Swissquote: Rotation – where to?
By Ipek Ozkardeskaya, Senior Analyst | Swissquote
At this moment, when I sit down at my desk, the first things I look at are the US crude and the Kospi charts. This morning, the former is looking relatively calm, with US crude consolidating its gains just below $80 per barrel, albeit with looming upside risks due to the re-escalation of tensions between the US and Iran, with no end in sight. The latter, the Kospi index, is doing poorly today—to put it politely. The Korean index is down by around 7% at the time of writing. (And I insist on the latter because volatility in the Korean market, dominated by two memory chip makers, is such that it can swing from -3% to +3% in the blink of an eye.) So, by the time I started writing, the Kospi was down by nearly 7%.
As a result, SK Hynix is down nearly 12% this morning. More importantly, it is now breaking through a key Fibonacci support level—the major 38.2% retracement of the rally from last April to this June. Entering the medium-term consolidation zone could pave the way for a deeper correction and eat into part of the roughly 50% premium that SK Hynix ADRs trade at relative to the underlying Korean shares—a reflection of the US market's superior liquidity. Alas, the highly leveraged nature of Korean chipmakers, combined with ETF, leveraged ETF flows constantly rebalancing positions, keeps both Samsung and SK Hynix firmly in the "ultra-risky" category for investors seeking portfolio stability.
More reassuringly, Nasdaq futures are flat this morning, suggesting that weakness in semiconductor stocks may be offset by gains elsewhere as investors rotate into other sectors (more on that below!)
Inflation relief – for how long?
Yesterday's economic data also provided further relief to markets that had been rattled by hawkish Federal Reserve (Fed) concerns. June PPI came in notably softer than expected. Both headline and core producer prices eased more than anticipated, with headline PPI slowing to 5.5% year-on-year and core PPI to 4.7%.
Regardless, both CPI and PPI remain meaningfully above the Fed's 2% inflation target, facing fresh heat-up due to re-escalation of Middle East tensions, and continue to argue for relatively restrictive monetary policy. But the latest data buys time and investors like it.
The S&P 500 climbed back to within a few points of its all-time high reached on July 1, while Morgan Stanley joined the major banks in reporting strong second-quarter results. The Nasdaq 100, however, came under pressure from the selloff in memory-chip stocks. Micron and Sandisk both lost around 8%. Meanwhile, the Dow Jones Industrial Average and the Russell 2000 advanced as investors rotated away from the mega-cap technology names.
Rotation – where to?
Zooming out, the Russell 2000 has gained more than 25% since its March lows during the Iran war-led energy shock.
And that's remarkable because small-cap companies are usually more vulnerable to rising energy prices and higher borrowing costs. Not this time. They have outperformed the S&P 500, which has risen by around 20% over the same period.
So what's the story? What is actually happening beneath the surface? Where are investors rotating, and how much of the move into small caps is really a rotation away from technology and AI?
Apparently, not much.
Looking at the companies that have driven the latest leg higher in the Russell 2000—drum roll...—we find chipmaking equipment manufacturers, data-centre infrastructure providers and cloud-server companies. Sounds familiar? Ichor Holdings, Ultra Clean Holdings, ACM Research, Applied Optoelectronics and Bloom Energy—which powers AI data centres—have been among the biggest winners of the past few months. Their price action has looked remarkably similar to that of the hottest semiconductor stocks.
And for many of these companies, expected earnings growth is comparable to what today's mega-cap AI leaders delivered during the early stages of the AI boom. Analysts expect many of these businesses to grow earnings by around 30–60% over the next year as wafer-fab equipment spending accelerates. Ichor, for example, is expected to grow EPS by roughly 58%, while revenue is projected to rise around 15%, reflecting strong operating leverage during the current semiconductor investment cycle.
As such, digging deeper, we see that the rotation into smaller companies is not a rotation out of AI at all. It is a rotation deeper into the AI supply chain, moving from the mega-cap beneficiaries—Nvidia, Microsoft and Broadcom—toward smaller companies supplying chips, networking equipment and semiconductor manufacturing tools.
The same applies to the Dow Jones. Large banks and industrial names such as Caterpillar are also benefiting from the AI buildout and the financing that comes with it, while debt markets are increasingly being tapped across the broader AI ecosystem—from data-centre developers and utilities to infrastructure providers and AI newcomers.
So how do you rotate out of tech? Or do you simply rotate toward the next beneficiaries of the AI boom—pharma, healthcare, consumer staples or infrastructure?
Perhaps the next AI winners won't be technology companies themselves, but the companies enabling, financing and servicing the AI revolution.
