The AI rotation stole the spotlight from a strong start to earnings season

AI trading dominated the market once again this week, marking an impressive start to the second-quarter earnings season. Colder-than-expected June consumer and producer price reports offered encouraging signs that inflation is continuing to decline, while profits from the country's largest banks bolstered the strength of capital markets. At the same time, investors kept their eyes on the Middle East as the US and Iran launched renewed air strikes and uncertainty around the Strait of Hormuz increased. West Texas Intermediate crude rose 15.5% last week to over $82 a barrel, while international benchmark Brent crude rose nearly 16% to just over $88. While these were major moves in a week, they were well rounded off at the height of the war, as hopes for diplomacy remained. We will have to watch future economic reports to see whether the new increase in oil prices increases inflation. But last week, beneath the surface, there was another sharp turn in the AI trade. Investors have turned to hyperscalers from many semiconductor names. Friday's market decline caused the S&P 500 to lose about 1.6% for the week, while the tech-heavy Nasdaq fared even worse, losing almost 3% last week. Here's a closer look at what's driving trading action. IBM warning ripples IBM shocked Wall Street on Tuesday by pre-announcing disappointing second-quarter results, causing the stock to lose 25% for its worst day on record. CEO Arvind Krishna expressed leniency towards customers increasingly directing their technology budgets towards cybersecurity, hardware and AI tokens. That left less money for traditional software and consulting projects, pushing many big deals into future quarters. Jim did not recommend buying the big dip. No real recovery occurred. IBM shares lost more than 26% for the week. The market quickly rewarded those who took advantage of this shift in corporate spending. Club stocks CrowdStrike and Palo Alto Networks gained about 12% and 7%, respectively, on Tuesday; Hardware and memory names like Dell and Micron followed suit. Earlier this year, cybersecurity stocks came under pressure due to concerns that artificial intelligence would disrupt the industry. IBM's comment reinforced our view that the opposite is happening: AI is driving demand for cybersecurity as companies work to secure increasingly complex AI infrastructure and applications. Palo Alto and CrowdStrike were our two top performers in the Club portfolio this week. Elsewhere, Club name Salesforce fell 2% on Tuesday, and fellow software-as-a-service (SaaS) name ServiceNow lost nearly 6% on news that more traditional software spending is increasingly being pushed aside. Although Salesforce managed to gain around 4.6% for the week, the stock is still down 35.5% year-to-date. Great AI rotation Investors spent the week shifting money from AI developers to buyers. Sales began Monday, following SK Hynix's blockbuster debut in the U.S. on Friday, July 10. The South Korean memory giant fell 9%, sparking a broad selloff in the AI infrastructure trade. To start the week, Sandisk was down 12%, Intel was down 6% and AMD was down 4%. The pressure continued throughout the week and eased briefly on Tuesday following IBM's preliminary announcement highlighting where enterprise tech dollars were flowing. Even bullish updates from AI infrastructure leaders have failed to reverse this trend. ASML raised its full-year sales outlook for the second time this year on Wednesday, and Taiwan Semiconductor raised its capital spending forecast on Thursday. But investors largely ignored these demand signals. Instead, the focus has been on the rising cost of artificial intelligence and whether semiconductor stocks are going up too fast, too fast. Adding to the cautious sentiment, Chinese startup Moonshot AI unveiled a new model on Friday that it says narrows the gap with leading U.S. offerings. For the week, the VanEck Semiconductor ETF (SMH) fell nearly 9%, extending its recent decline with its third weekly decline in the past four weeks. Much of this capital flowed back to hyperscalers. Alphabet gained 3% on Wednesday after Warren Buffett told CNBC's Becky Quick that he had personally approved Berkshire Hathaway's investment in Club shares. The statement eased concerns that Buffett might be concerned about Alphabet's heavy AI spending and related debt financing. The stock later gave up those gains after Bloomberg reported that Google was months behind in delivering its latest Gemini AI model. Alphabet shares lost nearly 3% last week. Apple has been one of the Club's biggest winners this week, climbing to record highs after receiving approval to bring Apple Intelligence to China. CNBC confirmed that the company will use Alibaba's AI models to support features of Chinese devices. This release gives consumers another reason to upgrade since older iPhone models don't have the processing power to run Apple Intelligence. On Friday, Apple regained its title as the world's most valuable company in terms of market value, surpassing Nvidia, albeit for a short time. Despite a decline in most of Big Tech towards the end of the week, Apple, Amazon and Microsoft finished the week on the rise. Jim said this week's rotation doesn't change the AI story. Unlike previous boom-and-bust semiconductor cycles, today's AI landscape continues to be defined by supply constraints, long-term customer commitments, and relentless demand for computing. We view the pullback as largely a function of profit-taking after many AI infrastructure names went parabolic following massive gains this year. That's why the Club recently exited its remaining Lever position on July 8, securing a gain of roughly 75% and selling 150 shares of Corning in June at prices well above current levels. On Thursday, during our July Monthly Meeting for Club members, Jim said he would have bought back about 25 of those shares if he had not been restricted. Wall Street's biggest banks capitulated Banks are off to a strong start to the second-quarter earnings season. Five of the six major U.S. banks reported on Tuesday. The club, which owns Goldman Sachs, led the group with stunning results driven by strengths in investment banking and trading. Jim described it as the group's best quarter and said the firm's business appeared more resilient than in previous deal cycles. Shares closed at a record high on Tuesday and finished the week up nearly 1%. Wells Fargo, as the club is called, beat earnings and revenue expectations as CEO Charlie Scharf continued to shift the bank beyond its traditional lending roots into insurance and M&A advisory. While the quarter is strong enough to keep us invested, we want to see more consistency from the management team before making any moves to upgrade the stock or raise our price target. Shares initially fell 2.7% following earnings as investors focused on weak net interest income, but recovered in subsequent sessions and finished the week up 0.4%. Looking ahead, Club stock Capital One reports earnings after Tuesday's close. We'll be watching to see if the company can generate its first quarterly revenue and begin to show the benefits of the Discover acquisition. For the week, Capital One was up more than 3%. (See here for a complete list of stocks in Jim Cramer's Charitable Trust.) 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