Chip selloff forces rotation to small caps.

Transcript

Tom Chip stocks are crumbling, and money is rushing into small caps — the rotation trade is on, and it might just be getting started.

Marie Welcome to Investment Flash, the Weekend Edition for Saturday, July eighteenth, twenty twenty-six. I'm Marie, and with me as always, Tom and Gerald.

Gerald Tom, your sell semiconductors call from yesterday's episode — the semiconductor ETF down another two percent. You're sounding prescient.

Tom Buddy, I wish I could take credit, but this is a momentum unwind. A Chinese startup's new AI model just lit a fire under crowded trades.

Marie Right — Nvidia fell over two percent, AMD is still up over a hundred percent year to date but momentum is breaking, and the semiconductor ETF lost two point two percent in Friday's session. The air pocket below is deep.

Tom And that's why the rotation into small caps is the play. The small-cap ETF barely budged while the Nasdaq 100 dropped one and a half percent. It's only three percent off its fifty-two-week high.

Gerald Yeah look, I get the momentum, but small caps aren't exactly cheap on a price-to-earnings basis. If growth slows, they're not immune.

Marie Hold on — Citi's Beata Manthey says sharp rotations are necessary to broaden the rally. This is exactly the kind of shift she was talking about.

Tom Exactly.

Gerald Fair enough, fair enough — I'll concede the rotation is real. But I'm watching valuations.

Marie Meanwhile, the AI divide is brutal. IBM issued a revenue warning and shares fell nearly three percent, now just four percent above its fifty-two-week low. It's a clear AI loser.

Tom IBM warning is a 'hammer' according to Bloomberg — more like a feather duster, buddy. That stock has been stuck for years.

Gerald Ha. A feather duster. But it's still a sixty billion dollar company. The point is: if you're not in AI infrastructure, you're in pain.

Marie Now let's talk energy — a completely different story. Amundi is pressing the EU to let transition funds hold oil and gas. That's a potential regulatory tailwind.

Tom Valero Energy hit a new fifty-two-week high, up over three percent on refining margins. Gas prices staying high even if oil falls — that's a pure play on strained capacity.

Gerald Alright, but the energy sector ETF is up twenty-six percent year to date. How much more juice is there? It's crowded.

Marie But this Amundi push could open institutional demand from ESG funds. That's a structural shift, not just momentum.

Tom One hundred percent. That's the catalyst, Gerald.

Gerald Alright, alright. The policy angle is new — I'll give you that.

Marie Now the bond market is a mess. Hyperscalers like Microsoft and Amazon are issuing debt for their AI buildout, and that supply is crushing investment-grade bonds. The investment-grade bond ETF is near its fifty-two-week low.

Tom So even bonds aren't safe? What about Treasuries?

Gerald UBS's Kevin Zhao is shorting Treasuries, betting US growth erodes the haven. But yields actually fell on geopolitical tension. The long-duration Treasury ETF is near its low too — both trades are crowded. It's a whipsaw waiting to happen.

Marie So on bonds, better to watch from the sidelines. The contradiction is too high.

Tom Fair. Boring, but fair.

Gerald Sometimes boring is smart, mate.

Marie Oh, that's — yeah, that's fair. But let's keep moving. Mining equipment makers Sandvik and Epiroc fell over nine percent on order slowdowns. That's a direct hit from falling metals.

Tom Sandvik down eighteen percent from highs — that's rough. But it's a niche play, not our main theme.

Gerald It could ripple into gold miners too. The gold miners ETF shed nearly three percent in a week. If capex cuts follow, that group underperforms.

Marie Earnings season delivered some sharp single-stock moves. Netflix down ten percent premarket on a revenue miss, Intuitive Surgical down fourteen percent on guidance disappointment, and SpaceX fell three and a half percent on a launch abort. Verizon gained one percent on a store sale plan.

Tom Netflix missed? That's — I didn't see that coming. Subscriber growth slowing?

Gerald Guidance disappointments are the theme. Even Intuitive Surgical beat but got crushed. It's a tough tape for high-multiple names.

Marie Right — and that ties back to our rotation call. High-growth tech is being punished, while defensive or value plays get a bid.

Gerald Now, the most original take from the Financial Times: the London I P O market isn't as bad as the narrative. Despite defections, the UK is on track for its best year of new listings since twenty twenty-one.

Tom Okay, but London is a sideshow compared to New York in this rotation story.

Gerald No, but listen — the UK ETF is undervalued partly because of this misplaced pessimism. There's a value case here, and I saw that FT piece three days ago, so it's been building.

Marie He's got a point. If the I P O pipeline is robust, that's a sign of corporate confidence. The UK might be a contrarian buy for patient money.

Tom Alright, fair. EWU might be worth a watch. I'm just more focused on the dispersion trade.

Marie Which brings us to our view. The cleanest expression isn't a single stock — it's a pairs trade. Long the small-cap ETF against short the Nasdaq 100 ETF captures the rotation. And long Valero Energy against short the semiconductor ETF plays the energy-tech divergence.

Tom Exactly! IWM only three percent off highs, QQQ seven percent below its peak — that trade has room to run.

Gerald But the counterargument Tom — the chip selloff might be overdone. This Chinese model's threat to Nvidia is unproven, and the Blackwell ramp is still on. If next week's tech earnings surprise, the rotation snaps back hard.

Tom Buddy, when momentum unwinds, it doesn't care about fundamentals in the short term. The trade is on until it isn't.

Marie Hold on — Gerald's right about one thing: the Fed is the missing piece. September meeting is huge, and no one's discussing it. A doveish surprise could upend all these trades.

Gerald And the AI capex debt overhang won't go away. Those hyperscaler bond issuances are a structural headwind for credit that deserves more attention.

Marie So with all that said — as always, none of this is investment advice. Do your own research.

Tom And if you're just finding us, hit follow on Spotify or check investmentflash.com for the full digest with charts and sources.

Gerald We'll be back tomorrow, ten a.m. London, for the Weekend Edition. Until then, trade smart.

Marie And maybe don't put all your chips in semiconductors — literally.

Tom Ha — see what you did there, Marie.