A Rotation Trade That Keeps Flipping
The tape today shows a rotation trade, and it is flip-flopping from what played out late last week. The weakness back then went beyond memory chip stocks. Semiconductor equipment makers got hit too, and AMD and Intel each fell more than 10% over the first two days of July.
The memory chip names took the hardest blow. Micron, Seagate, Western Digital, and SanDisk all slid into bear market territory, down over 20% from their recent highs after a parabolic run. Now money is rotating back into those same names. The weakness in chips last week ran alongside strength elsewhere: the Dow settled at a record high, the Russell 2000 hit record highs, and there were solid gains across three of the major indices, even though the Russell was a little soft into the end of the week.
That narrative is still playing out. Investors are shifting between sectors rather than dumping the market outright, and that is a healthy setup heading into earnings season, which kicks off later this week or into next week as financials start reporting.
Several forces are lending support. The pause in geopolitical risk helps. Crude oil sitting near $68 a barrel helps. The dollar came off its 13-month highs last week, which added some cushion. The jobs report on Thursday complicates the picture: it came in at 57,000, roughly half of what was anticipated, though the unemployment rate dropped to 4.2%. A weak headline number is not a positive read, and there were downward revisions to the prior two months. FOMC minutes land this week under Kevin Warsh, and they will offer a first look at how these meetings get framed as the Fed steps back from providing as much guidance as it used to.
The Memory Chip Story
Micron sits at the center of the memory trade this morning, with shares higher. The week also brings SK Hynix tapping US markets. A UBS analyst reiterated a price target of 1625 and said the fundamentals remain strong.
The four big memory names that led the sector's parabolic move took a dent last week, and that looks like profit taking combined with the rotation into financials, healthcare, and other areas that had been underappreciated. The companies themselves are pushing hard on supply. Micron is expanding a factory in western Japan, building out in Singapore, and expanding in its home state of Idaho, all in an effort to meet demand. SK Hynix is going public with ADSs this week and is expected to begin trading on Friday. Samsung and SK Hynix are increasing capacity as well.
Here is the tension worth sitting with. Historically, when these companies ramp capacity, it does not end well, because memory has always been a boom-and-bust sector. What changes the math this time is the guidance getting stretched out to 2028, 2029, and even 2030. If demand really is that robust and that durable, the industry can absorb the extra capacity without the usual glut.
Citi added weight to the bullish case with a note on Micron today, opening an upside 90-day catalyst watch and setting a $1,400 price target. Their analysts expect DRAM prices to keep climbing on stronger AI CPU demand. That kind of call helps explain the rotation back into these names, all of which are still in bear market territory after hitting all-time highs only a couple of weeks ago.
Meta's AI Reality Check
Meta shares are higher this morning, shaking off some uncomfortable headlines. According to a Reuters report, the CEO told an internal town hall that the company's AI agent systems have not advanced as quickly as originally anticipated, and the timelines are being pushed out. The restructuring has not been as clean as it could have been, and execution was miscalculated. There are challenges overseas layered on top of that.
Last week was volatile for the stock, which finished up nearly 6%. It rallied on news that Meta may sell some of its cloud space and AI capacity to compete with other players in that arena, and investors liked the idea. Even so, the stock has been languishing and remains down nearly 12% year to date.
The central question is how Meta diversifies away from advertising, where it makes the majority of its money, into other revenue streams. It has the capacity to try, but it lacks the cloud business that rivals can lean on. Broadening its footprint and reducing its heavy reliance on its core ad and search revenue is a reasonable move, especially with 3.6 billion daily active users across its platforms. Investors want to see the AI spend actually monetized, and Meta was one of the first to ramp capex, with plans to push that spending even higher in 2027. For now, this reads as a wait-and-see story while the company figures out how to make the AI trade pay off.
Why Chip Equipment Still Wins
ASML shares are higher off a price target hike, with a positive note from Bernstein. The semiconductor equipment makers, ASML included, took a hit last week on the same profit taking that swept the sector. The longer arc favors them.
When the major tech companies expand their footprints, and when the memory chip makers build out new factories, they need ASML's equipment to do it. The supply-demand imbalance in chips runs across the board: the CPU side, the memory chip side, and the GPU side. On top of that, Google's Alphabet is getting into custom silicon with its TPUs, and Amazon has its Tranium chips. All of that requires more capacity, and building capacity means buying equipment. That is a direct benefit for the semi-equipment makers as they work to meet the demand issues that have dogged the space.
One small note on how the analysts operate: Bernstein set an oddly precise price target of 2623, a break from the round numbers that so often show up on these calls.
