“Time in the market beats timing the market.”
-Ken Fisher
Here’s what you need to know this week:
· Stocks fall on AI and interest rate anxieties
· Are AI companies making too much money?
Slowdown
Stocks retreated from their recent highs amid a handful of stressors. Thursday’s Personal Consumption Expenditures (PCE) report for the month of May showed monthly inflation at 0.4% and annualized inflation at 4.1%[1]:
While these numbers were in line with Wall Street expectations, they illustrate the Iran war’s increasing impact on inflation, which in turn raises the odds of interest rate hikes later this year. Negotiations with Iran remain ongoing but there have been no major breakthroughs and both sides continue to trade airstrikes.
Spending Spree
The other stressor last week was new concerns over the cost of artificial intelligence. Micron Technology (ticker: MU) has been one of the largest beneficiaries of the AI trade, gaining an eyewatering 807% over the last year. Micron is now valued at $1.28 trillion, making it one of the most valuable companies in the world. Micron reported quarterly earnings last Wednesday and the report was a blockbuster: $41.46 billion in revenue, shattering the $35.8 billion predicted by analysts, and projected revenue of $50 billion in Q4 2026. Really think about that number: fiftyBILLION dollarsof revenue in THREE months.
These numbers are obviously wonderful for Micron shareholders. Other semiconductor manufacturers such as NVIDIA, SanDisk, Samsung and Western Digital have enjoyed similar meteoric rises. Over the last two years the semis and AI companies have been a huge tailwind to the markets but some are beginning to question if the price is too great. After all, Micron’s $41.46 billion in revenue had to come from somewhere, right?
In short, Micron (and the other semis companies) are getting their revenue from everyone else. Tech companies like Apple and Microsoft, banks like JP Morgan, classic consumer companies like Walmart, McDonalds and Coca-Cola are all piling money into AI investments to get a leg up on their competitors. The tech “hyperscalers” have continually upped the ante on each other, spending billions of dollars every quarter:
While AI has advanced rapidly, corporate spending on AI development has outpaced revenue. The “hyperscaler” tech giants have collectively spent roughly $1.4 trillion on AI infrastructure but have only recovered about half that spend in revenue, and are planning even larger outlays in the next few years[3].
Is all this spend worth it? The leadership at these companies certainly thinks so. While investors have been on board for most of the last two years, the magnitude of this spending cannot be ignored. Market participants have increasingly sold their positions in the AI spenders to buy stock in the AI producers, and the net result is stock price declines for the major AI spenders. MAGS, an ETF that tracks the "Magnificent Seven" stocks (Apple, Amazon, Alphabet, Meta, Microsoft, NVIDIA, Tesla), has declined by more than 13% in the last two months.
It appears that as more money flows to AI development companies from everyone else, investor dollars are doing the same. While it’s possible that these AI companies are experiencing a localized bubble, they have the revenue to back it up. Furthermore, the drawdown in the AI spenders indicates that the broader market is not in a bubble. Markets can always move lower, but the apparent investor skepticism on all this AI spend is a sign of a healthy market, not a mania.
What Else
· Washington D.C. is hosting the Great American State Fair to celebrate the USA’s 250th birthday this week
· A duo of powerful earthquakes struck Venezuela last Thursday, leaving more than 1,000 casualties and tens of thousands of people still missing
· A historic heat wave has struck France and southern Europe, driving temperatures above 100 degrees Fahrenheit
· Ukraine struck two more Russian oil refineries, continuing to hamper Russia’s energy grid
· Team USA plays Bosnia & Herzegovina in the World Cup Round of 32 tonight at 7:00 PM CT on FOX
What We’re Reading
A two-week-long search for an escapee in the Texas Hill Country came to a close last Friday as helicopters located the culprit: Gracie the Giraffe. Gracie escaped a private game reserve and roamed the land west of San Antonio before being discovered “fat and happy” in an uninhabited area with no public access roughly four miles from her ranch. Click below to read more about Gracie’s daring escape:
What’s Happening Downtown
The OKC Philharmonic is hosting their annual Fourth of July “Red, White & Boom!” celebration this Friday, July 3rd at Scissortail Park. This event is free to attend and features a full concert from the OKC Philharmonic at the Love’s Pavilion before culminating with a thrilling fireworks display. The show begins at 8:30 PM, click below to learn more and find a link for parking instructions:
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Written by: Kane Ogle, CFP®
Steve Beck, Kane Ogle, CFP®, Amber Eduvigen, CFP®, Cale Olbert, CFP®, Brett Valentine, CFP®, Brandon Ingerson, Bill Daniel, Sam Postich, Jenni Hess, Hannah Hartman