jim did not recommend buying a large dip. No real recovery was made. IBM stock lost more than 26% in the week. The market quickly rewarded the beneficiaries of that change in business spending. Stocks of the club CrowdStrike and Palo Alto Networks rallied about 12% and 7%, respectively, on Tuesday — as did computer 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 comments reinforced our view that the opposite is happening: AI is driving increased demand for cybersecurity as companies work to secure AI infrastructure and complex applications. Palo Alto and CrowdStrike were our two best performers in the Club portfolio this week. On the other hand, Club name Salesforce sank 2% on Tuesday, and software-as-a-service (SaaS) name ServiceNow fell about 6% as news showed that the use of traditional software is being sidelined. While Salesforce managed to gain about 4.6% for the week, the stock is still down 35.5% for the year to date. Big AI investors spent the week moving money from AI developers to consumers. The sell-off began on Monday following SK Hynix’s US blockbuster release on Friday, July 10. Member giant South Korea fell 9%, triggering a broader sell-off across the AI infrastructure trade. Sandisk fell 12%, Intel fell 6%, and AMD declined 4% to start the week. The pressure persisted throughout the week, easing briefly on Tuesday after IBM’s announcement highlighted where business technology dollars are flowing. Even bullish updates from AI infrastructure leaders have failed to reverse the trend. ASML raised its full-year sales outlook for the second time this year on Wednesday, while Taiwan Semiconductor raised its capital spending forecast on Thursday. Investors, however, are looking far beyond these demand signals. Instead, the focus has shifted to the rising costs of AI buildout and the fact that semiconductor stocks have risen much, much faster. Adding to the cautious sentiment, Chinese company Moonshot AI unveiled a new model on Friday that it says narrows the gap with the best US offerings. This week, the VanEck Semiconductor ETF (SMH) is down nearly 9%, extending its recent decline to its third weekly decline in the past four. Most of that money flows back to the hyperscalers. The stock gained 3% on Wednesday after Warren Buffett revealed to CNBC’s Becky Quick that he personally approved Berkshire Hathaway’s investment in Club stock. The disclosure eased concerns that Buffett might be concerned about Alphabet’s heavy-handed use of AI and related debt financing. The stock later gave up those gains after Bloomberg reported that Google was months behind in delivering its latest Gemini AI model. Bullion stocks lost about 3% last week. Apple was one of the big winners of the Club this week, riding a record after getting permission to bring Apple Intelligence to China. CNBC confirmed that the company will use Alibaba AI models to power the features on Chinese devices. The release gives consumers another reason to upgrade because older iPhone models don’t have the processing power to run Apple Intelligence. On Friday, Apple narrowly surpassed Nvidia to regain the title of the world’s most valuable company by market capitalization. Despite the recent week’s pullback in Big Tech, Apple, Amazon, and Microsoft all finished the week on top. Jim said this week’s spin-off doesn’t change the story of AI. Unlike previous boom-and-bust semiconductor cycles, today’s AI architecture continues to be defined by supply constraints, long-term customer commitments, and the relentless demand for computing. We view the pullback as a profit-making exercise after many AI infrastructure names reversed, following big gains this year. That’s why the Club recently exited its remaining position in Arm on July 8, closing at about 75% profit, and cut 150 shares of Corning in June at prices above current levels. On Thursday, during our Monthly Club Members Meeting, Jim said he would have bought 25 shares of that stock if it wasn’t restricted. Wall Street’s biggest banks deliver Banks got off to a good start to second-quarter earnings season. Five of the six largest US banks reported on Tuesday. Goldman Sachs Holdings Club led the team, delivering outstanding results driven by strength across investment banking and trading. Jim called it the best quarter for the group and said the firm’s business appears stronger than previous sales cycles. Shares closed at a record high on Tuesday and ended the week up nearly 1%. Group name Wells Fargo exceeded earnings and revenue expectations as CEO Charlie Scharf continues to move the bank beyond its traditional lending roots toward underwriting and M&A advisory. Although the quarter was strong enough to keep us invested, we want to see more consensus from the management team before making any moves to improve the stock or increase our price target. Shares initially fell 2.7% after the earnings as investors focused on waning interest rates, but rebounded in later sessions and finished up 0.4% for the week. Looking ahead, Club Capital One stock reports earnings after the close on Tuesday. We’ll be watching to see if the company can deliver its first three-quarter revenue beat and start to show the benefits of its Discover acquisition. For the week, Capital One rose more than 3%. (See here for a full list of stocks from Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling stock in his charity portfolio. 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