July Market Commentary | The AI Trade Cracks as the Market Broadens

July's market action signalled a rotation away from concentrated AI and momentum leadership rather than the end of the equity cycle, but higher long-term yields increase the risks to expensive, long-duration assets.

• The S&P 500 total return was -0.1% in July, versus +1.0% for its equal-weighted version and -3.2% for the NASDAQ; the Philadelphia Semiconductor Index fell 21%, erasing US$2.2 trillion of market value.
• The semiconductor sell-off was uneven: Taiwan Semiconductor fell 15%, Micron Technology 29%, and Intel 35%, while Nvidia and Broadcom gained; the SOX ended 23% below its June 22 record despite an 8.3% rally over the final two days.
• Market breadth improved: 73% of S&P 500 constituents and 76% of S&P 600 constituents finished above their 200-day averages, while AI-exposed companies underperformed companies viewed as vulnerable to AI disruption by a record 42 percentage points.
• AI spending remains substantial but its returns are increasingly questioned: Big Tech AI spending has passed US$1 trillion, future commitments are estimated at roughly US$2 trillion, and Amazon and Microsoft reaffirmed large investment plans despite cheaper competition from China's Kimi K3 model.
• Earnings remain supportive, with S&P 500 growth forecast at 28.5% in 2026 and 14% in 2027, but valuations are high at roughly 25 times trailing earnings and 19 times forward earnings; the 30-year Treasury yield closed July at 5.27% after 12 consecutive sessions above 5%.

Takeaway: Investors should distinguish broadening participation from a market breakdown, while reducing concentration in past AI winners and accounting for the possibility that persistently high real yields, fiscal borrowing and AI-related debt issuance will pressure valuations; the article does not regard the AI investment cycle as finished.