AI trading continued to dominate the market this week, marking a great start to Q2 earnings season. June’s report on consumer and producer prices was weaker than expected, an encouraging sign that inflation continues to ease while profits at the nation’s largest banks reinforce capital market strength. At the same time, investors were focused on the Middle East as the United States and Iran renewed airstrikes and uncertainty increased around the Strait of Hormuz. West Texas Intermediate crude soared 15.5% last week to more than $82 a barrel, while international benchmark Brent crude rose nearly 16% to just above $88. Although these were major developments in one week, expectations for diplomacy remained deep-rooted, and the war ended well below its peak. It will be necessary to pay attention to future economic reports to see whether the rise in oil prices will stimulate inflation. But last week, behind the scenes, there was another radical change in the artificial intelligence industry. Investors have moved from many semiconductor manufacturers to hyperscalers. Friday’s market slump sent the S&P 500 index down nearly 1.6% for the week, while the tech-heavy Nasdaq fared even worse, dropping nearly 3% over the past week. Now let’s take a closer look at what triggered the trading action. IBM’s warning ripples IBM shocked Wall Street on Tuesday by pre-announcement of disappointing second-quarter results, sending its stock down 25%, its worst day ever. CEO Arvind Krishna highlighted that more customers are directing their technology budgets toward cybersecurity, hardware, and AI tokens. This left less money available for traditional software and consulting projects, and some large deals were postponed to future quarters. Jim did not recommend buying the big dip. No substantial recovery occurred. IBM stock has fallen more than 26% this week. The market quickly rewarded the beneficiaries of the change in corporate spending. Club stocks CrowdStrike and Palo Alto Networks rose about 12% and 7%, respectively, on Tuesday, as did hardware and memory stocks such as Dell and Micron. Earlier this year, cybersecurity stocks were under pressure on concerns that AI would disrupt the industry. IBM’s comments reinforced our view that the opposite is happening: AI is increasing the demand for cybersecurity as companies grapple with securing increasingly complex AI infrastructure and applications. Palo Alto and CrowdStrike were the two best performing companies in the club’s portfolio this week. Meanwhile, club name Salesforce fell 2% on Tuesday, and fellow software-as-a-service (SaaS) name ServiceNow fell nearly 6% as news showed traditional software spending was increasingly sidelined. Salesforce managed to gain nearly 4.6% for the week, but is still down 35.5% year-to-date. Massive AI rotation Investors spent the week moving money from AI builders to buyers. The sell-off began Monday following SK Hynix’s blockbuster U.S. debut on Friday, July 10th. The South Korean memory giant fell 9%, sparking a broad selloff across AI infrastructure trades. SanDisk started the week down 12%, Intel down 6% and AMD down 4%. The pressure continued throughout the week, but only briefly eased on Tuesday after IBM’s pre-announcement revealed the flow of enterprise technology funding. Even bullish updates from AI infrastructure leaders have failed to reverse this trend. ASML on Wednesday raised its full-year sales forecast for the second time this year, and Taiwan Semiconductor on Thursday raised its outlook for capital spending. But investors largely ignored these demand signals. Instead, the focus shifted to the rising costs of building AI and whether semiconductor stocks rose too much or too fast. Chinese startup Moonshot AI announced a new model on Friday, adding to the cautious mood as some say it will narrow the gap with its U.S. rivals. The VanEck Semiconductor ETF (SMH) fell nearly 9% this week, extending its recent pullback and marking its third week of decline in the past four weeks. Much of that capital flowed back to hyperscalers. Alphabet rose 3% Wednesday after Warren Buffett told CNBC’s Becky Quick that he personally approved Berkshire Hathaway’s investment in the club’s stock. The disclosure allayed concerns that Buffett was concerned about Alphabet’s large AI investments and related debt financing. The stock then gave up that gain after Bloomberg reported that Google was months late in delivering its latest Gemini AI model. Alphabet stock fell nearly 3% last week. Apple was one of the club’s biggest winners this week, hitting a record high after winning approval to bring Apple Intelligence to China. CNBC confirmed that the company will use Alibaba’s AI models to enhance the capabilities of Chinese-made devices. Older iPhone models lack the processing power to run Apple Intelligence, so this rollout gives consumers another reason to upgrade. On Friday, Apple also briefly surpassed Nvidia, reclaiming the title of the world’s most valuable company by market capitalization. Apple, Amazon, and Microsoft all ended the week higher, even though many of the Big Tech companies retreated later in the week. Jim said this week’s rotation doesn’t change the AI story. Unlike previous boom-and-bust semiconductor cycles, building AI today continues to be defined by supply constraints, long-term customer contracts, and constant demand for computing. We see this pullback primarily as a result of profit-taking, as many AI infrastructure names have gone parabolic following this year’s strong rally. To that end, the club recently liquidated its remaining arm position on July 8, locking in an approximately 75% increase, and in June cut 150 shares of Corning stock at a price well above current levels. On Thursday, during the July monthly meeting for club members, the gym said it would buy back about 25 of those shares if there were no restrictions. Brought to you by Wall Street’s biggest banks Banks are off to a strong start to the second quarter earnings season. Five of the six largest U.S. banks reported on Tuesday. The group, which owns Goldman Sachs, led the group and delivered an outstanding performance, supported by strengths across its investment banking and trading businesses. Jim called this period its best quarter and said the company’s business looks more durable than in previous trading cycles. The stock closed at a record high on Tuesday, ending the week up nearly 1%. Wells Fargo, the club’s name, beat expectations for profits and sales as CEO Charlie Scharf continued to shift the bank from its traditional lending roots toward underwriting and M&A advisory. While the quarter was strong enough to continue our investment, we would like to see more consistency from management before raising the stock price or raising the price target. The stock initially fell 2.7% following the results as investors focused on the decline in net interest income, but rebounded in subsequent trading and ended the week up 0.4%. Looking ahead, club stock Capital One will report earnings after the close of trading on Tuesday. It will be interesting to see whether the company beats profits for the first time in three quarters and starts to realize the benefits of the Discover acquisition. Capital One rose more than 3% for the week. (See here for a complete list of Jim Cramer Charitable Trust stocks.) 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