Our Strategy Behind the Recent AI Stock Rally

AI stocks surged this week as investors reacted to a weaker‑than‑expected July jobs report and strong corporate earnings. Major indices posted a second consecutive week of gains, with the Dow Jones Industrial Average and the S & P 500 reaching record highs. The Dow rose 3% for the week and closed at a record on Wednesday, while the S & P 500 and the Nasdaq Composite gained 3.6% and 5.2%, respectively. The Nasdaq remains 1.5% below its June 2 all‑time peak. The jobs data eased concerns that the Federal Reserve might raise rates in September, prompting a 55% probability that the Fed will hold rates steady, up from 45% the previous day according to the CME FedWatch tool.

Semiconductor and data‑center stocks, which had been under pressure in July, rebounded strongly. The earlier collapse of the Situational Awareness hedge fund had triggered broad selling across AI‑related names, but that forced liquidation appears to be over. With the overhang cleared, earnings and fundamentals are once again driving price movements. Our portfolio reflected the rebound: Corning emerged as the top performer, and the iShares Semiconductor ETF (SOXX) jumped 7.6%, outpacing the Dow’s 3% gain. Although guidance from SanDisk and Western Digital trimmed some gains on Thursday, we view this as company‑specific rather than a sign of weakening AI demand.

We increased our positions in Micron Technology, whose shares have recovered from July 30 lows but remain about 28% below the June 25 record of $1,213.56. SpaceX’s shares fell 13% on Wednesday after reporting strong revenue and earnings while announcing a $18.4 billion capital‑expenditure budget, well above expectations. The stock later rallied 23% after the first IPO lock‑up expiration. Elon Musk confirmed that SpaceX will build its AI infrastructure exclusively on Nvidia, reinforcing Nvidia’s position as the leading supplier of AI computing hardware; Nvidia’s shares rose more than 11% for the week, its best performance in over a year. AMD slipped 7% despite solid quarterly results, but we believe Nvidia, AMD and Intel can all benefit from the ongoing AI build‑out.

In our portfolio we continued to reposition toward high‑conviction ideas. We added to our Corning stake after upgrading the stock, and we increased our Intel exposure on Wednesday, taking advantage of the recent pullback. We used proceeds from the Dover sale to boost our Johnson & Johnson holding, viewing the recent dip as an overreaction to an accounting adjustment. Honeywell Aerospace was exited after its guidance was lowered due to supply‑chain execution issues, and we trimmed positions in CrowdStrike and Palo Alto Networks after they reached record highs and approached our price targets, locking in gains of roughly 146% and 172%, respectively.

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