Muse unleashes Agentic AI Frenzy: Nasdaq hits record high while mega-caps do all the heavy lifting

Good morning……What a day it was - The Nasdaq gained 2.25% and closed at a new all-time high. The S&P gained 1.5%, not bad, not a high, but not bad. The Dow added 0.7%, the Russell was up 0.5%, the Transports lost 0.5% and are now below their 200 dma (Yellow flag), the Equal Weight S&P gained 0.5% while the Mag 7 surged – adding 3.5% to their bottom line.

Now, let’s pull back the sheets and take a peek at what else is happening…..

Mega-cap technology stocks exploded higher yesterday, - and almost anything else ‘tech’ also gained – Cybersecurity + 3.3%, Semi’s up 5%, Memory names up 3.3%, Software up 2.7%, Disruptive Tech up 2.8% while the Quantum names also added better than 3%.....…..

Let’s be clear – Yesterday was a powerful tech rally , but there is a reason to remain cautious…… The Dow Transports broke below their 200-day moving average yesterday. That matters because the Transports are often viewed as a barometer of underlying economic activity.

Now, one day below the 200-day does not necessarily signal disaster—we need to see whether the Transports quickly reclaim it or confirm a further breakdown. With the Nasdaq at a record high and mega-cap technology doing most of the heavy lifting, weakness in the Transports is another sign that the broader market is not confirming the excitement.

In Dow Theory terms, that divergence between the Dow and the Dow Transports screams caution—not panic, but caution. (Currently the Dow is hugging its intermediate term trendline, while the Transports have broken down and thru their 200 dma). A healthy rally should have participation from technology, small caps, the Equal Weight S&P and the economically sensitive Transports. Right now, we do not have that confirmation.

Remember - when a handful of mega-cap names are doing most of the heavy lifting, the headline indexes can look spectacular even as the average stock goes nowhere. That works beautifully while those leaders are rising - but if they stumble, there may not be enough participation underneath the market to support the broader indexes.

So, what caused the surge in tech??? Can you say MUSE?

Muse is META’s newest AI agent, and it climbed to the top of the app store – re-igniting all kinds of enthusiasm around anything ‘agentic AI’. You see, MUSE reminded everyone that agentic AI will require enormous amounts of computing power - not only GPUs, but CPUs, servers and all of the infrastructure necessary to allow AI agents to perform millions of real-world tasks in seconds. And THAT argument caused AMD to explode - gaining 10% - giving it a trillion-dollar value, INTC added 12%, ARM up 17% and NVDA added 2.3%.

Away from tech we saw strength in Communication Services up 3.5%, Consumer Discretionary rose 1.3%. Healthcare, Industrials, Real Estate and Financials all finished modestly higher – up by about 0.2%. Energy lost 2.9% as oil prices sank, while Utilities, Consumer Staples and Basic Materials fell by 0.4%.

And what else happened on the way to the Forum? Oil fell – 4.9% to end the day at $95.42, - the move a direct result of satellite images showing the Saudis are boosting exports of oil thru the Strait – easing last week’s concerns that the damage to the East-West pipeline was going to cause a supply shock…It’s amazing what we can see from space, no?

And then there were rumors of ‘diplomatic progress’ (think Iran) circulating around the street – and that’s always a potential boon. Any prospect of diplomacy takes some of the geopolitical risk premium out of the oil market.

In addition – we saw both the TLT and TLH gain 0.7% and that caused the 10-yr Treasury yield to slip by nearly 5 bps – ending the day yielding 4.94% while the 30 yr fell by 2 bps to end the day yielding 5.28%.

Gold lost nearly 1% to end the day at $4,350 and this morning it is down another $30 at $4,313. The message is clear - a hawkish Fed means another possible rate hike while rising real bond yields are increasing the cost of holding an asset that pays you nothing to own it. In addition – some of the ‘geopolitical safety trade’ is also coming out as investors hope diplomacy can lower the temperature in the Middle East. In the end - Gold’s longer-term story may remain intact - but in the short term, the conflict and the bond market are clearly in charge. This morning it is sitting right on the trendline – where I think it finds support.

The VIX was quiet yesterday and is quiet again this morning….. It ended the day at 14.87 and continues to trade inside the 13.80/16.15 complacency zone - suggesting that investors are pricing in very little near-term trouble. That doesn’t mean the risks have disappeared, it just means that nobody is paying up for protection.

It is also UN Week in New York. Trump is scheduled to address the UN General Assembly this morning and has said he would “probably” be open to meeting Iranian President Masoud Pezeshkian. – Open, yes, confirmed, no.

Trump is also expected to meet Ukrainian President Zelenskyy, while Xi Xi is scheduled to meet Trump in DC on Thursday – the hope is that they can extend their trade truce and make progress on tariffs, critical minerals, investment and artificial intelligence.

So, it appears that the algorithms are interpreting all of this as good news: Money moved out of gold, traders removed some of the risk premium from oil, and the bond market eased just enough to allow everyone to breathe again.

And remember what we have been saying: Oil and the 10-year Treasury yield have become the market’s two biggest tells. When oil rises and the 10-yr pushes above 5%, stocks struggle. When oil retreats and the 10-yr falls below 5%, investors breathe again—and growth stocks tend to benefit the most.

There was no meaningful economic data yesterday, but today we’ll get the Philadelphia Fed Nonmanufacturing Index -think services -followed by the Richmond Fed Manufacturing Index and its Business Conditions Survey. I don’t expect any of them to move the markets materially, but they will give us another look at how regional businesses are holding up.

Tomorrow we’ll get the preliminary S&P Global Manufacturing and Services PMIs. Both are expected to remain in expansion territory at 53.7 & 55.9 respectively.

Then on Thursday, we’ll get New Home Sales, which are expected to rise 1.3%. But pay close attention to what is driving those sales. Builders are offering mortgage-rate buydowns, help with closing costs and all kinds of “free” upgrades to attract buyers.

This morning US futures are pushing cautiously higher - tech seems to be holding onto yesterday’s gains but the overall tone is still a bit cautious. Dow futures are up 130, S&P’s up 5, Nasdaq up 50, while the Russell is up 15.

European markets are mixed…. Italy is down 0.4%; Spain is up 0.5%. The others are just north of the unchanged line.

Oil and the 10-yr will continue to control the conversation. WTI is down another 1% at $94.70, Brent is down 1% at $99.30. The 10 yr is yielding 4.94% all as Trump prepares to address the UN General Assembly at 10 am.

So, the setup is straightforward - the AI trade remains alive and well - but the broader market is cautious. If oil moves lower and the 10 yr stays below 5%, then the sense is that tech can continue to lead the market higher. If oil and yields reverse and turn higher, the macro pressures that caused unrest last week will return. Look, in the end, investors want to focus on AI and the 3^rd qtr. earnings that begin in 2 weeks – but as long as oil, inflation and the Fed are still in focus – the action will remain cautious.

The S&P closed yesterday at 7,764 - up 114 pts. We are now in the 7,720/7,800 trading range and with the Nasdaq closing in record territory yesterday – all eyes will be focused on the broader market to see if it confirms the excitement. 7,798 is the target….and it is just 0.4% away from kissing it.

Keep your eyes on the Equal Weight S&P, the Russell and most importantly the Transports. If they reverse and join the move higher, it tells us the rally is broadening. If they continue to lag while mega-cap technology does all the heavy lifting, the S&P can still kiss—and even penetrate—its record high at 7,798. But it will remain a narrow rally sitting on a much weaker foundation. That does not scream “sell everything”—but it absolutely screams caution.