The stock market’s performance in the second quarter was historic on many levels. Major US indexes posted their best returns since 2020. Semiconductors had their best quarter ever
But underneath the surface of the seemingly robust AI trade lurks a troubling divergence — one that still has Wall Street strategists on edge
As chipmakers have soared, hyperscalers have taken a back seat. Allegedly elite Magnificent 7 stocks have been surprisingly weak
Forget the Mag 7 — they’ve been the Lag 7. The underperformance in recent months is particularly glaring when you chart it:
Investors have made it clear that they currently prefer the companies that actually make the chips needed to power the AI trade. The exorbitant capex spending from hyperscalers, meanwhile, has gone out of fashion as traders increasingly wonder if the investments will pay off. It’s a classic push and pull that’s long defined the AI trade
Whether hyperscalers can close the gap is ultimately the question that will dictate how the entire AI trade fares through the end of 2026
Major equity strategists across Wall Street are hopeful. The idea of a hyperscaler comeback keeps coming up in mid-year reviews and interview discussions
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Mike Wilson, Morgan Stanley’s CIO and chief US equity strategist, is the most recent notable Wall Streeter to throw his weight behind the idea. He wrote in a new client note that he expects a rotation back towards hyperscalers, away from chipmakers
“Semiconductor stocks are going to correct,” he told Bloomberg TV, adding: “You can’t have this divergence continue. It’s not sustainable.”
Meanwhile, Ben Snider — the chief US equity strategist at Goldman Sachs — told BI recently that resilient spending, combined with valuations that now look attractive, make hyperscalers a great investing play
To round out the Wall Street believers, JPMorgan recently laid out how the semi-vs.-hyperscaler divergence could end up shrinking. Under this scenario, hyperscalers improve monetization and start generating revenue and earnings that allow it to capture a bigger share of the AI pie
This all sounds good. But is it easier said than done?
The next Mag 7 earnings season in a couple of weeks will offer the next critical litmus test for how investors feel about AI spending — and whether tangible results are coming quickly enough
