The AI trade is officially in a bear market.
Wait… what?
That can’t be right.
Can it?
Believe it or not, it’s true.
If we use the Philadelphia Semiconductor Index as a proxy for AI infrastructure spending, then the answer is technically yes.
The iShares Semiconductor ETF (SOXX), which tracks the index, was 20% below its recent high as of Friday – the textbook definition of a bear market.
You can argue whether semiconductors are the perfect proxy for AI spending or whether the broader AI infrastructure boom remains intact. That’s a fair debate.
But the takeaway here is clear.
Investors are reassessing one of the market’s biggest winning trades. AI-related hardware, especially chipmakers, is no longer getting the benefit of the doubt.
Why?
Because Wall Street is questioning whether this unprecedented spending spree is sustainable… and whether the hyperscalers writing the checks are actually getting a decent return on their investment.
We’re not going to have to wait long for answers.
Google parent Alphabet (GOOGL) reports quarterly earnings tomorrow. The other three major hyperscalers – Microsoft (MSFT), Meta Platforms (META) and Amazon (AMZN) – all report next week.
Every Wall Street analyst will be hanging on every word, looking for any insights about the future of AI spending.
Great!
Let them play detective.
That’s not how I operate.
My investment thesis doesn’t hinge on management comments buried in the notes of the quarterly earnings report. That’s a suckers’ game.
I focus on durable megatrends… and I follow my system.
So, what does my system have to say about the technology sector?
Let’s do a sector X-ray to find out.
Technology Sector X-Ray
We’ll start with a breakdown of the sector’s Green Zone Power Ratings.
Immediately, you can see that the tech sector is a minefield.
Of the 73 stocks in my coverage universe, only eight rate as “Bullish,” meaning a score of 60 or higher out of 100. (For those new to my system, “Bullish” rated stocks outperform the S&P 500 Index by double on average over the following year.)
Another 27 rate as “Neutral,” meaning my system would expect them to perform more or less in line with the broader market. And a full majority, at 38, rate as “Bearish,” meaning my system would expect them to underperform the market.
I can’t tell you for sure if the AI infrastructure boom is collapsing or simply taking a breather after an extraordinary run over the past few years.
But I can tell you that my system is warning us to be cautious here. This isn’t a time to indiscriminately buy the dip. To the extent we invest in tech, we need to be selective.
That’s exactly how I’m approaching it in my Infinite Momentum Tech Titans portfolio, where every decision is driven by my quantitative system – not headlines or Wall Street narratives.
Now, let’s keep digging to see where technology stocks are showing strength.
Where Does Tech Pick Up Points?
The Green Zone Power Rating system is a composite score based on six primary factors: momentum, size, volatility, value, quality and growth, each of which comprises several sub-factors. (As we are looking at large-cap constituents of the S&P 500, I don’t consider size when doing the sector X-ray.)
Let’s take a look to see where technology stocks pick up points.
The tech sector tends to rate exceptionally well on its quality and growth factors, which is exactly what I would expect. Tech stocks tend to be high-margin, capital-light businesses, making them the very definition of high-quality companies.
Though often cyclical and subject to the whims of the economic cycle, they also tend to be fast growers. Fully 67 out of 73 rate as “Bullish” on quality, and another 51 rate as “Bullish” on growth.
Unfortunately, this high-quality growth comes at a price.
Tech stocks are generally more expensive than non-tech stocks and often more volatile.
Today, only 11 rate as “Bullish” on value and four rate as “Bullish” on volatility. (The more “Bullish” a stock’s volatility score, the less volatile it is.)
The Bullish Few
Let’s take a harder look at the select few technology stocks that my system rates as “Bullish” today.
I listed all eight “Bullish” rated stocks below.
Conspicuously missing from the “Bullish” list are any of the “Magnificent Seven” stocks.
To be fair, four out of the seven are not technically classified as “tech stocks” by S&P. Amazon, Tesla (TSLA), Meta and Alphabet are all included in other sectors.
But among the Mag 7 that do classify as tech – Apple (AAPL), Microsoft and Nvidia (NVDA) – none rate as “Bullish.” Apple and Nvidia both rate as “Neutral,” and Microsoft rates as “Bearish.”
So, if not in the Mag 7, where should we be looking?
According to my system, hardware is still the place to be.
The SOXX may technically be in a bear market, but many of the leading chipmakers and the companies that support them still rate as “Bullish” in my system.
Many of these names will look familiar to my Infinite Momentum subscribers. Micron Technology (MU), Lam Research (LRCX) and Applied Materials (AMAT) are all pieces of the Tech Titans portfolio, and we’re sitting on open gains of 592%, 315% and 176%, respectively.
I’ll be refreshing the portfolio on Friday, of course, as I do every four weeks. Will any of these stocks still be in the portfolio come next week?
That depends entirely on how they rate when we run the model on Friday. We’ll know then whether these three still have gas left in the tank or if it’s time to take our profits and move on.
To good profits,
Adam O’Dell
Editor, What My System Says Today
P.S. I’ve got something important lined up for you tomorrow — Wednesday, July 22 at 1 p.m. ET.
I’m going live with an urgent broadcast… and what I have to share could reshape the way you invest for the second half of the year.
There’s a move I believe every investor should be making with their money right now — before the week is out.
Oh — and I’ll be revealing the name and ticker of what I believe is the single best stock to own in 2026. Completely free.
You’ll also get the chance to ask me anything live during the stream.
I’ll be live tomorrow at 1 p.m. ET right here.
For now, just make sure Wednesday, July 22 at 1 p.m. ET is locked in on your calendar.
