AI Stock Rally Still Rests on Earnings and Underweight Investors

Ozan Tarman said investors should be careful about chip stocks, but he also said the rally is understandable while the revenue and earnings story remains strong. AI was dominating geopolitical worries in the market setup described by Lizzy Burden, and the answer was that the trade still has two supports: earnings and positioning.

The earnings support is straightforward. Revenues are there, earnings are there, and first-quarter earnings were up 25%, which Tarman described as the strongest earnings performance in five years. That has made some index targets look less aggressive than they once did. He cited Deutsche Bank colleague Binky Chadha’s 8,000 target as now looking “on the conservative side,” with markets already around 7,600.

The positioning support matters because professional investors are not, in his view, universally crowded into the AI trade. Retail investors may already have exposure, and some professionals do, but he put professional positioning at “maybe 50%, maybe 60%” based on sentiment and positioning surveys. If earnings continue to come through, that leaves room for the market to go higher.

He also referred to “the three famous IPOs,” saying some market participants believe demand will be held back for them. His point was limited: that reserved demand could precede “a bit of a correction,” but with the market already around 7,600, there would still be many investors willing to buy the dip.

The threats are concentrated in rates and oil. The first is a return to the bond-market mood of the prior week, when the U.S. 10-year yield was “flirting” with 4.75% and talk of a 5% 10-year had re-emerged. Tarman distinguished the recent selloff from a classic inflation-expectations move: so far, it had been driven mainly by real yields, while inflation expectations had remained stable. The danger is that inflation expectations begin to move.

The near-term test is CPI. Tarman acknowledged a data-heavy week ending with nonfarm payrolls, but he put greater weight on the June 10 CPI release. If CPI beats by 0.1 or 0.2 percentage point, he said, the “2022 narrative” would strengthen.

The second threat is the Middle East. He described Iran and the Strait of Hormuz as being in a “holding pattern.” The question was whether there would be a deal or a major escalation. If investors are caught offside by “a big big escalation,” he argued, it would not help the risk story, the AI story, or the rate story.

Ozan Tarman expects both equities and bonds to depend heavily on whether the recent yield spike proves temporary. His “gut feel” was that the market could resemble the period after April 2019. He described that earlier moment as a dip in equities after President Trump “found the bond market yippy” and began taking steps back on tariffs; after that, markets had corrections but “never looked back.”

The comparison rests partly on the level of the U.S. 10-year yield. The 10-year traded at 4.68% the prior week. Tarman compared that with a 4.64% level reached toward the end of May the previous year, after which summer brought concerning payroll figures, inflation came in line, and yields moved lower. His base case was not that rates cannot rise again, but that they may have reached a near-term extreme if inflation data cooperate.

That condition is crucial. A June 10 CPI beat would, in his view, push both sell-side and buy-side investors to argue for a revisit of 4.68% on the U.S. 10-year, if not higher, especially if oil is also rising. He emphasized CPI more than payrolls because it would determine whether the bond-market move broadens from real yields into inflation expectations.

The positioning picture makes the trade unstable. Tarman said his roundtables from the prior week showed fast-money investors, multi-asset funds, and pods were “overwhelmingly” positioned to pay rates and be long dollars. He described the long-dollar trade as “a bit more intellectual,” especially after investors backed away from the soft-dollar view. Paying rates, by contrast, was not just a macro view; it was a crowded position.

Many investors fear inflation expectations will rise and yields will revisit their highs, so many are already positioned for that outcome. That is why, in his framing, “receivers and softening of rates” are vulnerable to the existing consensus: the market is already heavily arranged around higher rates and a stronger dollar.

UK gilts had rallied sharply before the discussion turned to whether the move could last. Ozan Tarman put the UK alongside Japan as the “bad students” of the bond market: since the prior summer, many investors had expected a fiscal-dominance or “Truss 2.0” moment led by one of those markets. Japan had calmed down, while the UK remained under scrutiny.

Gilts had rallied by almost 40 to 45 basis points over roughly two weeks. Asked by Burden whether investors were waiting for the result of a June 18 by-election involving Andy Burnham, Tarman called the election “key.” A nod toward fiscal rules was positive, in his view.

The UK still needed help from global market conditions. Escalation around Iran and Hormuz would not help; oil at $120 or $130 would not help; and a June 10 CPI surprise that makes U.S. bond markets “yippy” would not help either. Even so, his “gut feel” was for a calmer summer in UK gilts, which would work against the worldwide pay-rates consensus he had described.