AI Reality Check: Tech Selloff & Rotation Signals Valuation Jitters
Things You Need to Know
- Global markets relatively calm after yesterday’s tech wreck.
- MU reports after the bell….It’s anyone’s bet.
- Oil down, gold down, yields steady.
Wake up…. It’s a new day….and as we turn our attention to today’s session, remember this:
Yesterday wasn’t the day to be a hero; it was a day to watch as the pressure built. And the pressure was concentrated in the AI complex, semiconductors, memory names, all stocks that have led this market higher since April. This should come as no surprise to anyone who has been paying attention; we have been discussing this ad nauseam.
Those are exactly the names you’d expect to come under pressure first if investors are beginning to question valuation. And as I noted yesterday, the question now is whether selling remains concentrated in the most extended AI names or begins to spread into industrials, financials, healthcare, consumer staples, and the broader market?
Because that answer matters!
Because if the selling remains isolated to the overcrowded AI trade, then what we’re experiencing is more like a ‘healthy’ – yet uncomfortable correction after a powerful run.
But if selling begins more indiscriminately and spreads across sectors, market caps, and styles, we may need to reconsider whether something larger is developing beneath the surface.
That’s why today isn’t about predicting what happens next; it’s about observing the breadth and watching the leadership. It’s also about watching the long end of the Treasury market (think 20+ yrs) – because that will tell us more than any headline will.
In the end, the investors, traders, and algorithms finally asked the question nobody wanted to ask. What if all this AI spending doesn’t deliver the returns investors expect?
Not that AI isn’t real. Not that AI isn’t changing the world. Not that NVDA, MU, AVGO, and the hyperscalers (think AMZN Web Services, GOOG Cloud, MSFT Azure) aren’t building something extraordinary – because they are…..
The selloff in tech yesterday was really about investors suddenly waking up and questioning how much they’re willing to pay for that future. And it wasn’t as much as they were willing to pay on Monday!
Hello – Reality check – Aisle 5!
It started on the other side of the world Tuesday – South Korea to be exact – the Kospi lost 10%, tripping a circuit breaker that halted trading for 20 mins (recall that market center was up 95% ytd – not 9.5% but 95% – so I’m actually surprised we didn’t see even more of a pullback) … and it turned into a global event that dragged technology stocks sharply lower. Last night the Kospi rose 3.25% and the damage in the memory names subsided.
Foreign investors ran for the door – dumping $2.5 billion worth of technology, Leveraged (Long) ETFs came undone, Margin calls went out across the network forcing liquidations that only added to the drama….and suddenly the whole place came under attack.
And when the sun set on Asia, it rose in Europe and the selling continued and then it jumped on a flight to NY…..need I go on? Haven’t we seen this story before? Yes, we have…..And there are so many places to lay the blame…. but let’s not go there right now.
Nothing in the tech space was spared – the Tech ETF – XLK lost 4.1%, Disruptive Tech down 2.2%, Semi’s down nearly 8% (MRVL lost 9%) the Growth trade lost 2.4%, Expanded Tech down 3.5%, Quantum names gave up 3.1%, Memory names – DRAM etf down 14.25% and the individual names in the group including MU – gave back 13%, WDC gave up 8.5% and STX lost 5%.
Let’s be clear – it wasn’t pretty, but it is also not a reason to start abandoning the trade – unless you got in at the top….if so, you are a bit black and blue today, but if you got in at much lower prices – you’re good.
At the end of the day – here is what it looked like and while it was not a bed of roses – it was not a complete disaster at all.
The Dow lost 46 pts, the S&P lost 107 pts, the Nasdaq got punched in the face and then the kidneys….losing 580 pts or 2.2%, the Russell lost 296 pts, the Transports lost 165 pts, the Equal Weight S&P lost 32 pts while the Mag 7 gave up 488 pts or 1.5%.
Here’s the stat that should stop you from panicking. While the Nasdaq was getting hammered and semis were being taken to the woodshed, 7 of the 11 S&P sectors actually finished higher. We That is NOT liquidation – that is rotation and it is important – because liquidation suggests fear while rotation suggests a repositioning of sorts.
Industrials lost 2%, Tech down 4.1%, Consumer Discretionary lost 1% while Basic Materials gave up 1.4%. On the upside – Consumer Staples won the day – rising 1.9% (makes sense – think nervousness), Healthcare rose 1.4% (also makes sense), Real Estate added 1.4%, Utilities gained 0.8%, Energy up 0.75%, while Communications added 0.4%.
As you would expect – the contra trades did well. The SH (S&P short) gained 1.4%, the PSQ (Nasdaq short) gained 3.3%, the SPXS (Direxion Triple levered short) rose by 3.4%, the VIXY (fear trade) gained a whopping 5.2% and the SARK – (Short disruptive tech) gained 2%.
Now let’s talk about the elephant in the room – Fed Chair Kevy Warsh. Because while everyone wants to blame South Korea, Micron, memory chips and AI valuations, part of this selloff has a much simpler explanation. Rates.
Warsh held his first press conference last week and made it crystal clear that defeating inflation remains the priority. Remember he is an inflation HAWK. And what the market heard was higher for longer and that’s where the problem begins. Yes he said that he can lower short term rates and shrink the balance sheet (one offsets the other), but he can’t control (lower) the long end of the curve – Capisce?
Right now – the 2 yr is kissing 4.2%, up 24% off the March lows when the whole inflation story began to game steam, the 10 yr is kissing 4.5% and the 30 yr is kissing 5% – And all those rates do is make it harder to justify lofty valuations of the sexy growth names – and THAT is the trap!
We have been conditioned to believe that every pullback would be met with lower rates, more liquidity and another Fed rescue. We can thank Benny, Janet, and JJ for that – but Kevy is saying something very different and Momo trades (leveraged or not) are often the first casualties when investors begin adjusting to this new reality. Just sayin’. I suspect we may be seeing more of that if tomorrow’s PCE report suggests hotter inflation at the core level which eliminates the volatile food and energy sectors.
Meanwhile, oil continued its decline as investors grow more comfortable with the cease fire between the US and Iran as more than 19 million barrels of oil flowed through the Strait of Hormuz. (at least that is what Donny told us).
This morning – WTI is down $1.50 at $71.65 – down 27% off the May highs…. Now we have breached both the short and intermediate term trendlines and are about to sit on the long term trendline at $70 where it should find some support until there is finality and clarity on the conflict. Once that happens and oil production returns to normal – we could see WTI trade back to the low to mid 60’s.
Remember – Lower oil helps inflation, helps consumers, helps corporate margins and ultimately, lower oil helps the Fed.
Gold continues to fall and this morning it is down another $50, trading at $4,070/oz. We are now well below all three major trendlines and trading at levels last seen in November 2025.
So here is the deal… if geopolitical tensions continue to ease, the dollar remains firm, and inflation stays under control, then the fundamental reasons investors rushed into gold begin to fade and if that is true, gold could continue to break down and potentially revisit levels last seen in August 2025 near $3,500/oz.
I know that sounds aggressive. But who thought gold would be up 174% in 2 yrs? Markets overshoot in both directions, and if the fear premium continues to come out of the trade, a move toward $3,500 is not impossible. It’s simply a scenario you need to consider.
Which brings us to today. Because now – everything comes down to Micron. As we discussed they report after the bell and what was just another earnings release has suddenly become the most important report of the quarter. – even more than NVDA!
We want proof. Proof that memory demand remains strong, proof that hyperscaler spending remains intact, proof that AI infrastructure investment is still accelerating and proof that the trillions of dollars being spent across the industry will produce real returns.
A beat-and-raise will cause a celebration…..anything less will pour gasoline on yesterday’s selloff. Recall – the stock is priced to near perfection, and when that’s the case, anything less than perfection will become a (short-term) problem. Either way, we’re about to find out. The announcement happens right after the market closes…. You can feel the excitement…. And while I think it will be a great report, you can never underestimate how traders and algorithms respond….
Eco data today includes New Home Sales – expected to be up 3.23% and Building Permits – expected to be down 0.1%.
European markets are mixed…. France is up 0.3% while Germany is down 0.9%.
U.S. futures are also mixed…. Dow futures down 100 pts, S&P’s up 20pts, the Nasdaq is up 185 pts while the Russell is giving back 9 pts. All four of these indexes are in the neutral zone vis a vis their RSI’s. While still a bit elevated, they are not Overbot nor are they Oversold – which just means we might just churn and digest the recent moves.
The S&P closed at 7365 down 107 pts…It is sitting right on its short term trendline – where I think it holds for now…. the 4 pm MU announcement will determine what happens tomorrow.
The VIX is down 1% at 19.30. and SpaceX is up 0.5% at $156.80.
Take good care,
Kp
Kenny Polcari is a partner and Chief Market Strategist at Slatestone Wealth – A boutique wealth advisory firm with $2 billion dollars of investor assets under management. In this role, his responsibilities range from market and economic analysis to investor education interpreting the ever changing economic and market landscape on behalf of Slatestone and how those impacts may affect future investment and planning strategies on behalf of their clients. With more than 40 years of industry experience as a member of the NYSE serving institutional investors both at home and abroad – he is a seasoned and well-known voice on the markets. You may recognize him from his many years serving as a market analyst on Fox Business and CNBC or his ‘Trader Talk’ Podcast on the Yahoo Finance Channel. For more, please visit his Substack HERE.
Disclaimer. Source: Bloomberg, CNBC, Reuters, Wall Street Journal
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