Markets test tech conviction as Micron earnings loom – AI rotation takes hold

Good morning and yes, I am back – after a brief vacation I got home last night…so I am just catching up on all of the action…Markets have been under a bit of pressure since we last spoke, not a disaster, but a bit of pressure. Remember - the market has climbed by nearly 20% off of the April lows on a number of themes that include:

Peace may be possible in the Middle East (jury is still out on that), Oil will fall and it is, (taking some of the pressure off of inflation), AI spending will continue at a blistering pace, the new FED chair will cut rates (maybe not so quick), and corporate earnings remain resilient.

Suddenly investors, traders and even the algo’s are beginning to question all of those ideas, asking themselves, has this whole trade gotten ahead of itself?

So let’s start with the closing prints from yesterday and see what that tell us - the Dow gained 148 pts or 0.3%, the S&P lost 28 pts or 0.4%, the Nasdaq got slammed – down 351 pts or 1.3%, the Russell added 25 pts or 0.8%, the Transports added 158 pts or 0.7%, the Equal Weight S&P added 11 pts or 0.15% while the Mag 7 lost 736 pts or 2.2%.

Of the 11 S&P sectors – 6 were higher and 5 ended lower…..Communications getting hit the hardest – down 2.3% on the back of a negative story about AI talent walking out the door at GOOG (-5%) and going to Anthropic….and that is raising concerns that GOOG is losing the AI talent war…we also saw weakness in Consumer Discretionary – down 1.9%, Consumer Staples down 1.3%, Basic Materials down 0.4%, and Utilities down 0.1%.

On the upside – we saw strength in Industrials +0.5%, Financials + 0.25%, Energy +0.6%, Healthcare + 0.45% and Real Estate up 0.4%.

But here’s where the story gets interesting. Technology actually finished higher by 0.4%, even as investors were dumping some of the largest names in the AI ecosystem. Microsoft (-3.2%), Amazon (-4.8%), Alphabet (-5%), Oracle (-4.8%), and Meta (-2.3%) all came under pressure as investors reassessed valuations and questioned whether the returns on all this AI spending will justify the massive capital commitments being made.

Yet at the very same time, investors were aggressively buying other parts of the AI trade, suggesting rotation NOT liquidation. Semiconductors rose 2.4%, while memory names continued to attract fresh money. Micron (MU) surged 6% to $1,211 and the DRAM ETF gained 5.2% as investors focused on exploding memory demand, data-center expansion, and the AI infrastructure buildout that requires ever-larger amounts of high-bandwidth memory.

Now all eyes turn to MU’s earnings report tomorrow after the bell. And make no mistake, this report matters. MU is taking on an NVDA type of market dynamic. The options market is pricing in a move of roughly 14% to 17% in either direction depending on what management says—and more importantly, how they say it. For perspective, Micron’s average post-earnings move over the past year has been closer to 4%, so this 14% projected move highlights just how critical this report has become as a barometer for the broader AI trade.

The stock has had an extraordinary run—up roughly 290% this quarter alone and more than 325% year-to-date. It is – as we say - priced for perfection. And when a stock is priced for perfection, perfection becomes the minimum requirement. Anything less - think softer guidance, slowing demand trends, margin pressure, or even a cautious tone from management could trigger a meaningful pullback.

In fact, we may already be seeing some of that psychology at work. This morning, Micron is down 8.5% in the pre-market, trading near $1,100 as investors appear to be taking some money off the table ahead of the announcement. The media will likely point to the sharp overnight selloff in South Korea’s KOSPI index (-10%) as the catalyst, arguing that weakness in one of the world’s most important semiconductor markets is a bad omen for memory-chip manufacturers.

Maybe. But let’s not forget that the KOSPI has gained 95% ytd – that is unsustainable and at some point, markets need to digest or even correct those gains. I’d say the same is true for MU which does NOT mean it is a fundamental change in the memory story it just may mean that investors, traders and algo’s are ringing the register – and pocketing some of those gains ahead of one of the most anticipated earnings reports of the quarter.

Now let’s look at something else that should catch your eye…. The Dow added 148 points, but Caterpillar accounted for 224 of those points all by itself. In other words, without CAT, the Dow would have finished lower. Which naturally leads to the question: What’s going on with Caterpillar?

Can you say more AI power grid? Shares surged up and through $1,000/sh after news that Solar Turbines (a CAT subsidiary) will participate in Project Kilby, a massive energy project in West Texas being developed by CVX and MSFT.

The project is expected to generate roughly 2.7 gigawatts of power—enough electricity to support the next generation of AI data centers and advanced computing infrastructure. Put it this way – 2.7 gigawatts of power is enough to power about 2.5 million homes or is the equivalent of 2 or 3 nuclear reactors. It is enough power to run several of the largest AI data centers in the world.

It’s BIG….and what it tell us is that this story is about building an entirely new layer of infrastructure that requires massive amounts of energy, transmission, cooling, turbines, natural gas and capital. The AI story is morphing into an industrial story and just think of some of the beneficiaries…. CVX, XOM, GEV, CEG, ETN, HUBB, EMR, JCI, TT, ET, KMI and that is only scratching the surface.

Eco data today includes the Philly Fed Non- Manufacturing (think services) index, and it is expected to be down 16 pts…which would be up from the -23.6-pts last month (that’s good). We will also get the S&P Manufacturing PMI at 54.6 and the Services PMI at 52.1 – both remain in the expansion zone. Tomorrow brings us New Home Sales and Building Permits – both expected to be a bit higher. But the focus will be on the PCE data (FED” s favored inflation gauge) on Thursday – and it is expected to be HOTTER than last month at +0.5% m/m and +4.1% y/y. Core PCE at +0.3% m/m and 3.4% y/y – again both of those reads higher than last month. And that will bring the whole Kevy Warsh perspective back to front page news (he is an inflation hawk) …. Will he say anything, will other members of the committee say anything, or will he let the markets hash it out?

Bonds got sold yesterday – the TLT and TLH down 0.8% and 0.6% respectively. This morning bond yield remain elevated…. The 2 yr is yielding 4.18%, the 10 yr is yielding 4.48% while the 30 yr is 4.93%.

Oil continues to decline on the back of that potential peace deal with Iran – this morning WTI is trading at $73.43 down 40 cts and is now down 19% since last week and is down 26% off the May high. We are almost back to ‘pre’ Iran invasion levels and if the deal holds – then I would expect us to trade back to the mid 60’s.

Gold which has been a fan favorite – has suddenly fallen out of favor…this morning it is trading at $4,111 – down $78…and is now down 14% off the May high and has now fallen below all 3 trendlines…. but should find support in the $3900/$4000 range. The slump in gold a direct result of investors pricing in a possible rate hike later this year as well as the recent strength of the US dollar – now up 3.6% off the May low.

European markets are all lower this morning…. the KOSPI once again taking the blame for what we are seeing as global weakness. Markets across the Eurozone all down more than 1%.

US Futures down…. Dow futures down 350 pts, S&P’s down 100 pts, the Nasdaq getting whacked over the head – down 730 pts while the Russell is giving back 50 pts. The sell off in the Kospi (think high flying tech/memory names) cascading across global markets.

SPCX also in the news – closing down 16% last night and looking lower again this morning…. down 3% at $149.80 in the pre-mkt taking it BELOW its opening day price of $150. IPO buyers at $135 are still ok – but we could see that change in a flash as well – if this round of tech weakness just beats everyone up.

The S&P closed at 7472 down 28 pts…futures action this morning suggests it won’t be pretty today….but again – watch where we see the pressure build – AI names, names that are extended….. Today isn’t the day to be a hero. Today is the day to watch where the pressure builds. Is the selling concentrated in the most extended AI names, or does it begin to spread? The answer to that question will tell us whether this is simply a healthy correction or the beginning of something larger.

The VIX is up 15% in the pre-mkt – ticking at 20…gapping up and thru all 3 trendlines – leaving markets vulnerable to a swift pullback…a pullback that may last a while longer.

Bucatini Aamatriciana

This is a bit ‘spicy’ HOT if you will…and so it makes sense for today’s dish.

For this you need: Olive oil, Guanciale, Red Pepper flakes, dry white wine, 1 can of peeled tomatoes – hand crushed, s&p, 1lb of Bucatini pasta and of course the fresh grated Pecorino Romano Cheese.

Bring a pot of salt water to a rolling boil on the back burner so it’s ready for you.

Start by heating the olive oil over medium-high heat until shimmering. Add guanciale and pepper flakes and cook, stirring, until lightly browned, about 5 minutes. Add wine and cook, scraping up any browned bits on bottom of pan, until nearly evaporated, about 3 minutes.

Add the tomatoes – season with s&p and bring to a boil and then reduce to simmer for 15 mins.

Now add the pasta to the pot of water and cook until aldente. Using tongs, transfer the pasta to the sauté pan – adding 1 ladle of the pasta water (tears of the Gods).

Turn the heat up and toss to coat the pasta and thicken the sauce. Remove and add a handful of the cheese and stir rapidly. Serve in warm bowls with plenty of extra cheese on the table for your family.