AI momentum pullback enters a mature phase, while earnings and improving inflation support further equity broadening

Overview

This report is a global equity strategy report focused on whether the recent pullback in AI-related stocks and momentum factors will drag down the broader market. It argues that the retreat in AI and semiconductors mainly reflects crowded positioning, momentum clearing, and concerns over hyperscaler cloud capex monetization, and should not be interpreted as the start of sustained weakness in global equities. Peaking inflation data, easing bond yield pressure, a potentially weaker dollar, and a strong second-quarter earnings season together support a broadening of market leadership in the second half from the narrow AI trade toward broader cyclical and regional opportunities.

Core views

The core views of the report are: first, the AI momentum unwind and semiconductor pullback have already released a meaningful share of technical risk, with SOX RSI near oversold and Mag-7 relative valuations now cheaper. Second, semiconductor fundamentals remain solid, as AI capex, data center demand, DRAM/NAND supply tightness, and earnings resilience mean the sector may find support soon. Third, peaking inflation helps reduce bond yields and central bank hawkish pressure, while promoting rotation from concentrated AI trades toward broader cyclicals, consumption, and Eurozone earnings recovery. Fourth, geopolitical shocks may create volatility, but the report believes the market is increasingly inclined to treat such risks as temporary shocks, and still recommends using related pullbacks to add equity exposure. Fifth, early second-quarter earnings data support the broader market, especially semiconductors and banks.

Analysis framework

The report combines technicals, macro inflation, earnings season data, regional EPS revisions, and cross-asset signals in forming its strategy view. On the technical side, it focuses on SOX, Mag-7 relative performance, momentum factor pullbacks, RSI, and positioning indicators; on the macro side, it tracks CPI, Brent oil prices, inflation expectations, the US 2-year yield, and Fed funds futures; on earnings, it examines EPS beat rates for the S&P 500 and Stoxx 600, stock price reactions on earnings release dates, and the convergence in Eurozone versus US EPS revisions.

Methodology notes

• Market Style RotationRotation trade

  Broadening from AI and momentum trades toward wider cyclical and regional opportunities

  The report interprets the recent pullback in AI-related assets as part of a broadening in market leadership and a momentum factor unwind, rather than a deterioration in systemic risk; against a backdrop of falling inflation and improving earnings, cyclicals remain preferred over defensives.

• Technicals and PositioningMomentum unwind and RSI

  Momentum factor pullback and semiconductors nearing oversold

  The report uses SOX RSI, S&P 500 momentum factor long-short baskets, and technical positioning indicators to judge that previously crowded trades have been materially unwound and that semiconductors may be entering a buyable zone.

• Macro Inflation FrameworkInflation peaking and broadening trade

  Peaking inflation supports valuations and market broadening

  The report argues that falling energy prices, slower headline CPI, and anchored long-term inflation expectations will reduce bond yields and lessen pressure for further central bank hawkishness, thereby supporting equity valuations and late-cycle sectors.

• Earnings RevisionsEPS revisions convergence

  Eurozone EPS revisions catching up with the US

  Through the narrowing gap in EPS revisions between MSCI Eurozone and the S&P 500, the report supports the case for Eurozone earnings catch-up and a relative opportunity in European equities.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Global Equities

  Overall bullish

  Strengths

  Peaking inflation, a strong earnings season, lighter positioning, and broader market leadership together support further upside.

  Weaknesses

  Geopolitical conflict and the unwinding of AI trades may still create short-term volatility.

  Comparison

  The report argues that unlike in 2022, inflation expectations have not become unanchored this time, and wage growth is also slowing.

  Risks

  A renewed rise in oil prices, escalation of the Iran conflict, or central banks turning more hawkish than expected.

• Semiconductors

  Tactically bullish

  Strengths

  AI capex, data center demand, DRAM/NAND supply tightness, and earnings resilience remain in place, while stock prices have diverged from earnings.

  Weaknesses

  Recently pressured by crowded positioning, momentum pullbacks, concerns over memory pricing, and doubts about hyperscaler capex monetization.

  Comparison

  Relative to other AI-related stocks, the report believes semiconductors are more likely to find support first.

  Risks

  Deferred AI chip demand, earlier-than-expected supply release, competition from Chinese manufacturers, and weaker hyperscaler capex guidance.

• Mag-7

  Cautious turning constructive

  Strengths

  Relative valuations have become cheaper, and earnings still support a rebound in share prices.

  Weaknesses

  They still lag the broader market year to date and are still digesting prior crowding in the AI trade.

  Comparison

  The report does not expect a full repeat of the second half of 2025 rally dominated solely by the Mag-7, but it believes there is still upside over the coming months.

  Risks

  AI commercialization returns disappointing, doubts about capex, or regulatory and valuation pressure.

• Cyclicals

  Preferred over defensives

  Strengths

  US and European cyclicals have outperformed defensives by about 7% and 5% year to date respectively, and the macro and earnings backdrop still supports continuation.

  Weaknesses

  Consumer subsectors had previously still lagged significantly, so participation needs to broaden further.

  Comparison

  Compared with defensives, they benefit more from falling inflation, improving real income, and economic resilience.

  Risks

  Slower growth, a rebound in yields, or geopolitical shocks dragging on risk appetite.

• Eurozone Equities

  Relatively favored

  Strengths

  EPS revisions have converged with the US, while fiscal impulse, industrial and defense demand, and a weaker EUR support exporters.

  Weaknesses

  If the Iran conflict escalates further in the second half, the earnings uptrend may be disrupted.

  Comparison

  The report believes the Eurozone has earnings catch-up potential relative to the US.

  Risks

  An energy price shock, a stronger euro, slower external demand, or renewed geopolitical escalation.

• AI-disruption baskets: software, business services, media

  Avoid or bearish

  Strengths

  Valuations of some individual stocks have already corrected significantly.

  Weaknesses

  The report maintains a fundamentally bearish view, arguing that AI adoption will hit revenue models, pricing power, and profit pools.

  Comparison

  Weaker than AI infrastructure beneficiaries such as semiconductors.

  Risks

  If the direction of AI commercialization changes or cost-cutting demand is stronger than expected, these sectors could continue to underperform.

• Energy stocks

  Avoid

  Strengths

  Rising oil prices or geopolitical conflict could provide short-term support.

  Weaknesses

  The report uses peaking inflation and falling Brent as evidence of macro improvement and is not constructive on energy positioning.

  Comparison

  Relative to cyclicals, semiconductors, and the Eurozone, energy is not a preferred direction in the report.

  Risks

  Escalation of Middle East conflict causing a sharp rise in oil prices could change short-term relative performance.

• Emerging Market Equities

  Maintain OW

  Strengths

  The report believes the EM memory trade still has room to run, with limited new supply before 2028.

  Weaknesses

  More heavily affected by global risk appetite, the dollar, and geopolitical disturbances.

  Comparison

  Against the backdrop of global equities hitting new highs, the report still believes the probability of further upside is greater than downside.

  Risks

  A stronger dollar, a renewed rise in US interest rates, or a reversal in the memory cycle.

Key data

• Korean market drawdown from peakAbout 25%The report states that Korea has fallen about 25% from last month's peak, mainly dragged down by major memory chip companies.
• SOX drawdown from peakAbout 20%The report states that the SOX has fallen about 20% from its peak, though RSI is near oversold.
• Year-to-date relative performance of AI at risk basketsLagging by 20%+AI-disruption baskets such as software, business services, and media continue to significantly underperform.
• US headline CPI 3-month annualizedFrom 8.2% down to 2.8%The May to June readings declined sharply, which the report believes helps reduce inflation pressure in the second half.
• US 5Y5Y inflation forwardsHeld within a 25bp range, without breaking above 2.60%Long-term inflation expectations remain anchored, which is a key difference versus 2022.
• Early S&P 500 EPS beat rateAbout 97%Above the long-term average of about 76%, supporting the cushioning role of earnings season for the broader market.
• Median earnings-day performance for S&P 500 beatersAbout 1.6%The table shows a positive stock price reaction on earnings day for companies beating EPS expectations.
• Average earnings-day performance for Stoxx 600 beatersAbout 2.4%European companies also saw positive stock price reactions after beating earnings expectations.
• MSCI Eurozone EPS revisionsCurrent 18%, improved by 22 percentage points versus Jan '26The table shows that Eurozone EPS revision momentum has improved significantly.
• DRAM/NAND supply tightnessMay persist through 2028The report cites the global tech team view that AI/server demand and HBM prioritization will keep traditional DRAM/NAND supply tight.

Impact & implications

The investment implication is that the recent pullback in AI and semiconductors should be viewed more as a tactical re-entry opportunity rather than a signal to reduce overall equity exposure. At the portfolio level, investors can continue to use geopolitically driven pullbacks to add equity exposure, favor cyclicals over defensives, favor the Eurozone over the US, and watch for semiconductors to regain investor inflows during the summer. By contrast, software, business services, and media sectors whose revenue or profit pools may be eroded by AI, as well as energy stocks, are listed by the report as areas to avoid.

Risks

• The Iran conflict or other geopolitical events could re-escalate, pushing up oil prices and weakening risk appetite.
• A rebound in Brent could push headline CPI higher again, weakening the peaking inflation and falling yields thesis.
• If hyperscaler capex guidance weakens, it could hurt semiconductors and the AI infrastructure chain.
• If AI monetization disappoints or token efficiency improves too quickly, sectors such as software, business services, and media could face further pressure.
• If central banks remain more hawkish or the market prices in more rate hikes than the report expects, equity valuations may come under pressure.
• If subsequent second-quarter earnings releases are weaker than the early sample, the earnings support thesis may be weakened.
• If the improvement in Eurozone earnings revisions does not continue, the allocation view favoring the Eurozone over the US may be challenged.

What to watch

• Whether SOX RSI and the divergence between semiconductor prices and earnings will repair.
• Hyperscaler capex guidance and data center capacity plans beyond 2027.
• Whether DRAM and NAND prices, revenue growth, and supply tightness will persist through 2028.
• US headline CPI, core CPI, core PCE, and Brent pass-through to inflation.
• Whether US 5Y5Y inflation forwards remain anchored and below 2.60%.
• Whether US 2-year Treasury yields and Fed funds futures pricing for further tightening continue to decline.
• Subsequent second-quarter earnings beat rates and earnings-day stock reactions for the S&P 500 and Stoxx 600.
• Whether Eurozone EPS revisions continue to improve relative to the US.
• Whether the Iran conflict and energy transport risks escalate again.
• Whether market leadership broadens from AI/Mag-7 to cyclicals, consumption, and Europe-related sectors.