Wall Street is looking for follow-through on the AI trade heading into earnings season next week.
The S&P 500 (GSPC) gained less than 1% last week. The Nasdaq (IXIC) whipsawed back and forth, with semiconductors at the center of that trade.
"The moves have been probably pretty frenetic," T. Rowe Price portfolio manager Tony Wang told Yahoo Finance. "I think earnings season is probably going to clear up what's going up over the next few quarters."
Analysts will be watching for signs that the AI trade can persist. Memory chipmaker SK Hynix's Nasdaq debut on Friday — where shares surged 14% — underscored that market enthusiasm remains strong.
Investors now have a way to play the memory trade beyond US-based giant Micron (MU), which has soared more than 250% year to date but has seen volatility in recent weeks.
"For every time Micron comes out and says that we can't keep up with demand. Well, who's going to benefit from them turning away business? It's going to be S.K. Hynix," Kevin Mahn, Hennion & Walsh chief investment officer, told Yahoo Finance.
"I see more opportunities in memory," he added.
Meanwhile, semiconductors and Mag Seven stocks have taken turns retreating and rebounding as investors scrutinize all sides of the AI trade.
Since late June, the Roundhill Magnificent Seven ETF (MAGS) has rebounded 8%, while the S&P 500 minus the Mag Seven — tracked by the Defiance Large Cap ex-Mag 7 ETF (XMAG) — is basically flat. Meanwhile, the PHLX Semiconductor Index (^SOX) is down 12%.
"We've gone from a phase where anyone that's spending on AI was getting rewarded. Now it's like the market is becoming more discerning," said Wang.
The portfolio manager is watching for margins, revenue growth, and free cash flow growth, which will help determine the sustainability of the AI cycle.
Wall Street expects the hyperscalers to reaffirm their commitment to AI spending this earnings season, which could be a boon for chip and equipment makers.
"One person or one company's spending is somebody else's revenue and profits," said Sonu Varghese, Carson Group chief macro strategist.
"We view the recent weakness in semiconductor stocks as a buying opportunity," said a Yardeni Research note last week. "Their melt-up over the past three years has been well supported by their earnings."
Investors are gradually shifting their focus from near-term growth to whether spending can be sustained beyond 2027, per UBS strategists. Diversification and careful stock selection will become increasingly important.