Money rotating out of AI trade

What happened: Hedge funds are reducing their exposure to artificial intelligence (AI) stocks, according to UBS, marking a shift from the previously crowded trade. This rotation comes as AI hyperscalers like Microsoft and Apple have experienced significant declines, with Microsoft down 27% year-to-date and Apple falling 8% in a single week. Meanwhile, investors are quietly rotating into unexpected stocks like TJX, Coca-Cola, and Monster Beverage, which recently reported strong earnings growth.

Market impact: The rotation out of AI stocks is affecting tech-heavy indices and AI-focused ETFs. Companies like Microsoft and Apple, prominent in AI development, are experiencing significant sell-offs. Conversely, defensive stocks in sectors like retail and consumer goods are seeing increased investor interest, driving their share prices to new highs.

What to watch next: Investors should closely monitor Micron's earnings, scheduled for late July, as it leads the supplier rotation and has seen gross margins jump from 38% to 85%. Additionally, keep an eye on Taiwan Semiconductor's guidance, as it is another key supplier in the AI ecosystem. Lastly, observe the performance of AI-focused ETFs and tech indices around the upcoming AI-related earnings from companies like Nvidia and AMD.