The Situational Awareness unwind is only one reason the AI trade is back
It was a clearing event after all. It’s been just over a week since the forced unwind of the high-flying Situational Awareness hedge fund, and the artificial intelligence trade is now standing on solid ground after a turbulent July battered the market’s old leaders. The best part is that the hedge fund’s reckoning last Thursday isn’t the only reason for the sustained reversal of fortunes. The biggest winners of late in our portfolio tell the story of a sturdier AI trade: Microsoft , Corning , Eaton , Intel and Amazon . This covers the performance since the July 29 close through Thursday of this week. The entire top 10 consists of AI winners, in some form or another. Prior to the Situational Awareness meteor, nine of the 10 stocks were lower during the month of July. The lone exception was Microsoft , which had been crushed in June and had started to perk up into July. Jim Cramer figured this may be the case on the morning of July 30, as reports emerged that Situational Awareness was facing a margin call and its brokers were seeking buyers for its public stock portfolio. The fund, run by former OpenAI researcher Leopold Aschenbrenner, was using a lot of borrowed money to make bullish bets on AI infrastructure providers, including chipmakers, and to bet against companies with perceived disruption risk, like enterprise software vendors. In recent weeks, those previously successful trades went wayward — hardware names were falling, and software was rising — culminating in the forced unwind. “I have always believed that when you clear out the people who have to sell, like this gentleman, you get a bottom,” Jim said before the market opened. “This is a clearing event … because he’s not the only one.” The market ripped higher last Thursday, with semiconductor stocks and data center suppliers soaring, while the rebounding software group took a breather. But the comeback for stocks like networking cable maker Corning and chipmaker Intel didn’t stop there because the news that followed reinforced the notion that the AI buildout is alive and well. That has given investors the confidence to step back into stocks that looked like damaged goods just a few weeks earlier. We’ve done the same , buying more of Corning, Intel and semiconductor materials supplier Qnity Electronics this week. On Thursday, we also added memory-chip maker Micron Technology to our Bullpen watchlist . Of course, some of the AI winners grew to become overheated in late June and were due for a pullback anyway. Speculation that perhaps the Federal Reserve could hike interest rates at its late July meeting added to the profit-taking last month. But the revelations from Situational Awareness ultimately put the past few weeks of trading in a different light. In certain cases, non-fundamental forces were likely at play to the upside — and to the downside. Then came the earnings reports, which have helped support most of our top 10 recent winners beyond just last Thursday’s session. The market has refocused on the underlying businesses of AI infrastructure providers, and the companies that are performing well are getting rewarded for it. Among the most notable reports came from the company at the top of the leaderboard: Microsoft. The tech giant last Wednesday night delivered an impressive number for its Azure cloud unit and, on the software side, showed surprising traction for its AI assistant Copilot. The Azure and Copilot performance, coupled with relatively strong free cash flow compared to its hyperscaler peers, helped soothe investor concerns about all its AI spending. The stock surged 15.5% last Thursday and from there added another 11% through this Thursday’s close. Amazon’s earnings report last week is another seminal event in the AI trade resurgence. While Amazon Web Services growing a better-than-expected 37% was nice, CEO Andy Jassy’s earnings call defense of the company’s aggressive AI investments was the real story. It gave investors a better appreciation for the potential return on all this AI spending — and, by extension, offered support for the durability of the investment cycle. That has benefited not just Amazon’s stock, but also the data center suppliers like chipmakers, Corning, gas turbine maker GE Vernova , and Eaton, which supplies electrical equipment and cooling technology for AI servers. The suppliers have also benefited from Amazon, Google parent Alphabet , and Meta Platforms raising their capital expenditure forecasts for this year, and from Microsoft suggesting it plans to invest more next year. These signals, coupled with the Jassy masterclass, made the market feel more confident that capex from the spenders hasn’t peaked yet, which is good for the vendors. Eaton’s own strong earnings report last Friday offered concrete evidence of how it’s benefiting from all this spending. No need to assume. Nvidia’s presence in the top 10 performers is especially heartening, considering the leading maker of AI chips has been in a frustrating position all year long . Up until the July 29 close, the stock had advanced a mere 2% year to date. It’s been off to the races since, and some of the gains this week can be attributed to SpaceX’s earnings report after the close Tuesday. CEO Elon Musk said the rocket-and-AI company would exclusively use Nvidia chips for its data centers, while also signaling massive investments in new computing power next year. That’s great news for Nvidia, of course, and supportive of data center suppliers more broadly. The only companies in our top 10 that do not provide AI infrastructure are CrowdStrike and Palo Alto Networks . The cybersecurity providers have emerged as AI winners in their own right, though, thanks to heightened risk of cyberattacks in the age of AI. Their stocks had incredible rallies beginning in the spring into July as the market came around to this view, before cooling off in July. They’ve heated back up amid reports that advanced AI systems from OpenAI, Anthropic and Meta Platforms have unknowingly hacked into other companies. The bottom line? The AI trade is in a different place than it was earlier this year, with at least one leveraged buyer on the sidelines. But its recent resurgence is more than justified by the facts on the sturdier ground. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. 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