AI Hardware Eats Software’s Lunch as Small-Caps Post a 30-Year First

Dear readers,

We closed yesterday’s letter with a question: could a soft inflation print do the heavy lifting the Fed can no longer be counted on to provide, even with a shooting war rattling the Strait of Hormuz? The answer arrived Tuesday morning, and it was about as favorable as investors could have hoped. Both the Consumer Price Index and the Producer Price Index for June came in surprisingly soft on a monthly basis — CPI down 0.4%, PPI down 0.3% — handing the Federal Reserve room to maneuver that seemed unthinkable a week ago. But beneath the relief rally in the major indexes, portfolios are being reshuffled in ways that matter far more than a single data print. Money is fleeing enterprise software for chip factories, and small-cap stocks are having a moment nobody under 50 has seen in their investing lifetime.

Hardware Wins, Software Pays the Price

The AI boom just claimed its most prominent casualty in old-guard tech. IBM lost roughly 25% of its market value on Tuesday — the worst single-day drop in its 115-year history, erasing about $70 billion in the process. The cause, according to CEO Arvind Krishna, is a wholesale rewrite of enterprise IT budgets: corporate clients abruptly redirected spending in late June, away from software and consulting (IBM’s infrastructure segment shrank 7%) and toward servers and memory chips, racing to lock in supply before an expected spike in AI-hardware prices.

The mirror image of that story showed up in Europe this morning. Chip-equipment maker ASML posted quarterly revenue of €9.33 billion, comfortably ahead of estimates, and raised its full-year guidance sharply — from a prior ceiling of €40 billion to a new range of €43 billion to €45 billion. The message for investors is blunt: the AI buildout is currently starving the traditional software sector of capital. That ServiceNow, Salesforce, and Microsoft all slid in IBM’s wake suggests the market is now drawing a hard line between the companies selling AI’s shovels and everyone else left waiting at the register.

The Rotation Nobody Saw Coming

While the Magnificent Seven show real signs of fatigue, the broader market is waking up. The Russell 2000 is outrunning both the S&P 500 and the Nasdaq, and the scale of it is genuinely rare: for the first time in more than three decades, all eleven small-cap sectors are simultaneously beating their large-cap counterparts.

This isn’t a speculative froth trade. Cooling inflation paired with a resilient US economy is pulling investor attention toward cheaper stocks outside the mega-cap tech complex, and the fundamentals so far are backing up the move. For readers looking to diversify after months of chasing the tech rally, small-cap and value ETFs — the Vanguard Small-Cap Value ETF is one example — offer a way to participate in this broadening without taking on single-stock risk in names most investors don’t follow closely.

BASF Says the Industrial Slowdown Was Overstated

Should investors sell immediately? Or is it worth buying Asml?

The world’s largest chemicals producer delivered a reminder Wednesday that reports of Europe’s industrial demise have been exaggerated. BASF raised its full-year guidance after preliminary second-quarter numbers blew past expectations: operating profit (EBITDA before special items) came in at €2.4 billion against analyst estimates of €1.6 billion, while revenue climbed 16% to €17.2 billion.

What stands out isn’t just the beat — it’s how BASF got there. The company raised prices by 11% and still grew volumes by 7%. Pulling off both at once, in a European economy widely assumed to be limping along, points to underlying industrial demand that’s considerably sturdier than the prevailing pessimism suggests.

Bitcoin Claws Back Above $64,000, But the Rally Feels Thin

Crypto caught the same tailwind from softer inflation data that lifted equities. After sliding below $63,000 earlier in the week, Bitcoin reclaimed its 50-day moving average and pushed back above $64,000, while total crypto market capitalization climbed to a three-week high of $2.22 trillion.

Look closer, though, and the advance reads more like a macro reflex than a conviction trade. Much of the move appears tied to short-covering rather than fresh buying, and the underlying demand picture remains weak: spot ETF trading volume is running nearly 80% below its yearly high, and on-chain activity is subdued. BlackRock’s IBIT did post inflows of $269 million — a notable reversal after last week’s outflows topped $1 billion — but one week of inflows doesn’t undo months of institutional caution. Until ETF flows turn decisively positive, the break above $64,000 looks fragile enough to give back quickly if the macro backdrop sours.

The Takeaway

That backdrop may already be souring. President Trump’s move to blockade the Strait of Hormuz has pushed Brent crude back above $86 a barrel — a sharp escalation from the “protective angel” framing floated just days ago. That’s the real threat to this week’s Goldilocks narrative. Soft CPI and PPI bought the Fed breathing room, but oil doesn’t care about base effects. If energy prices keep climbing on Gulf tensions, the disinflation story that just powered small-caps, BASF, and even Bitcoin could unwind faster than markets are currently pricing in.

Best regards,
The StocksToday.com Editorial