High Flying AI Stocks Come Down To Earth As Tech Stocks Take a Breather in July

When you see a group of stocks move higher parabolically, you know that the party has to end at some point. The trick is to make as much money as you can while the going is good, and then get out before the stocks come crashing down. If you get out too early, you leave a lot of money on the table. If you get out too late, you can lose much of your gains. That’s the story of the AI related stocks over the last year. As an example, the share price of Micron Technology (MU) was at about $105 a year ago. It ran up to as high as $1,200 over the past few weeks before crashing back down to earth in July to its present price of about $815. The reason I mention this is not that we own these stocks to any great extent in our mutual funds, but that the volatility in this sector has recently spread to growth stocks in general. For the month of July, while the S&P 500 and the Dow Jones were essentially flat, the tech-heavy Nasdaq was down about 3.5%. Sectors like energy, financials, and real estate fared well while technology pulled back. The bottom line is that investors didn’t sell. They instead shifted from one sector to another, leaving the market surprisingly resilient.

One of reasons that we saw the tech sell-off last month, aside from the obvious reason that they were over-extended and had seen exponential gains, was that a wildly successful hedge fund, Situational Awareness, got caught investing in these high flyers in a leveraged portfolio. When the losses began to mount, this fund was forced to sell, exacerbating the AI stock decline. Looking back, this might be considered a good thing, as much of the froth in the market has been reduced.

The markets have had a multitude of reasons to sell off. In the last month, oil prices and interest rates have moved higher and the continuing on-again, off-again war in Iran significantly adds to uncertainty. Yet the major averages continue to hang in there. And it’s not just the broader market that has shown itself to be resilient. Just since last Thursday, in 3 trading days, while the S&P is up 3.8%, the Nasdaq is up about 6%. As Professor Jeremy Siegel said on CNBC on 7/15, “This is a market that wants to go up. We have never seen earnings rise as they are now except in times coming out of recessions; a 20% increase in earnings. This is because margins are increasing to the highest levels we have ever seen”. In other words, a strong economy drives stock prices higher.

On 7/6, Jay Kaeppel of Sentiment Trader cited another positive economic development. He wrote that “After a prolonged decline, the Leading Economics Indicators finally flipped to favorable. This typically bodes well for stocks in the months ahead, particularly the real estate, technology, energy, and financial sectors”. “This latest signal and annual seasonality suggest that now is a time for investors to give the favorable market trend the benefit of the doubt”.

On 7/8, Brett Eversole of Stansberry Research explained why he expects more strong gains ahead for the second half of year. “Stocks just finished their best quarter since 2020. And while these good times won’t last forever, history tells us we can expect a strong finish to 2026.” “Strong momentum consistently leads to higher prices. We’ve only seen 11 other quarterly gains of this magnitude since 1950”. And following these gains, markets were higher 3 months later by 8.3% and 6 months later by 14.1%. “So stay invested. And don’t forget to appreciate the good times while they’re here”. And on 7/15, Brett continued to voice optimism about the market. “You see, even in powerful booms, it’s rare for small, medium, and large stocks to all soar at these levels. When everything is soaring, it all tends to keep soaring. And these environments are some of the best you could ever hope for as an investor”.

I addressed above the tech sell-off that hit the markets in July. Greg Diamond of Stansberry Research (7/29) thinks that the worst is over for that sector and that we should expect a significant rebound. Without getting into his technical indicators, he is confident that we are bottoming and that “I’m preparing to get aggressive from the long side”. “This will be a bull market to remember. Think 1999 or some of the early bitcoin moves. That type of runaway bull market”. And Greg wrote this on 7/29, and we have since seen the Nasdaq rise 6%. Greg called the bottom in April 2025 during the tariff induced market sell-off, so when he talks, I tend to listen. Jeff Feldman