Is the AI Trade Over?

Dear Reader,

This is Dylan Jovine with Behind the Markets.

Happy Tuesday.

Today is Tuesday, July 7th.

This weekend at a barbecue, a buddy of mine who's a member pulled me aside and asked a fair question.

He said, "I noticed you've been selling stuff. Do you think the AI trade is over?"

It's a fair question.

And I thought I could do a better job articulating why we've been locking in gains — especially coming from a guy who preaches patience and sitting on winners.

So I sat down with my Apple Notes and wrote it out.

Here’s what we sold and why.

Last week was a festival of gains.

AMD, 183%.

ASML, 142%.

FormFactor, 150%.

Amkor, we closed half the position at 136%.

Jabil, 62%.

Google, great gains.

ProFrac, 93%.

And others.

I don't want to pretend everything I touch turns to gold — that's nonsense.

But the track record speaks for itself, and last week was a very good week.

So why sell if we're in a bull market?

The Semiconductor Trade Is Crowded Beyond Belief

Here's what I'm seeing.

Semiconductors now represent 20% of the S&P 500.

That is a major historical warning sign.

I read a report last week saying semis are now double the valuation as a percentage of the market compared to dot-com.

Whenever one sector becomes this concentrated in the index, it's not sustainable.

I remember in 2006, banks and mortgage companies made up 20% of the S&P 500 — roughly double their normal weight.

We all know what happened next.

I'm not saying semiconductors are going to zero.

I'm saying the trade is overcrowded, expectations are elevated, and the era of massive earnings surprises in this sector is likely over for now.

A lot of it is baked into the cake.

The time to get into semis was a year ago when we did.

Now everybody's still chasing it.

The AI Cycle Isn't Over. It's Evolving.

Here's the important distinction.

The bull market won't be over until the hyperscalers stop spending the trillion dollars they're committing to CapEx.

That hasn't changed.

But there's a leadership rotation already underway.

And one of the places I think that rotation is heading is defense.

We've talked about this a lot lately.

The autonomous warfare budget is going from $225 million to $55 billion.

That's not a typo.

While everybody's been crowding into semis, the defense sector has been quietly setting up one of the best opportunities I've seen in years.

Equal weight indexes, small caps, domestic cyclicals — they're all gaining traction as that money flows out from the Mag 7 and through the broader economy.

Think about it like a waterfall.

The hyperscalers spend a trillion dollars on chips.

The chip companies push that money out to their suppliers.

The suppliers push it out to theirs.

That's how an economy gets humming.

That's why earnings are broadening out.

Second quarter earnings are on track for 25% growth year over year.

That's a big number.

And it's not coming from semis alone anymore.

Liquidity Is Changing Too

Credit creation is shifting from the Fed to the private sector.

Banking deregulation under Trump is playing a big role in that.

After the financial crisis, banks had to hold enormous amounts of capital.

Now they're being freed up to deploy it more aggressively.

That changes the game.

Where We Are Right Now

We're in a more selective regime.

The bottleneck trade — semiconductors and power — that's no longer sufficient on its own.

Hyperscalers may be bottoming, as Goldman suggested yesterday, and that's where I'm looking now.

And speaking of AI plays I'm watching closely -

There's one company that hasn't even gone public yet.

Nearly $1 trillion in valuation.

$47 billion in revenue.

Apple, Microsoft, NVIDIA, the Pentagon - they all depend on it.

Wall Street raised $30 billion in one private round and locked every door behind them.

But buried in one publicly traded stock is a $135 billion backdoor most investors have never heard of.

I just published my full briefing on it - including the ticker and how to get in before October.

We can wait or we can adapt.

The market has already decided.

One more thing.

I tend not to make public declarations like this until our paid members get served first.

That's why I'm talking about this now, publicly, while we were doing it quietly for paid subscribers over the past three to four weeks.

You take care of the people who take care of you.

That's just how it works.

After 35 years and all these gray hairs, I've earned the right to call us smart money.

Have a wonderful day.

I'll see you tomorrow.

“The Buck Stops Here,”