Is the AI spending boom running out of steam?
We’re about to find out.
The next two weeks will be pivotal for the market, as six out of the “Magnificent Seven” will report quarterly earnings. More than anything else, Wall Street will be watching what they say about AI capital spending.
Their guidance – and Wall Street’s reaction to it – will tell us a lot about where stocks head next.
Alphabet (GOOGL) and Tesla (TSLA) kick things off on Wednesday, followed next week by Microsoft (MSFT), Meta Platforms (META), Apple (AAPL) and Amazon (AMZN).
Combined, these six companies account for roughly a quarter of the S&P 500 Index’s total market cap. I’ve argued all year AI spending has become the market’s primary driver.
In many ways, the tech sector effectively is the stock market. As goes tech, so goes the S&P 500.
That relationship was on full display this past week. The State Street Technology Select Sector ETF (XLK) fell 5.5%, pulling down the broader market with it.
For the second straight week, energy was the top performer. The State Street Energy Select Sector ETF (XLE) was up a commanding 4.7% last week, absolutely crushing every other sector.
The obvious explanation is the war in Iran. The U.S. has launched airstrikes for nine consecutive days and counting in an effort to force Iran to reopen the Strait of Hormuz.
The longer the standoff lasts, the greater the risk of a 1970s-style energy shock – and energy stocks are beginning to price in that possibility.
But is that the whole story?
Or is something bigger driving this rotation into energy?
More importantly, should investors be buying this rally?
Let’s see what my system has to say.
Key Insights:
- Energy enjoyed another solid week, driven by the Iran war escalation.
- Tech stocks took an absolute beating last week on fears of a capital spending bubble.
- Six of the Mag 7 report over the next two weeks, so we should expect volatility.
Two in a Row for Energy
Tensions are escalating in the Persian Gulf…
Over the weekend, three U.S. soldiers were killed in action, bringing the total to 17.
With every casualty, it gets harder and harder for the U.S. to simply walk away, increasing the probability that the conflict slides into a full-blown ground war. Or worse, another “forever war.”
Is that likely?
I couldn’t tell you.
But it’s clear that the possibility, however remote it might be, has Wall Street on edge.
So, how should we trade this?
Last week, I wrote:
I would not advise trading energy stocks based on war headlines.
Unless you somehow have access to a ring of spies or top-secret CIA intelligence briefings, you’re just reacting to noise. I’ve never seen that work out… for any investor… ever.
Does that mean we should ignore last week’s bump in energy stocks?
Absolutely not.
Energy stocks were rising long before the Iran war broke out, and the sector has consistently had a high percentage of “Bullish” rated stocks on my Green Zone Power Ratings system.
I see a lot of opportunity in the sector. But the key is to keep your eye on the ball and ignore the constant stream of war-related noise.
I’d reiterate those words today.
I am extremely bullish on energy stocks. But it has very little to do with the Iran war. I’m bullish because my system has identified the sector as being highly likely to outperform. It really is that simple.
As I do every week, I ran my customary screen of the biggest movers in the sector that were still within 10% of their 52-week highs last week. The idea is to look for solid, market-leading stocks that are getting stronger.
Here’s what I came up with:
The list has many holdovers from last week. And today, as was the case last week, every stock on this list rates as “Bullish” or “Strong Bullish” on my Green Zone Power Ratings system.
American pipeline and infrastructure plays are in prime position today. The Iran war is a bullish catalyst for the sector. But even if the war is resolved tomorrow, American energy infrastructure stocks likely have a lot further to run.
Take Valero Energy (VLO) for example. We own Valero in Green Zone Fortunes. I recommended the stock in November 2024, and it’s already up 133%.
This best-in-class refiner rates as at least “Bullish” on every factor but size… and as “Strong Bullish” on four of the factors.
Overall, the U.S. is in a unique position as a net energy exporter. And unlike some of our trading partners in Europe and Asia, there is little chance of American pumps literally running dry.
Buy the Dip in Tech?
Tech’s woes are easy enough to explain.
Wall Street is starting to get queasy about the exorbitant sums being spent on chips and data center construction… particularly given the news last week that China’s Moonshot AI just released a model that is reportedly almost as good as the top models by OpenAI and Anthropic at a fraction of the cost.
We saw this play out during the internet boom of the 1990s.
The internet ended up being more revolutionary than even the most wide-eyed permabulls could have imagined, and yet we still saw a crushing bear market in tech stocks because the infrastructure was overbuilt and spending was unsustainable.
So, is the AI boom nearing its end?
Probably not. Until proven otherwise, I’m going to view the current market turbulence as a normal, healthy correction. I’m still bullish on AI, though I expect the boom to pivot away from chatbots and into physical-world applications like automation and robotics.
I’ll be covering this in the July issue of Green Zone Fortunes and recommending one of my favorite stocks to play it.
But in the meantime, does the sell-off in tech create any buying opportunities for us?
Let’s see what my system says.
I ran my customary screen of the sector’s biggest losers for the week that are still trading within 10% of their 52-week lows. The idea is to find beaten-down gems that look poised to recover.
After the massive rally this year, finding enough tech stocks within 10% of their 52-week low to fill out a list was impossible, so I loosened that criteria. Here’s what I came up with:
There’s a lot of red here…
Of the tech stocks that got slammed the hardest last week, not a single one rates as “Bullish” on my Green Zone Power Ratings system. My system is telling us we should steer clear for now.
But surely there are opportunities, right?
Tomorrow, I’ll do a deeper dive into the tech sector to find out.
To good profits,
Adam O’Dell
Editor, What My System Says Today
