"Gradually and then suddenly" is the way in which Mike Campbell, the wealthy but aimless character from Ernest Hemingway's The Sun Also Rises, describes his bankruptcy.
That might seem familiar to those following tech stocks, with nearly two thirds of the S&P 500 Information Technology Sector trading in bear market territory this week, according to data from BarChart, as Wall Street's hottest investment theme shows worrying signs of wilting in the summer heat.
The market is changing, quietly and efficiently, heading into the start of a crucial second quarter earnings season that could either underscore the bull case for tech stocks over the back half of the year or test investor patience for long-awaited profits from the artificial intelligence boom.
The Nasdaq Composite, which hit its latest all time high in early June, slipped into negative territory for the past month on Tuesday, led to the downside by the ongoing slump in tech stocks that have led the market for much of the past four years.
The PHLX semiconductor index, which more than doubled since the start of the year until its peak in late June, has since fallen more than 15%, paced by a 25% pullback in Micron Technology and a staggering 90% decline for memory storage group Sandisk.
Both are still holding extraordinary gains over the past year, due to their key roles in the AI investment theme that is powering record sales and earnings, and the PHLX index is still two thirds higher than it was only six months ago. But investors are starting to sense fatigue in the trade that has captivated Wall Street for much of the year.
Old school stocks, meanwhile, are now back in favor. Financials have outpaced everyone over the past month, rising more than 7% on an index basis, with industrials and health care stocks trailing not far behind.
The Dow Jones Industrial Average is up nearly 5% over the past month, having topped the 50,000 mark in late May, and decidedly non-tech stocks such as Johnson & Johnson, Allstate, Coca-Cola and Bank of America hit record highs this week.
That leaves the market in a precarious position heading into the start of the second quarter earnings season next week, with banks expected to kick things off with solid gains that will ultimately extend the S&P 500's current streak of quarterly profit gains to seven, with 22% growth and a headline tally that will likely top $700 billion.
The S&P 500 is up a healthy 9.7% for the year, and within a percent of its all-time high, but markets are looking for more.
Samsung's better than expected second quarter results, published late Monday, triggered another round of tech selling on Wall Street that raises concerns about valuations in the market's most-important sector.
The Shiller CAPE ratio, devised by Nobel laureate economist Robert Shiller to create a longer-term view of corporate profitability, is now marked at the highest levels since the dotcom crash of 2001.
That's leading to inevitable questions of a tech stock bubble, tied in part to the AI investment boom, which could pop if profit and revenue forecasts disappoint.
"We think the answer [to tech bubble concerns] depends on whether AI can turn today's scarcity into tomorrow's abundance," said Jean Boivin, who heads BlackRock Investment Institute.
"Markets are increasingly pricing that outcome, expecting AI to lift productivity and growth enough to sustain today's extraordinary earnings, " he added. "Whether those earnings can endure -- not where valuations sit relative to history -- is key. Still-elevated margins suggest they can."
FactSet data suggests overall net profit margins for the S&P 500 will remain near record highs of around 14.8% over the second quarter, paced by the tech and semiconductor sector.
They'll need to be.
The Bank for International Settlements, effectively a global risk watchdog, published its annual report last week and warned that market reliance on AI spending carries big financial stability risks similar to the various investment "mania" tied to canals, railroads and electrification, of the past 200 years.
"Disappointment in returns could trigger a sudden pullback in financing and turn the capex boom into a protracted investment bust," the BIS said.
Wall Street isn't there yet. In fact, it's not even giving those warnings a great deal of thought, given the recent concerns tied to inflation, commodity prices, the U.S. war with Iran and the impending midterm elections.
And that could be the bigger concern.
"Revenue is growing rapidly for firms across the AI ecosystem, but it may not continue to match the extremely optimistic projections underpinning the data center buildout," said Megan Fisher, assistant economist at Capital Economics.
"The biggest risk, in our view, is that AI demand rises, but not as quickly as seems to be baked into these earnings forecasts," he added.
Hemingway's Campbell claimed he once had "a lot of friends. False friends," who were gradually replaced by creditors as his finances waned.
We'll see how loyal investors are to the tech trade if its starts to suffer a similar fate.
Write to Martin Baccardax at martin.baccardax@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
July 07, 2026 13:38 ET (17:38 GMT)
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