After an AI-shock week, big tech earnings decide what's next

Good morning. Last week on Wall Street was a chip story. Moonshot AI's Kimi K3 shook the idea of an unassailable US lead in AI, the Dow dropped nearly 400 points on Friday, and the S&P 500 lost 1.6% on the week. The semiconductor index sits about 20% below its late-June level, and South Korea's KOSPI fell 6.5%.

The drop hurt more because everyone was leaning the same way. In an institutional survey, 82% of respondents were long semiconductors, a record. That also explains why TSMC and ASML sold off despite good results. Underneath the headline indexes, money has been moving into value, financials and energy, and the equal-weight S&P 500 is near an all-time high.

Inflation worries have not gone away. June consumer prices offered relief, but import prices rose 7.7% from a year earlier, the most since 2022, and some analysts say a roughly 20% jump in oil this month has already undone the June relief. With the US striking Iran for a seventh straight night and ships under attack near Hormuz, fuel costs will stay a worry. That is why the market has not ruled out a Fed hike this year.

So the week ahead belongs to the hyperscalers, the big cloud companies. What matters is less their profit than what they say about future capital spending. If the plans hold, this pullback could end as a simple cooling-off. If they shrink, the chip weakness could last longer.