AI Market Splits as Hardware Soars and Software Stumbles

A Tale of Two AIs: Hardware Surges as Software Stumbles

The artificial intelligence boom that has powered markets is changing shape. While the second quarter of 2026 was the best for US stocks in six years, the initial excitement that lifted all tech boats is giving way to a more discerning phase. Investors are now rewarding companies making the physical tools for AI while punishing those with enormous spending bills and unproven profits.

The 'Magnificent Seven' Lose Their Shine

While the tech-heavy Nasdaq gained around 21% in the second quarter, its largest quarterly gain since 2020, June was a more difficult month for the biggest names in tech. The group collectively lost around $2.3 trillion in market value, signalling growing investor doubt about whether massive spending on AI will translate into the profits needed to justify high valuations. The market is shifting its focus from the big spenders to the suppliers.

This trend is starkly visible in the performance of individual sectors:

• Winners: Semiconductor and computer hardware firms dominated the S&P 500's best performers, adding around $2 trillion in combined value in the second quarter alone. Sandisk shares soared by an incredible 764%, while Micron Technology saw a 301% gain. However, some profit-taking emerged late in the quarter, with the sector falling nearly 8% in the final week of June.
• Losers: In contrast, software and internet companies have seen their valuations shrink. Intuit, for example, was one of the S&P 500's worst performers, falling 60% despite reporting solid revenue growth.

Amazon's Big Bet on AI Implementation

Underscoring the massive investment required, Amazon has announced it is putting $1 billion into a new 'Forward Deployed Engineering' team for its Web Services (AWS) division. The goal is to embed its technical experts directly within client businesses to speed up their adoption of AI. This highlights the intense pressure on major tech firms to demonstrate tangible returns on their colossal AI spending.

The Global AI Supply Chain Heats Up

The distinction between AI hardware makers and users is becoming sharper amid a global memory chip shortage. Device makers like Apple and Microsoft are being forced to raise prices on laptops and games consoles, citing soaring component costs. Microsoft warned that console memory prices could double by 2027.

Chipmaker Micron Technology suggests its own customers are partly to blame. The firm argues that major tech companies aggressively pushed down memory prices in 2023, which discouraged investment in new factories and ultimately led to today's supply crunch. This friction is now fuelling a global investment boom:

• Asian Manufacturing Strength: China's factory activity expanded in June, with its official PMI gauge hitting 50.3, largely thanks to strong US orders for AI-related exports. Meanwhile, South Korean giants Samsung and SK Hynix are planning to invest a colossal $516 billion in four new memory chip plants to meet demand. SK Hynix is even planning a US public listing to capitalise on the boom.
• Data Centre Deals: The infrastructure race extends to real estate. Digital Realty, a major owner of data centres, is buying out Blackstone's stake in three facilities for $3.5 billion. However, its shares fell as the deal will be funded with new stock, which dilutes the value for existing shareholders.

Supply Chain and Security Risks Exposed

Apple's heavy reliance on new manufacturing partners has been exposed after a ransomware group leaked over 630 gigabytes of sensitive files from Tata Electronics, a key iPhone producer in India. The leak included designs and supplier details for the unreleased iPhone 18 Pro. The incident raises serious questions about whether Apple's new production hubs can maintain the level of secrecy it established in China, revealing a critical operational risk in its strategy to diversify its supply chain.

AI's Disruptive Force Hits Outsourcing

The pressure from generative AI is being felt acutely in the call centre industry. These firms are facing a crisis as markets bet that AI will soon replace a significant amount of human-led customer service.

Concentrix, a major player in the sector, saw its stock plunge 24% after it was forced to cut its revenue forecast by $130 million. Its rival, Teleperformance, has also seen its share price fall to decade-long lows. The key question is whether these companies can successfully integrate AI into their services before their traditional business models become obsolete.

Anthropic Gets a Green Light

In a specific boost for the industry, AI firm Anthropic has received clearance from the US Department of Commerce to provide its latest models to foreign nationals again. Access had been suspended in mid-June by the Trump administration, raising concerns about protectionism in the fast-growing AI space. The reversal allows the company to resume the rollout of its Claude Fable 5 and Mythos 5 models globally.

Global Markets at a Crossroads

The first half of 2026 delivered its strongest returns in six years, with the S&P 500 adding an incredible $8 trillion in value and the Dow recording its best first half since 2021. Even smaller companies have participated, with the Russell 2000 index logging its best first-half performance since 1991. However, as we enter the second half, the economic picture is becoming more complex, with central banks and corporate earnings sending mixed signals.

Federal Reserve Takes Centre Stage

All eyes are now on the US Federal Reserve. New Fed Chair Kevin Warsh is facing his first major test at a central banking forum in Sintra, Portugal. His commentary is critical because markets, which had been hoping for interest rate cuts, are now starting to believe a rate hike is more likely by the end of the year.

Inflation Headaches

This shift in thinking comes as US inflation runs above 4%. This view was echoed by Cleveland Fed President Beth Hammack, who recently warned that the "insatiable" demand for AI infrastructure could itself push inflation higher. Consumers are feeling the pinch directly, with the cost of a Fourth of July barbecue for ten people hitting a record high of $73.82, driven by soaring beef prices as the US cattle herd hits a 70-year low.

Adding a political dimension, President Trump has begun publicly pressuring petrol stations to cut prices to $2.50 a gallon, warning of "big problems" if they fail to pass on recent falls in crude oil costs to consumers. The national average currently sits at $3.86.

US Dollar Reaches 13-Month High, But Long-Term Risks Emerge

The American currency has strengthened to its highest point in over a year, driven by expectations of higher US interest rates and strong demand for American assets. The Dollar Index is up 3.1% for the year. This strength has put severe pressure on other currencies, with the Japanese yen falling to its weakest level against the dollar since 1986.

However, a recent survey signals a potential long-term shift. A growing number of global central banks have indicated plans to reduce their exposure to the US dollar over the next decade, while simultaneously increasing their holdings of gold and euros. If this diversification trend gathers pace, it could act as a significant headwind for the dollar in the years ahead.

Corporate Earnings: A Mixed Picture

Recent results from major consumer brands show a clear split. Nike's results were superficially strong, beating expectations largely thanks to a one-time $986 million tariff refund, which added 52 cents per share to its profit. However, its shares fell because sales in Greater China, a key market, dropped by 12%, while its North American revenue, despite growing by 3%, also fell short of analysts' forecasts.

In contrast, Constellation Brands, maker of Modelo and Corona beer, delivered a clean beat on sales and profit and confirmed its financial outlook for the year. Its shares rose as a result. The market is rewarding companies with genuine demand and punishing those propped up by financial one-offs.

Sector Spotlight: Defence, Pharma, and Property

• Defence: AeroVironment, a US drone maker, saw its shares surge around 28% after reporting a 133% jump in quarterly revenue. The company's order backlog swelled by 65% to $1.2 billion, reflecting massive demand for cheap drones and counter-drone systems driven by recent global conflicts.
• Pharmaceuticals: Several major drug companies, including Merck and AbbVie, saw their shares dip after a US House committee launched a national security investigation into their clinical trials in China. Lawmakers are concerned about research conducted at hospitals linked to the Chinese military.
• Property: US home prices reached another record high in May, but annual price growth has slowed to just 0.7%, the ninth consecutive month under 1%. The market appears frozen by high mortgage rates and a low supply of homes for sale.
• Food Producers: Three of the largest US egg producers, including Cal-Maine Foods, settled a price-fixing investigation with the Justice Department. As part of the agreement, which still needs court approval, the firms will donate around 53 million eggs and set up new antitrust compliance programmes.

Commodities Face Headwinds

While equity markets have performed well, the commodity space is showing signs of weakness, reflecting concerns about global economic demand and shifting politics.

Oil Prices Tumble

In a surprising development, the price of Brent crude oil recorded its largest monthly fall since March 2020, dropping by over 20% in June and closing its worst quarter since 2020. With West Texas Intermediate crude trading near $70 a barrel, traders are now preparing for a global supply glut rather than a shortage. This follows the de-escalation of conflict in the Middle East which allowed more supply to reach the market, though President Trump's recent comments have introduced a new layer of political pressure on retail pricing.

Gold's Shine Fades

The precious metal has also faced significant selling pressure, recording its largest quarterly price fall in 13 years. This unwinds much of the strong gains seen last year, as a stronger US dollar and the prospect of higher-for-longer interest rates make non-yielding assets like gold less attractive.

Copper Rally Cools

The price of copper is also under pressure. The threat of US tariffs and a shift by manufacturers towards cheaper alternatives like aluminium are weighing on demand. Major companies including Tesla and BMW are reportedly substituting aluminium for copper to reduce costs, a significant structural change for the industrial metals market.

Crypto Slumps on Retail Outflows, But Institutions Build for the Future

As the stock market celebrated a record-breaking quarter, the cryptocurrency market fell into a deep slump, with Bitcoin hitting a yearly low. The two asset classes, which had moved in tandem for much of the year, have sharply diverged. However, beneath the surface of the price crash, a wave of regulatory clarity and institutional adoption signals that a more mature phase for the industry may be beginning.

Why Crypto Missed the Stock Rally

The split between soaring stocks and sinking crypto has a clear cause: institutional money flows. In the first quarter, billions flowed into new US spot Bitcoin ETFs, tying crypto's performance closely to Wall Street's appetite for risk.

That trend reversed sharply in the second quarter. These same ETFs saw over $4 billion in net outflows in June, their worst month on record. When the biggest new buyers became the biggest sellers, prices collapsed. At the same time, a strengthening US dollar tightened global liquidity—the flow of money around the financial system—which disproportionately hurts speculative assets like Bitcoin that don't generate their own cash flow.

Strategy Abandons "Never Sell" Pledge

Confidence in the crypto sector was further rocked by news from Strategy, the company built by advocate Michael Saylor into the world's largest corporate Bitcoin holder. The firm has authorised the potential sale of up to $1.25 billion of its Bitcoin holdings to cover dividend payments, sending its shares down over 6%.

This move shatters the company's long-held "never sell" promise, which was the core of its appeal to investors. The change signals that even the biggest backers are feeling financial pressure, leading many to question the stability of the market.

Regulation Takes Shape on Both Sides of the Atlantic

In a significant development, the UK's Financial Conduct Authority (FCA) finalised a comprehensive regulatory framework for the crypto industry on June 30th. For the first time, the new rules bring exchanges, crypto custodians, and stablecoin issuers under a full authorisation regime.

This contrasts with the situation in the US, where the industry is spending heavily to influence policy. Crypto firms have already funnelled $189 million into political campaigns for the 2026 midterm elections to push for favourable legislation, such as the new Clarity Act, which is currently stalled in the Senate.

BlackRock and Major Banks Back New Stablecoins

Evidence of deep institutional interest is mounting. Ethena announced that its USDe stablecoin will be integrated into BlackRock's Aladdin, an investment management platform used to oversee more than $20 trillion in assets. This move makes a crypto-native asset accessible within the existing workflows of the world's largest money managers.

Separately, a new stablecoin called Open USD (OUSD) was announced with an unprecedented coalition of over 140 backers. The list includes payment giants like Visa and Mastercard, banks such as BlackRock and Standard Chartered, and tech leaders like Google and Samsung. This level of mainstream support for crypto infrastructure is a powerful long-term signal that major firms see a future for the technology, regardless of short-term price volatility.

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