Transcript

Amada Agati:  

If the AI trade feels unstoppable right now, that’s usually the moment to start asking tougher questions. From December 31st to March 30th, the SOX was up just 1%. From March 30th to June 18th, it was up 100%. That’s not just strong performance. That’s a surge in a very short period of time.

On a technical basis, the SOX reached its most overbought level in three years, with RSI pushing to 79. That doesn’t tell you when momentum fades, but it does tell you expectations and positioning are stretched. So the question at these levels is simple: are investors targeting fundamentals, or chasing momentum?

This rally wasn’t random. You had a powerful alignment: geopolitical tension in the Middle East, an earnings season reinforcing AI demand, and continued urgency around semiconductor supply and compute. It created the perfect setup for semis to surge. But in a move like this, you have to ask: how much optimism got pulled forward?

At first glance, it looks like “Tech” is leading. But one level deeper, the story is far more concentrated. Year-to-date, the SOX is up roughly 90%, while the S&P 500 Software index is down about 20%. Same sector, very different reality. So yes, tech is leading, but leadership is narrow. It’s being driven by one industry: semiconductors.

Many of these companies operate in what’s traditionally been the more commodity end of the chip spectrum. Demand is clearly strong, driven by hyperscaler capex, but now the pricing function is doing the heavy lifting. That’s not typical. And if the capex story shifts, this kind of momentum can unwind quickly.

But this is where the narrative gets more interesting. Recent earnings, especially from Micron, one of the world’s largest producers of memory chips, offer a reality check. Yes, momentum is elevated, but the underlying demand story hasn’t cracked. Micron made that clear.

Demand for high-bandwidth memory, the kind that actually powers AI, is still running well ahead of supply. In fact, they can only meet about half of current demand, and they don’t yet see when supply catches up. Customers aren’t pulling back. They’re locking in supply years in advance with multi-billion dollar commitments.

That’s not late-cycle behavior. That’s sustained, infrastructure-driven demand. So while this rally may have pulled forward returns, the build-out behind it is still very much in motion. If Nvidia tells you how fast AI is scaling, Micron tells you whether it can keep scaling. And right now, Micron's latest earnings report is saying it can.

Zoom out to the broader market and you see a similar dynamic. Since late March, the S&P 500 is up about 16%, while the equal-weight index, ex-Mag 7, is up closer to 22%. So breadth has improved, just as we expected. But leadership, especially in tech, remains concentrated. This isn’t a broad tech rally. It’s a semiconductor surge wearing a generic tech label.

Now to valuations. The Mag 7 are trading around 28x forward earnings, compared to roughly 20x for the rest of the S&P 500. A premium like that isn’t unusual. These are higher-quality businesses and they deserve it. But expectations are elevated, and when expectations are elevated, the margin for error narrows. Because great companies can still become expensive stocks.

At the center of it all is hyperscaler capex. Big Tech is still investing aggressively in data centers, compute, and AI infrastructure. That’s been the fuel behind this rally. But how it’s being funded is starting to change. We’re seeing a shift from free cash flow to debt issuance, and in some cases, equity. That matters. The cost of staying competitive in AI is rising.

So where does that leave us? The AI story is intact, but the setup is more demanding. This doesn’t end the cycle, it changes the phase. The last few months were about momentum. The next phase is about discipline.

If this rally has been driven by one industry, one theme, and a narrow set of winners, the next move depends on two things: do fundamentals broaden, and do expectations reset?

Because from here, Adding Alpha gets more selective.