Dow surges on broad strength as semis sink, Oil slides and MSFT/META loom [Video]

Good morning…so take a look the Dow’s 537-point rally yesterday and you’d think investors were going ALL IN….. But not so fast…..that’s not what happened.

What happened was another day of rotation…..Investors, asset managers, and the Momo guys continued to shift their seats.

They continued selling the high-flying semiconductor names- pushing the SOXX down 4.8% and leaving it 26% below its June peak, officially a bear market. But don’t lose sight of the bigger picture...even after all this selling, the group is still up 63% this year. That’s not a collapse—that’s investors ‘locking in’ gains after an extraordinary run. And where did the money go? Into companies that are more economically sensitive, less expensive, and, most importantly, are reporting strong earnings.

Think Consumer Staples up 2%, Healthcare up 2.4%, Communications up 1.9%, Basic Materials up 1.8%, Consumer Discretionary up 1.4% while Financials added 1.3%.

KO was probably the most important earnings report of the day. They Beat EPS, Beat revenue, Raised full-year guidance, reported strong international demand and best of all – their pricing remained resilient.

The stock ended the day up 5% - adding 24 pts to the Dow’s 537-point gain. It also sent a positive message about the health of the global consumer.

Sherwin-Williams (SHW) -Another standout. Sales up 7.5%, EPS of $3.70 – beating expectations, strong margins, robust guidance. The stock surged by 8.25%, suggesting commercial/residential construction and remodeling remain healthier than many feared – because after you build it – you have to PAINT it. That move added 160 pts to the DOW and was by far the clear leader.

Other Dow advancers – included AMGN, IBM, UNH, BA, HD, CRM, and more…. adding another 410 pts to the index – and guess what? Those are not the Mag7 or the chips – those are core mega cap all-American names.

At the end of the day – complementing the Dow’s advance, we saw the S&P add 15 pts, the Nasdaq continues to get sold – losing 55 pts putting that index right on the edge of an official ‘correction’ – down 10% off the recent high. The Russell added 6 pts, the Transports lost 177 pts, the Equal Weight S&P gained 65 pts – to close at a new all-time high while the Mag7 added 175 pts.

Think about it. The equal-weighted S&P hit another record closing high. And all that means is that this rally is not about a handful of mega-cap tech stocks that have dominated the headlines for years now. Oh no, this should tell you something important. Investors are NOT rejecting stocks. They are just finding opportunities in other places.

Look, we know the deal – the semi’s are now on pace for its worst month since 2002 - down 26% - not because AI is dead, not because demand has disappeared. But because expectations had become enormous, valuations were stretched, the trade was very crowded, and earnings season was about to begin.

Investors keep asking the same question over and over…..Is the money (hundreds of billions of dollars) being poured into AI ultimately going to payoff to justify today’s valuations? Well, we don’t know, yet…..but today and tomorrow will certainly give us a clue into what happens next.

And then something else happened ‘on the way to the forum’ - …. oil prices continued to collapse…WTI now trading at $79.30 down from $94 just days ago while Brent is at $84.40 down from $101. That caused bond prices to rise and yields to fall. The TLT and TLH up 0.6% and 0.5% respectively. 2 yr yields fell 4 bps to 4.28%; the 10 yr also fell 4 bps to end the day at 4.60% while the 30 yr fell 5 bps to end the day at 5.08%.

The story here is that lower oil prices will give the FED some breathing room. I ask, breathing room for what? Rates aren’t changing today and they weren’t expected to change. So, is that supposed to mean that the September hike that the market is pricing in, is off the table? Slow down, big boy – there is still a lot of data between now and September 16^th.

And btw – the whole Middle East conflict isn’t over yet and as we know – the ‘ceasefire’ today, means nothing about tomorrow. So, while the action in the oil patch was welcomed – it ain’t over til the fat lady sings.

And apparently she is not ready to sing because Iran just launched another round of attacks on US bases – this time in Jordan - and if that isn’t enough, they also sent drones to attack Saudi oil facilities. Now all of those attacks were thwarted, but that’s not the issue – the issue is how far apart we are from ending this conflict. Overnight oil did trade as high as $83.30 but at 5:30 it is up $2.70 or 3.3% at $82.

Gold remains trapped in the $4,000/$4,200 – trading range – yesterday it ended the day basically flat at $4,025 as everyone is waiting for the next catalyst. This morning – gold is up $5 at $4,030.

The FOMC decision hits the tape at 2 pm and the presser starts at 2:30. Fed fund futures still give us a 30% probability of a rate hike today…. which is unusual this late in the game. I am in the 70% camp that says we get nothing and Kevy has promised NOT to promise anything that suggests any future action or paints him into a corner. Expect the markets to listen to what he says just to see what has changed – who voted with him and who voted against. Remember - while we still not sure if he is a hawk or a dove – he is a reformer – so expect to hear how things are changing at the FED.

Earnings – there are a lot.

Today we’ll hear from VRT, GD, BSX, HUM, SOFI, MAS, SWK, PPG, BG, & TEVA – These companies represent AI infrastructure, Defense, Healthcare/Medical devices, Fintech, Housing, Industrials/Consumer, Chemicals, Agriculture and Pharmaceuticals.

But don’t get too comfortable because all these names do is set the stage – think the ‘opening act’. The ‘climax’ comes after the bell when MSFT and META take center stage. They’ll either justify the hundreds of billions being spent on AI—or they’ll give investors another reason to HIT THE SELL BUTTON. So do yourself a favor...hit the head before 3:45 pm, then buckle up because the fun starts after 4 pm.

Remember- Demand for compute isn’t going away and that’s why tonight’s earnings matter so much. MSFT, META, and the rest of the hyperscalers are still spending extraordinary amounts of money because underinvesting is an existential risk.

Compute -not the models themselves -is still the moat.

The moat? Many are asking - What does that mean, because everyone is saying it now…So, pay attention –

Some believe that the AI race is all about the best model – that’s the mistake – the real race, the real competitive advantage (otherwise known as ‘the moat”) is the computing power, because without the power to train, refine and run the models for billions of users, the model doesn’t matter!

So, what is compute? Compute is everything required to build, train, deploy and run AI at scale. It’s NVIDIA GPUs, AMD GPU’s, it’s ASML – the single most important company in the semi supply chain – because they build the machines that make the most advanced chips. It’s MU and the memory names, its servers, data centers, electricity, HVAC, high-speed networking, storage and memory. All that IS the engine.

What is a model? The model is software. ChatGPT, Gemini, Claude, Grok,

Gemini…. etc.

So why is compute the moat? Because models evolve quickly. Competition shows up. Open-weight models emerge. Costs come down. We’ve already seen that with Chinese models like Kimi.

But you know what can’t be copied? hundreds of thousands of GPUs, gigawatts of electricity, billions of dollars of data centers, years of infrastructure investment.

To put it into ‘food’ terms – Anyone can write the recipe, but if you don’t own the kitchen with all the equipment, you can’t cook the meals that are feeding billions of people. Capisce?

That’s why MSFT, AMZN, META, GOOG, and ORCL keep spending hundreds of billions of dollars. They’re not buying today’s AI—they’re building the infrastructure that will allow them to dominate tomorrow’s AI. They know that if they underinvest today and a competitor (again think China) builds more compute, they may never catch up.

In Asia – the selling continues…Taiwan down 3.8%, the Kospi index lost 6% while the Semi’s lost another 9.67% - SKHynix is down 2% in pre-mkt trading.

European markets are lower! Surprise! It’s the ongoing pressure on tech, it’s the uncertainty around the FED and what that means for the BoE and the ECB and it’s the renewed fighting in the Middle East.

US futures are confused. Dow down 85 pts, the S&P’s up 14 pts, the Nasdaq is up 46 pts, while the Russell is up 5 pts.

Jersey Mike’s (JMKE) is going public tomorrow – they are bringing 45 mil shares to the market and it is supposedly 10 x’s oversubscribed….Price range is $21-$25/sh. What that says is that there is still plenty of risk appetite demand. And btw – their steak, cheese, peppers, onions and mushrooms sub is fantastic.

The S&P closed at 7428 up 15 pts. On Monday we tested trendline resistance at 7472 and failed to pierce it, closing at 7,413. Yesterday we made another feeble attempt and failed to pierce it. This morning futures are mixed – so I am not sure we’ll even get near testing it. We remain in the 7300/7470 trading range.

Chicken thighs agrodolce (Sweet and sour sicilian chicken)

This is one of those dishes that proves Sicilian cooking is all about balance. Sweet. Sour. Salty. Rich. And the best part? It tastes even better the next day.

Ingredients: 8 bone-in, skin-on chicken thighs, s&p, olive oil, 1 large, sweet onion, sliced, 5 garlic cloves, sliced, 1 cup chicken stock, 1/2 cup dry white wine, 1/3 cup red wine vinegar, 3 tbsp honey, 2 tbsp brown sugar, 2 tbsp tomato paste, Kalamata olives, golden raisins, capers, fresh rosemary, thyme, toasted pine nuts, fresh parsley.

Season the thighs generously with s&p. Heat olive oil in a large Dutch oven or heavy skillet.

Place the thighs skin-side down and don’t touch them for 7-8 minutes. You want deep golden, crispy skin. Flip and cook another 3 minutes.

Remove and set aside.

Add the onions to the pot. Cook until soft and beginning to caramelize. Add garlic.

Stir in the tomato paste. Deglaze with white wine. Reduce by half.

Add the chicken stock, vinegar, honey, brown sugar – mix well.

Now stir in the olives, raisins, capers, rosemary & thyme.

Bring everything to a simmer.

Now – add back the chicken. Skin side UP and above the liquid. Cover. Bake at 350°F for 40-45 minutes.

Uncover after 30 mins so the skin gets crispy while the sauce reduces. You want a good balance of sweet and sour.

When serving sprinkle with toasted pine nuts, chopped parsley & a drizzle of excellent olive oil.