A toxic stew drags stocks lower as we look at what can get the AI trade back on track

Every weekday, CNBC Investment Club with Jim Cramer publishes Homestretch, an actionable afternoon update just in time for the final hour of trading on Wall Street. Stocks fell sharply on Monday as many sectors weakened. Stocks related to technology and artificial intelligence were the most affected groups as the sales in the Korean stock market spread to the US markets. The real damage was done to the Nasdaq, which fell almost 1.5%. The rise in oil prices was another development that negatively affected the broader market after the United States and Iran exchanged strikes over the weekend, prompting President Donald Trump to reinstate the blockade of Iran in the Strait of Hormuz. The president also proposed imposing a 20 percent tax on cargo passing through the vital waterway. Oil's rise was followed by bond yields, with the 10-year Treasury bond yield rising above 4.6%. Hawkish comments from a Fed official also contributed to the rise in bond yields and pressure on stocks. Federal Reserve Governor Christopher Waller warned Monday that the Fed may need to raise interest rates if inflation continues to rise. "If we get another hot reading on core inflation this week, the FOMC will need to consider tightening monetary policy in the near term," Waller said in a speech before the New York Association for Business Economics. he said. The Federal Open Market Committee is the central bank's policymaking group. According to the CME FedWatch tool, it is almost a coin toss that the Fed will increase interest rates at its meeting on July 29. This is a significant change from a week ago, when the chance of an increase was around 25%. A month ago, this rate was only 8%. Although we have long been of the opinion that the Fed will not raise interest rates this year, we acknowledge that the claim to raise interest rates has become more difficult due to the slow flow of crude oil through the Strait of Hormuz. Corning's price target was raised by analysts at Citi to $240 per share from $225. Analysts said they remain "constructive" on the shares due to continued strength in optical connectivity due to the build-out of AI data center infrastructure. Citi also noted that opportunities in advanced glass packaging substrates for next-generation semiconductor applications, as well as its solar component business, are growing rapidly and negatively impacting earnings. Like many other companies in the AI infrastructure trade, Corning's shares have fallen sharply from their highs in June. The stock briefly rose above $260 but retreated nearly 30% in July. The recent performance is a good example of why parsing into parabolic moves is disciplined. We reduced the position three times in June at progressively higher prices (about $200, $222, and $260), and the stock is now trading well below those levels. In fact, it's back to its first innings following the company's announcement of its major multi-year partnership with Nvidia. Increasing volatility in the group prevents us from buying back the shares we sell. In the absence of new, positive developments, approaching $162, which erases all of Nvidia's deal gains, could encourage us to buy more shares. What could possibly get the AI theme back on track? Earnings season. More specifically, capital spending guidance from Alphabet, Amazon, Microsoft and Meta Platforms. If all four of our hyperscalers raise their capex guidance for this year and continue to signal investment growth through 2027, this would strengthen confidence in the resilience of the AI investment cycle. But a renewed focus on capital discipline will complicate trading. There are no major earnings reports after the closing bell on Monday. Tuesday is the big banking day, when the Goldman Sachs and Wells Fargo clubs, as well as JPMorgan, Citigroup and Bank of America, will report before the open. Wells Fargo's earnings are a test of whether the stock's standing in our portfolio remains in jeopardy. Tuesday morning's economic calendar includes the first of this week's two inflation reports, the June consumer price index. Economists surveyed by FactSet expect an annual increase of 3.8% and a monthly decrease of 0.1%. A stronger-than-expected inflation report could increase the likelihood of additional Fed tightening, consistent with Waller's comments. (See here for a complete list of stocks in Jim Cramer's Charitable Trust.) When you subscribe to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trading alert before buying or selling a stock in his charitable foundation's portfolio. If Jim talked about a stock on CNBC TV, he waits 72 hours after issuing the trading alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, TOGETHER WITH THE DISCLAIMERS. NO CIVIL OBLIGATIONS OR DUTIES EXIST OR SHALL BE RESULTING FROM YOUR RECEIVING ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULT OR PROFIT GUARANTEE IS MADE.