Market Storylines: AI Crosscurrents, Broadening Rally + Small Caps Rise

**Eric Criscuolo** (0:00)
Hey, I'm Eric Criscuolo, Market Strategist at the New York Stock Exchange, and this is Market Storylines. Every week, we're here to keep you up to date on the key trends and events driving global markets. We're recording this on Thursday, June 25th. The city is only just starting to come off its high from the next championship and the ensuing parade up the Canyon of Heroes, which took the champs right past the front door of the NYSE.
Now, last week, Michael dropped a lot of Nicaragua references as he should have, but he also managed to fit into his commentary a detailed review of Kevin Warsh's first policy meeting and rate decision as Fed chair. His commentary included equities selling off and treasury yields rising on hawkish takeaways from that meeting. With markets closed on Friday for Juneteenth, the S&P ended the week up 1%.
Tech, hardware and semiconductors had a lot to do with that. The ICE semiconductor ETF rose 7% last Thursday. The DRAM memory ETF rose 10% and 18% for the week. The tech and industrial sectors were the best performers, while energy was the worst due to crude falling about 10% for the week.
This week started with summer making its triumphant return to the Northern Hemisphere as the solstice occurred early Sunday morning.
That means Michael and I need to pivot from the NICs to the Yankees.
Speaking of pivots, Kevin Warsh has begun the process of pivoting the Fed to new strategies and operations and finding a new identity, so to speak. The same can be said of markets this week and in particular the tech and AI trade. In a nutshell, the market is trying to figure out what this trade wants to become. A rift has been forming between AI hardware suppliers versus the buyers and model providers. At its most basic, hyperscalers are spending billions on capex and chips from semiconductor and memory suppliers. This week saw those hyperscalers, Alphabet, Microsoft, Amazon and Meta, down 5 to 7 percent. Oracle was under the most pressure, down over 15 percent. The concern around the AI infrastructure suppliers manifested in smaller operators like the NeoClouds and HPC providers that have converted from crypto miners. Declines of 10 to 20 percent were common across that crew, including CoreWeave down about 15 percent. Now, it would be nice if it was a clean split and a concise narrative, but it's not. Chips suppliers were on a roller coaster. The DRAM memory ETF rose over 15 percent from Thursday of last week to Monday. It then gave it all back when it fell 14 percent on Tuesday. Then memory bellwether Micron reported absolute blowout earnings Wednesday night. The overall takeaway was that memory supply was severely constrained and would remain so into next year due to AI demand. The DRAM ETF ripped 10 percent on Thursday, including a 20 percent gain for Micron. South Korean memory giant SK Hynex followed a similar pattern. However, other AI component suppliers didn't fare as well. NVIDIA is down 8 percent this week. Meanwhile, software's impressive comeback from April to the start of June is close to fully evaporating as the IGV ETF continues to fall back towards mid-April lows.
While tech generates all the headlines right now, there's more to the market than trillion parameter AI model training. I myself am guilty of talking too much about it.
While the weakness in tech is responsible for the S&P 500's 2 percent decline this week, as of now, underlying metrics are much better. 8 of 11 sectors are higher this week. The S&P equal weight is up 1 percent, outperforming the headline index by 300 basis points. Small cap indexes are up 1 to 2 percent. Pulling back a little bit more on that, the Russell 2000 is up 20 percent near to date. Know what the S&P 500 is up? 7 percent. Now, some of the moves this week had to do with basic rotation out of the long-term tech trade and into other areas like health care. It's the leading sector this week despite coming into it down 5 percent on the year.
Financials are also a leading sector as well as a year-to-date underperformer.
The approaching quarter-end next week is likely driving some of that rotation. Behind that, though, are an increasing number of stories of companies pulling back on their AI spending as budget items like token spending get completely blown out.
Expanding on that are the exploding costs of production. Apple provided the latest example today, announcing big price increases across most of its product lineup due to skyrocketing prices for memory and storage chips. Micron's quarterly gross margin chart provides a stark example of the economics of AI.
Now, as the old economic adage goes, the cure for high prices is high prices.