The AI theme is seeing a clear divergence—infrastructure providers like chip makers continue to strengthen, while the hyperscale cloud giants pouring money into AI are stalling. JPMorgan strategists warn that this pattern bears a striking resemblance to the late 1990s internet bubble, and the price action over the next few weeks will determine whether this divergence is a healthy rotation or a precursor to a broader crash.
Alphabet and Tesla both reported earnings this week, announcing increased AI capital expenditure, but the market reacted coldly. This signal further reinforces the main theme of the year: the "shovel sellers" of AI—chip makers and infrastructure providers—continue to benefit, while the "shovel users"—tech giants aggressively purchasing AI computing power—are being punished by investors. The Roundhill Magnificent Seven ETF (MAGS) is up only about 1.5% year-to-date, while the Philadelphia Semiconductor Index (SOX) has surged over 70% in the same period.
JPMorgan strategist Jason Hunter warned clients on Wednesday that if the hyperscale cloud giants cannot break through key technical resistance levels, and the semiconductor sector remains below its critical resistance, "what initially appears as rotation within the AI theme could evolve into a more concerning systemic breakdown."
The Ghost of the 1990s: History Repeating or a False Alarm?
JPMorgan Asset Management's Chairman of Markets and Investment Strategy, Michael Cembalest, detailed this historical analogy in a podcast aired by the bank on Wednesday.
He pointed out that in the late stages of the 1990s internet boom, the market experienced a similar internal split: communication services stocks peaked and moved sideways first, while infrastructure stocks continued to climb, "which was a false signal for the market."
The current situation closely mirrors this—hyperscale cloud giants at the forefront of the AI supply chain are seeing free cash flow decline and their stock prices stall, while chip, infrastructure, and optical network companies continue to rise.
Cembalest used a vivid analogy to highlight the problem: "You always want the train carriages to run slower than the engine, but now the opposite is happening."
In a July 1 research note, Hunter presented a chart clearly showing the historical trajectory at the end of the internet bubble, noting that since early July, the SOX index has corrected 20% from its highs, while the hyperscale cloud giant sector has rebounded within its wide 2026 trading range.
Optimism vs. Pessimism: Two Interpretations, Equal Weight
For the current market setup, Hunter offered two starkly contrasting interpretations, both technically valid.
The optimistic view is that hyperscale cloud giants finding support within their trading range signals funds are rotating out of crowded hardware stocks, a rotation that will ultimately make the AI theme more sustainable over the coming months and quarters.
The pessimistic view points out that a similar sector convergence occurred in the second quarter of 2000, which marked the very top of the entire market cycle.
"From a technical analysis perspective, both arguments have merit, which is why we believe the price action over the next few weeks will be critical," Hunter said.
Key Technical Levels: The Numbers That Will Decide Fate
Hunter outlined a series of technical thresholds for investors to watch closely.
For the semiconductor index, the SOX must break through the short-term resistance zone of 12,769 to 13,333. If it fails, the index could fall to a support zone of 9,975 to 10,554, representing a 28% to 32% deeper correction from the June high. However, Hunter noted that if the SOX falls towards this lower support zone in the coming weeks, it could be seen as a "tradable buying opportunity."
On an individual stock level, Hunter detailed the key positions for several core holdings:
Alphabet needs to break above the 50-day moving average of $368 and the resistance level of $381, but the stock was trading at $328 in pre-market trading on Thursday, still some distance from the target.
Amazon.com needs to break through the $251 to $258 resistance zone to "confirm the continuation of a larger-scale bull market trend," with the next target at $278.
Meta Platforms, Inc. has recently rebounded from the $525 to $553 range but is facing resistance near $669 to $694. A break above $694 would be a "strong bullish signal."
Microsoft has key support around $350, but the stock is currently far below its medium-term resistance zone of $465 to $493. It needs to sequentially break above the 50-day moving average of $400, the 61.8% retracement level since May of $421, and the 200-day moving average of $438.
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