Published July 31, 2026
A week or so ago, Michael Cembalest, an executive in JP Morgan’s wealth management group, issued a thought-provoking report on the parallels between the current AI-fueled boom and the late-90s internet mania. We thought you might find it interesting.
“The Summer I Turned Pretty…cautious on US equity market technicals
A couple of years ago, many investors were in a frenzy due to the allegedly infallible signal of inverted yield curves leading to US recession. We argued that a recession was unlikely, and the loudest adherents of recession faded away as the economy continued to grow. In other words, technical don’t always work. That said, I’m concerned about the technicals below due to the role AI has played in growth, capital spending and profits.
The worrisome part of a boom cycle is when companies closest to final demand roll over, even as capital spending beneficiaries of the cycle keep on thriving. In late 1999 and early 2000, communications services companies rolled over (Verizon, AT&T, WorldCom, Bell South, GTE, Sprint) even as communications equipment company stocks (Cisco, Nokia, Nortel, Qualcomm, Motorola) kept on rising. The obvious parallel to today is soaring stock prices and free cash flow for semiconductor companies (the caboose) even as the front end of the train (hyperscalers) are seeing stock prices stagnate and free cash flow plummet. All of these trends are shown in the charts below.
More technicals to watch. As shown in the first chart, tech sector earnings typically track reasonably well with sectors that rely heavily on technology (finance, manufacturing, media, transport and healthcare) and pay for all that equipment and software. The recent divergence begs the question: who is going to pay for the AI boom if the tech sector’s primary customers are not making more money as well? On the right, if we look at all four-year periods for S&P 500 performance since 1928, the current one (starting in 2022) is way into the top decile. The bottom line: the good times are rolling, but for how long?”
In addition to Mr. Cembalest’s concerns above, the Wall Street Journal made the following observations regarding the stock market’s AI drivers:
“The stock market is particularly vulnerable now because, depending on how you measure it, AI-related companies made up an unprecedented 40% or more of the S&P 500’s value at the beginning of July. They’re also a massive part of South Korea’s and Taiwan’s exchanges— vital cogs in the AI supply chain.
Investors’ all-in bet on American AI was underpinned by two rosy assumptions.
One was that Washington could maintain an insurmountable technological lead over foreigners by restricting tech exports. The other was that massive corporate investment in data centers would be rewarded with commensurate profits as those companies dominated a new industrial age.
Both of those are looking wobbly at the same time.”
Market Update
A big week for investors with more than half of the Mag 7 companies reporting earnings and a Fed meeting with new Chairman Warsh to influence interest rates. Monday offered a mixed result with the on-again, off-again Iran peace talks back on to send oil prices scurrying lower. That helped the S&P 500 and Dow Industrials while the Nasdaq dipped on continued semiconductor weakness. More of the same Tuesday but with greater effect. Another -5% loss in semis pushed the Nasdaq down while strong earnings from Coca-Cola, Sherwin-Williams and Boeing sent the Dow Industrials up +1%. It was all undone Wednesday when Fed Chair Warsh’s post-meeting remarks were met with selling in the bond market. That spilled over to stocks sending all the indexes down almost -2%. Strong results from Microsoft broke the bearish spell for Thursday’s session. Oversold semiconductors bounced back strongly to leave the Nasdaq higher by almost +3% while the broader market ended +1.7%. Interest rates jumped sharply Thursday as bond investors continued to react negatively to the Fed meeting output. The leap in rates continued Friday pressuring interest-sensitive sectors. But a powerful earnings report from Amazon kept money returning to the oversold AI trade. The indexes rose +0.6%.
The Wednesday Fed Day plunge proved to be an outlier this week as the S&P 500 held its ground the other four days to end the week higher by +1.10%. The Nasdaq 100 (QQQ) came back from a sharply down week to a positive +0.55%. Small cap stocks were flat on the week. The 30-year Treasury yield surged above 5% for the first time since 2007.
Warm wishes and until next week.