Chips Surge, Software Struggles: The AI Divide Deepens
Markets extended their recovery during the week, as a combination of ceasefire stability, resilience in economic data, and improving sentiment helped investors look past lingering geopolitical risks tied to the ongoing Iran conflict. Despite the backdrop of elevated energy prices and global uncertainty, equities pushed higher for a second consecutive week, indicating the market has structural support even in a volatile macro environment.
The rally gained traction late in the week after news that a ceasefire extension in the Middle East would hold for an additional three weeks, easing immediate fears of further supply disruption. That headline alone was enough to shift positioning, as defensively hedged investors began to re-engage with risk assets. S&P 500 futures moved higher into Friday, reflecting improved confidence even as the broader geopolitical situation remains unresolved.
Investor sentiment improved sharply alongside price action. The latest AAII survey showed bullish sentiment surged to 46.0% from 31.7% for the week ending April 22, while bearish sentiment dropped meaningfully. This shift highlights how fast positioning can change when volatility subsides, particularly in a market that has repeatedly demonstrated a willingness to buy dips.
The economic backdrop also supported the recovery in sentiment, pointing to what can best be described as a “resilient but recalibrating” scenario. Consumer strength remained a key pillar. Retail sales surged 0.7% in March, well above expectations, underscoring that the U.S. consumer continues to drive growth despite higher borrowing costs and persistent inflation. The so-called “wealth effect,” supported by strong equity markets, appears to be offsetting pressure from rising prices.
Labor market data painted a more nuanced picture. Initial jobless claims edged up to 214,000, while continuing claims rose to 1.82 million, suggesting a “low-hire, low-fire” environment. Employers are reluctant to lay off workers, but hiring momentum has slowed, indicating a cooling -- yet still stable -- labor market. This dynamic gives the Federal Reserve flexibility to maintain a restrictive stance without triggering immediate recession concerns.
Business activity also showed signs of improvement. The S&P Global Composite PMI rose to 52.0, indicating a rebound in private sector activity after a sluggish start to the year. Manufacturing output strengthened, while services remained in expansion territory, though businesses noted rising input costs tied to supply chain disruptions and geopolitical uncertainty.
Sector performance reflected a broad but selective recovery. Leadership came from a mix of technology, industrials, energy and even defensive areas like staples and real estate. The latter benefit from softer interest rates. The rotation suggests that investors are not positioning for a single macro-outcome, but rather balancing exposure across growth, cyclicals, and rate-sensitive sectors.
Within technology, the story remains one of extreme dispersion. Semiconductor stocks continued their strong run, with the SOXX index extending its rally to a remarkable 17 consecutive positive sessions, highlighting sustained demand for AI infrastructure. A major catalyst this week was Intel, which delivered significant earnings beat and surged over 20% following the report. The company’s announcement of a major AI chip manufacturing deal signaled a turning point in its competitive positioning and had ripple effects across the semiconductor space.
Interestingly, Intel’s strength lifted sentiment across the broader chip ecosystem, with peers benefiting from a “rising tide” effect as investors reassessed the total addressable market for AI-driven computing demand. At the same time, software stocks remained under pressure, continuing a trend of divergence within the technology sector as investors grapple with the implications of AI disruption on traditional business models.
This bifurcation defines the current corporate narrative. On one side are companies benefiting from the physical buildout of AI infrastructure, including semiconductors and equipment providers. On the other hand, firms are undergoing structural adjustments as AI challenges existing revenue models.
Looking ahead, the macro and policy outlook remains fluid. Market expectations for Federal Reserve policy have shifted significantly in recent months. At present, futures markets are pricing in a less than 50% probability of even a single rate cut this year, which reflects ongoing uncertainty tied to inflation data and geopolitical developments.
For now, the market’s message is one of cautious optimism. A ceasefire has reduced immediate geopolitical risk, economic data continues to point to resilience, and investor sentiment has improved. Yet beneath the surface, structural shifts in technology, labor markets, and monetary policy expectations continue to shape a market that remains both opportunistic and highly sensitive to new information.
Featured Clips
