Tech and AI snap back after brutal one-two punch – Strong jobs, rising yields

Good morning and yes, I am back – I was away at a wedding, so I missed the action on Thursday and Friday….so here we go….

Before we talk about yesterday’s bounce, let’s talk about what happened at the end of last week because Friday’s selloff didn’t come out of nowhere. It was the collision of not one but two powerful forces that had been building for weeks, forces that we have been discussing…..the stretched technology trade and the stronger than expected eco data. It ended up being a one/two punch that caught some off guard.

Last week – markets were a bit edgy….the Iran/US negotiations were at a stalemate, oil was on the rise, bonds were getting slammed, yields were rising and then the NFP report on Friday surprised everyone…..Every index got sold - the Nasdaq plunged 4.2%, the S&P 500 fell 2.6% and the list goes on….

Now let’s be clear about what happened. The selloff was all about technology, more specifically, the semiconductors. The AI trade slammed into a wall. The warning signs actually appeared on Thursday when Broadcom disappointed investors by failing to raise its AI chip outlook despite reporting solid results. The stock sold off, and that weakness quickly spread across the entire semiconductor sector.

Then Friday came. Nvidia got hit. Broadcom got hit. Micron got obliterated — falling 13%. And the selling became indiscriminate. All the Momo guys running for the door at the same time….and you know what happens then…..the bottom falls out. This is the problem with concentration…. because when a handful of names carry the market higher, those same names become vulnerable when the algo’s throw a fit and decide to go into ‘sell’ mode all at once.

But that was only half the story. The second punch came from the economic data. Friday’s NFP report showed employers added 172,000 jobs in May – nearly double the expectation. Bonds declined and yields exploded higher – the 2-yr kissed 4.17%, the 10- yr kissed 4.55% while the 30-yr kissed 5.02% as the street began reassessing the path of interest rates – Fed fund futures are pricing in a rate hike before year end now….

I mean think about it. A stronger economy means inflation pressures may remain sticky. Sticky inflation means the Federal Reserve remains boxed into corner. And that means interest rates stay higher for longer. And that is exactly the plot line that creates problems for a market trading at elevated multiples – the S&P is trading at 25 x’s expected 2026 earnings…. a bit rich for sure. In other words, Kevin Warsh’s job just got a bit harder.

Good news for the economy became bad news for bonds and higher yields became bad news for stretched tech stocks. And suddenly the AI trade that had looked unstoppable all year looked vulnerable. The selling took nearly one trillion dollars in market value out of the tech/AI complex. The bulls were bruised and the bears were taking a victory lap proclaiming the ‘AI trade is over, the bubble has burst’.

Except...maybe not…..Yesterday the dip buyers began to sift thru the rubble…..MU added 10%, SOXX was up 5.9%, WDC +3%, STX +3.5%, NVDA +1.7%, AMD + 5.1%, INTC + 11.2%, AVGO + 2.8% - It’s funny – the algo’s were buying the same names that they were throwing out 48 hrs. ago…and as usual – all the analysts came out to take advantage of the opportunity. Morgan Stanley saying it was ‘inevitable’, Citigroup raised their year end target, while UBS continues to tell investors not to underestimate the strength of tech while at the same time telling investors not to let a hawkish FED get in the way.

Remember – earnings were better than expected, eco growth is robust, capex spending is strong, consumers are spending, compute demand is surging – I mean look at INTC – it surged 10% on the back of a headline that said Apple was set to purchase more than 3 million TPU chips by 2028 – a TPU (Tensor Processing Unit) is an application specific integrated circuit (ASIC) designed specifically for AI workloads. The excel at the core mathematical operations that allow AI to learn and predict. They are not the same as a CPU or GPU – they are ‘in addition to’.

At the end of the day – the Dow lost 80 pts, the S&P added 22 pts, the Nasdaq rose by 220 pts, the Russell added 22 pts, the Transports rose by 220 pts, the Equal Weight S&P lost 6 pts while the Mag 7 gave back 18 pts.

Only 3 of the 11 Sectors advanced – Tech +2.1%, Consumer Discretionary + 0.5% and Energy + 1.1%. Of the other 8 sectors – Utilities lost 1.9%, Real Estate lost 1.5%, Basic Materials lost 1.3%, Financials lost 0.6%, Communications lost 0.5%, Consumer Staples lost 0.4%, Industrials down 0.3% while Healthcare lost 0.25%.

Below that it was a mixed bag – Homebuilders lost 0.2%, Airlines lost 0.9%, Disruptive Tech added 1.9%, Retail +1.4%, the Value Trade lost 0.2% while the Growth Trade added 0.7%, Emerging Markets gained 1.8%, the Quantum Trades were up between 4% - 10%.

Bonds got sold again – the TLT and TLH down 0.5% and 0.3% respectively. Yields held steady at 4.14%, 4.55% and 5.03% for the 2, 10 and 30 yrs issues.

Oil – which has been a BIG driver of sentiment and market action – was down yesterday and is down again this morning – trading at $89.45…and is now down $7 from last week’s high of $96.50. The move a direct result of the ongoing negotiations between US and Iran…We are now below the short term trendline and will look to test the May low of $86.35. Should the news continue to be somewhat positive – expect oil to fall a bit further…. but it won’t collapse until there is a signed deal and the strait is open and the blockade is over.

Gold – what did I tell you….It was stuck in the triangle – between a rising long term trendline and a declining short term trendline…and it finally made a decision….breaking long term support at $4,437 to trade as low as $4,268 yesterday….This morning it is trading at $4,335 as it tries to asses what’s next. Remember – higher rates and a stronger dollar are negatives for gold…. next level of support should be around $4,100 while the trendline at $4,437 becomes resistance.

The VIX, which exploded higher (+35%) on Friday’s selloff as investors rushed to buy protection has already retreated as anxiety begins to fade. It closed last night at 18.12 and, with futures pointing higher and global markets rallying this morning, I’d expect it to end the day lower. Remember, anything below 20 generally suggests a level of investor complacency. And remember what I said two weeks ago when the VIX was trading in the 15s?

Be careful, because when investors become too comfortable, is when they get smacked. Well... Friday they got smacked.

Today’s eco data includes Existing Home Sales m/m and they are expected to be up 1.1%.

Tomorrow, we will get the May CPI report and while the m/m numbers are expected to be a bit lower the y/y numbers are expected to be a bit higher. The issue will be (as usual) if the actual numbers are not what the market expects. Now, I am expecting them to be stronger (higher) than the estimates, but let’s see. And Thursday brings us the May PPI index, and it is the same story. m/m expected to be down, but y/y expected to be up – I suspect both to be higher than the expectations.

Now, if I’m right and both CPI and PPI come in hotter than expected, then Friday’s selloff suddenly makes a lot more sense.

European markets are mostly all higher…. Italy up nearly 2%, Spain up 1.1%, Euro Stoxx up 0.9%, France up 0.9%, Germany up 0.7%. The UK is the only one not having fun…they are down by 0.2%.

US futures are all up strong. Dow futures +120, S&P’s +30 pts, the Nasdaq +205 while the Russell is +25.

Now when I left on Thursday morning the S&P was at 7,609, last night it closed at 7,405. Recall what I said to you last Wednesday -

‘The Dow, S&P, Nasdaq and the Equal Weight S&P are all kissing overbot – and all that means is proceed with caution, do not get fomo’ized’.

None of you should have been surprised at what happened next. So where are we now? Last Thursday the market was overbought, overconfident and trading like risk no longer mattered. Today it’s neither overbought nor oversold, the froth has been taken out. The weak hands (Momo guys) have been shaken. Now the market is about to get another test this week - the CPI and PPI. So stay alert.

One more side note – The AI trilogy is complete….Sammy Altman jumps in and files ‘confidentially’ to go public, now joining SpaceX – this Friday and Anthropic sometime in the fall. So now we will see how investors react and how much of these ‘trillion-dollar babies’ the market can absorb. Look for more money to come out of Bitcoin to fund these dreams.

Breaded pork cutlets bathed in white wine

This is also an easy dish to make and one that will become a family favorite. For this you need – boneless pork cutlets, eggs, seasoned breadcrumbs, flour, butter, both grated Parmegiana and Pecorino Romano cheese, white wine and chicken stock.

Preheat the oven to 350 degrees.

Begin by rinsing and patting dry the pork cutlets. Set aside. In a bowl beat 5 eggs – set aside. In a large bowl – add the breadcrumbs – season with pepper, onion powder, garlic powder, and a handful of both cheeses. Mix well. Set up the production line.

First Cutlets, then the bowl of flour, then the eggs, and then the breadcrumbs. Dredge the cutlets in the flour, dip in the eggs and then in the breadcrumbs – set aside and repeat.

Next – melt ½ stick of butter and a splash of olive oil in a large nonstick frying pan. When hot – sear the cutlets on both sides until the breadcrumbs form a crust – maybe like 4 mins per side. Place in a Pyrex glass baking dish. Next – add some white wine to the pan and deglaze – Now add some chicken stock – enough that when you add to the baking dish – the cutlets are bathing – do not cover them in the liquid.

Now cover the dish with tin foil really tightly and place in the oven for 30 mins or so.

Remove and serve with a side of roasted cauliflower and a large mixed green salad with sliced tomatoes, red onions, cucumbers. Dress in a red wine vinaigrette. Simple, easy and soon to be a family favorite.