What's driving the rally
The whole market runs on earnings, and earnings trace straight back to AI. AI depends on capex spending, and capex spending depends on AI making money. Over the past six weeks, the damage and worry sat entirely inside tech. Fears about whether AI can pay off and about heavy capex spending pulled the semiconductor index down 25%, along with the NASDAQ composite.
Last week healed most of that worry. The key data point was proof that AI makes money. Azure and AWS did more than beat estimates, they showed faster growth. Co-pilot adoption sped up too. After that, both the NASDAQ composite and the NASDAQ 100 pushed straight through their 50-day simple moving averages, a sign that confidence, even some risk-taking energy, is coming back into tech. The rally has run four or five days and is impressive, so the market may be a little overbought in the near term.
The ISM manufacturing reading helped as well. The link is not perfect, but stocks tend to do better when that reading sits above the line that separates growth from decline. Earlier this week it hit a 4-year high.
Seven years compressed into three
A simple rule in wealth management is the rule of 72: divide 72 by your return and you get the years it takes to double your money. The S&P 500 has returned about 10% a year over its history, so doubling takes a bit over seven years. Since 2023, returns have run above 20% a year. That compresses a doubling of the S&P 500 into just three and a half years.
What makes it striking is what the market climbed through. It started in a 2023 banking crisis, then came tariffs last year, then the Iran war this year. Through all of it, the index still doubled in a very short stretch.
The 30-year yield as a warning sign
The long end of the yield curve matters because it moves opposite to the risk premium and it steers where money flows. The 30-year Treasury yield hit a new cycle high near 5.28%, sitting just under 5.2%, and has since eased to somewhere around 5.19% to 5.21%.
A new cycle high is important, but the speed of the move matters more. If the 30-year drifts up a little every couple of weeks, the market can handle it fine. A fast, sharp jump driven by some event or catalyst is a different story. That could come from an unwind of the yen carry trade and selling of Treasuries, or from China selling Treasuries. It also reflects confidence in the government's ability to fund and service its debt. The velocity of the move is the thing to watch alongside the new highs.
Fixed income positioning
The short and long ends of the curve now face very different pressures. The long end is being pushed higher by fiscal problems at home and abroad, and by capex spending, since hyperscalers are now issuing their own debt and adding to that upward pressure.
That leads to a less favorable view on fixed income as a whole asset class, and a less favorable view on a total portfolio across equities, commodities, and cash. Inside fixed income, value remains in credit-oriented areas: investment grade corporates, high yield corporates, and preferreds. There are nuances around duration and how long you stay invested. The fundamentals there stay very positive, and earnings season backs that up.
Memory names reporting
SanDisk, Western Digital, and others in memory report later tonight. A couple of weeks ago, sentiment around chips, capex, and AI spending was so bad that even good news got sold. Samsung and SK Hynix beat their numbers, though SK Hynix had a margin issue, and there was volatility in Korea's market. The selling started with Alphabet's capex guide.
Now that sentiment has healed so much that the old pattern may flip. Expectations point to SanDisk beating and raising. There are no real problems with supply and demand right now, with new supply not coming online until around 2028. If they beat and raise, a positive reaction is likely, because this is not the same market it was two, three, or four weeks ago. A lot of the fear has already cleared, making it a good time to be reporting earnings.
