The Contradiction At The Heart Of The Market

Let’s start with some context. The current bull market is being driven by optimism about Artificial Intelligence (AI). The premise is that AI will radically improve economic productivity resulting in a massive economic boom.

It began on the afternoon of May 24, 2023 when Nvidia (NVDA) announced surprisingly good 2QFY24 revenue guidance of $11 billion. NVDA stock rocketed higher the following day and the market hasn’t looked back since. NVDA is +541% and the S&P as a whole +79% since that date.

From May 25, 2023 through October 29, 2025, The Magnificent 7 led the bull market as you can see in the first chart above. But since then, they are actually in a correction. What has held the market up the past eight months are the semiconductor stocks as you can see in the second chart above.

The push and pull this has created was evident in Thursday’s session. Micron (MU) reported a blowout quarter causing its stock to go up 16%. Apple (AAPL), on the other hand, said that it will have to raise prices due to the price of the memory chips being sold by MU and others causing its stock to drop 6%.

The hyperscalers are fueling the semiconductors stocks’ profit and stock price increases via their capital spending to build out AI. However, up to this point they are not seeing much of a return on their investment. That can be seen in the chart above of the forecast drop in their free cash flow (FCF) going forward.

This is the contradiction at the heart of the market: Unless AI starts to show some real returns, the hyperscalers will scale back their capital spending on semiconductors, undercutting the very stocks underpinning the market. To make an analogy, the men who came to California to mine for gold in 1848 were only going to spend money on picks and shovels as long as they were finding gold.

If (when?) the hyperscalers start to scale back or even slow the increase of their capital spending, the semiconductor stocks will sell off, removing the remaining pillar supporting the market. Apple’s announcement that it will be raising prices is the first sign that demand for semiconductors at current prices is unsustainable. We may reach an inflection point sooner rather than later.

Also see: Charlie Bilello’s Tweet from this morning (Thursday June 25, 10:18am PST) and Steve Sosnick’s summary of today’s session “Makers and Takers”.