Oil prices are finally showing signs of retreating as the Iran conflict cools off so expect gas prices to fall in the coming weeks. This will be good for consumers but it may be some time before supply dynamics in the global oil market will return to normal – some say the middle of next year. You can see in the chart below of August WTI Crude Oil futures and notable is that it is in an oversold position so a bounce could manifest at any time. Also, there remains a lot of headline noise as negotiations continue with Iran.
We also got another read on inflation this week with the Fed’s preferred measure, the Personal Consumption Expenditures (PCE) which came in at 4.1%. Not great and it will probably take months to see anything near 2% for CPI and PPI.
This may be why the S&P made its lowest close since early May as you can see in the chart below of the S&P 500. The momentum over the past four weeks shows a weakening in the momentum indicators at the bottom of the chart and indicates the S&P 500 may be in for a pullback to work off the vertical shot higher from the March low in the 6300 area.
Artificial Intelligence Is Not Free
As oil prices abate, we are potentially seeing another source of inflation and that is the cost of compute evidenced by Apple raising prices on Macs and iPads by up to 25%. Apple CEO, Tim Cook, basically confirmed this is the first big wave of AI-flation being passed on to consumers. Where else will this show up?
Fortunately, AI models are helping companies be more productive which can offset compute inflation. However, the expected cost savings on labor is less clear as companies are retaining employees (not firing) and training them on AI models to handle additional tasks. Instead of AI integration being a cost savings exercise, it is becoming another line-item expense as a report from UBS states that many companies are monitoring their AI budgets as they are integrated into daily operations.
In some cases, companies are actively shifting to cheaper open-source Chinese models. Pressure is coming from massive usage bills so cost alternatives are being explored. For example, some companies are utilizing model routing where they send easy tasks to low-cost models while reserving premium ones for complex reasoning, code, and long-context work. Chinese open-source models like Qwen, DeepSeek, MiniMax, GLM, and Kimi are now fitting perfectly into enterprise cost curves — especially since they can be run locally or accessed via cloud catalogs. (UBS)
Reviewing A Few Charts
As we travel this new AI journey, the landscape is changing as the cash-rich large-cap technology stocks with fortress balance sheets, high margins and free cash flow are going by the wayside. Google, Microsoft, Amazon (not pictured) and META are deploying hundreds of billions of capital into building AI datacenters and semiconductors. They are footing the bill and investors are taking notice.
Microsoft is trading where it did in 2023 but there is support at $345 and holding this level is critical as a loss of this level could bring a move below $300.
Google is right in the mix of building data centers and providing a top quality AI software with its Gemini model. However, the RSI and MACD indicate a weakening uptrend and it wouldn’t be a surprise to see a re-test of the $275 area.
META is trading at 2024 levels and has been in an ugly range for the past two years and a re-test of the $450 area would not be a shocker.
Here is the steady player in the technology space as completely missing the AI cycle has kept Apple Cash rich and hey, their customers will pay higher prices for the new shiny products that they make. Recently, they have pushed above this multi-year trend channel but you can see the swings in Apple stock have been measured as it manages a mature and predictable business model.
Below has been the buoy for the stock market as investors have piled into semiconductor stocks. Below is the SOXX Semiconductor ETF that has gotten to an extreme level and needs some rest. The last red candlestick is a bearish engulfing pattern so we will see if that means lower prices next week. The easy money has been made in this ETF and it probably has more upside but a move down to $450 wouldn’t be a surprise.
Market leader Nvidia keeps cranking out semiconductor chips but has a full pattern to the upside. The technicals at the bottom of the chart have been waning for some time so pressure remains to the downside right now.
Micron reported this week and continues to put up some very strong numbers as they see the industry having a difficult time supplying the insatiable semiconductor demand through 2027. They were smart enough to lock-in many customers through long-term contracts which is unprecedented. This chart has 1999 written all over it but they have the numbers to back up the current valuation which looks cheap by some standards.
Many sectors in the stock market look stagnant right now as inflation has thrown a wet blanket on consumers but that may change if we see inflation numbers fall with the price of oil. If that happens then you could see sector rotation into areas that have been starved for attention while capital chased semiconductors and mega-cap tech. The next move in this market may not come from AI — it may come from everything AI has crowded out.
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Paul J McCarthy III CFA
President, Kisco Capital
This commentary is provided by Kisco Capital LLC for informational purposes only and does not constitute investment advice or a recommendation to buy or sell any security. Opinions are subject to change without notice. Past performance is not indicative of future results. All investments involve risk, including possible loss of principal. Kisco Capital and its clients may hold positions in securities discussed herein.
