The AI Trade Is Splitting in Two

☕ Saturday Morning Coffee

Something unusual happened this week. The Nasdaq gained 2.12% and the S&P 500 added 1.76%, both solid weeks by any reasonable measure. But underneath those headline numbers, the AI trade that dominated 2025 quietly cracked down the middle. Technology as a sector finished down 0.29% for the week, making it one of only three sectors in the red alongside Utilities and Energy. Meanwhile, Communication Services surged 3.22% and the broader market celebrated what looked, on the surface, like a risk-on week.

The divergence inside the AI complex was even more striking at the stock level. Palantir gained 14.50% to close at $129.30. Palo Alto Networks jumped 14.42% to $348.06. Zscaler added 11.39% to close at $147.33. These are not small-cap speculative plays. These are mature, revenue-generating businesses. And they ran hard. On the other side of the ledger, Micron fell 13.84% to $975.56, Super Micro Computer dropped 11.13% to $27.22, Marvell Technology shed 8.05% to $245.29, and Intel fell 6.21% to $120.35.

What you are looking at is a rotation within AI itself. The chip and hardware layer that carried the AI trade from 2023 through most of 2025 is losing altitude. The software, security, and application layer is catching the baton. This is not a random week of noise. It is a signal worth taking seriously before earnings season kicks into full gear starting July 9.

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To understand why this is happening, you need to think about where we are in the AI investment cycle. The first phase of any transformative technology wave is always infrastructure. Railroads needed tracks before you could ship anything. The internet needed fiber before you could stream anything. AI needed chips, data centers, and GPU clusters before any application could run at scale. That infrastructure build-out created an extraordinary period of earnings leverage for companies like Nvidia, Micron, and the broader semiconductor complex.

But infrastructure investment cycles do not run forever at the same pace. At some point, the capex wave crests. Hyperscalers either have enough capacity or begin scrutinizing returns on that capacity more carefully. When that happens, the multiple compression for hardware companies can be swift. Micron's 13.84% decline this week likely reflects growing anxiety that memory pricing may have peaked, or at minimum, that the next leg of demand growth will be more uneven than the AI bull case assumed. SMCI's continued weakness down to $27.22 tells a similar story, compounded by ongoing concerns about its accounting and supply chain.

The software and security side of AI is operating on a completely different earnings clock. These companies monetize AI adoption rather than AI infrastructure build-out. Every enterprise that deploys AI models needs cybersecurity tools to protect them. Every organization running AI workflows needs data platforms to manage them. Palantir's move to $129.30 is a market saying: we believe this company's government and commercial AI contracts are real, recurring, and growing. Palo Alto and Zscaler running together in the same week is the market pricing in a simple but powerful idea: more AI means a larger attack surface, and a larger attack surface means more cybersecurity spending. The AI trade is not dying. It is maturing.

The macro backdrop reinforces this reading. Financials led all sectors this week at plus 3.83%, and the Dow hit a new record despite a weak jobs report. A weak jobs number, counterintuitively, is being read as a signal that the Fed has more room to maneuver. The 10-year Treasury yield barely budged, closing at 4.48%. The dollar weakened, down 0.50% on the DXY to 100.86. This is a classic soft-landing setup: growth is moderating enough to keep the Fed cautious, but not slowing sharply enough to threaten corporate earnings. That environment tends to favor quality compounders over cyclical hardware names.

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Here is what investors should be watching as we head into next week. PepsiCo reports July 9 and will set the tone for consumer spending narratives. Then on July 14, Goldman Sachs and JPMorgan both report, which given Financials' 3.83% week could either confirm the sector's leadership or trigger a sell-the-news moment. Netflix on July 16 will be the first major test of whether the Communication Services rally has earnings legs behind it. And Alphabet on July 22 will be the definitive verdict on whether the software-over-hardware AI rotation has real fundamental support.

The story of this week is essentially a preview of what earnings season will adjudicate over the next three weeks. Did the AI software and security companies actually grow into their valuations? Did the hardware companies over-earn during the infrastructure build-out and now face a hangover? Those are not rhetorical questions. The answers will arrive in quarterly results, and positioning ahead of those results is exactly what the market was doing this week.

One other thing to hold in your head as you plan your week: Tesla just launched its robotaxi service in Miami, and Rivian popped 19.19% on what appears to be a combination of short-covering and renewed EV enthusiasm. The consumer discretionary sector added 2.40% this week. There is a thread connecting all of this: when AI moves from infrastructure to application, it starts showing up in products people actually use. Robotaxis. AI-powered security platforms. Software agents in enterprise workflows. The investment opportunity is shifting from picks-and-shovels to the people actually swinging those shovels. With that backdrop, here are 5 stocks worth putting on your radar this weekend.

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📋 Weekend Watchlist

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💡 The Takeaway

The market gave investors a clear message this week: the AI trade is not over, but it is evolving, and the winners of the next phase will be found in software, security, and applications rather than semiconductors and server hardware. Financials leadership and record Dow levels add a second layer to this story, suggesting the broader economy is still running warm enough to support corporate earnings even as the labor market cools. The five stocks on this watchlist represent the frontlines of that transition, from Palantir and Palo Alto riding the AI-to-application wave, to Goldman and Netflix sitting at the center of the two biggest earnings stories of the next two weeks.