Archive for July, 2026
A Tale of Two Cities
In 1859, Charles Dickens published his timeless historical novel, A Tale of Two Cities, set in London and Paris before and during the French Revolution (1775 – 1789). He opens the book with one of the most famous passages in literary history:
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair.”
Nearly 170 years later, Dickens’ words could easily describe today’s stock market.
On one hand, the S&P 500 has climbed +9.6% this year and recently reached another all-time high – the “best of times.” On the other hand, many investors believe the artificial intelligence boom has become dangerously speculative and bears an uncomfortable resemblance to the technology bubble that burst in 2000 – the “worst of times.”
That divergence in sentiment was reflected in last month’s market performance:
- Dow Jones Industrial Average: +2.5%
- S&P 500: -1.1%
- NASDAQ: -2.8%
THE BEST OF TIMES
There are plenty of reasons why this multi-year bull market continues to march higher. Here are three of the most compelling.
AI Boom – Micron
As I discussed in last month’s article, The Multi-Trillion AI Tsunami, trillions of dollars are being invested across the artificial intelligence ecosystem.
Among the biggest beneficiaries are semiconductor memory companies such as Micron Technology, Inc. (MU), whose High-Bandwidth Memory (HBM) chips have become critical components powering next-generation AI data centers.
Micron recently reported extraordinary financial results as demand continues to outstrip supply. In its most recent quarterly report, Micron’s revenues more than quadrupled to $41.5 billion from $9.3 billion (+346%), a year ago. Profits for the three-month period skyrocketed even more by 15-fold to $28.2 billion from $1.9 billion (+1,398%).
Behind this remarkable growth is a structural supply shortage. Unlike software, semiconductor manufacturing capacity cannot be expanded overnight. Building a state-of-the-art memory fabrication facility requires billions of dollars of investment and typically takes three to four years to complete.
That lengthy construction timeline suggests favorable pricing and elevated profitability may persist well beyond the current earnings cycle, which explains Micron’s +837% spike in its stock price over the last year.
Earnings Are Rising Faster Than Stock Prices
Many investors assume record highs automatically mean expensive valuations. Not necessarily. Valuation depends on both price and earnings. When corporate earnings grow faster than stock prices, the market actually becomes less expensive despite reaching new highs.
Think back to elementary school fractions. If the denominator (earnings) grows faster than the numerator (price), the overall ratio becomes smaller. The same principle applies to the market’s Price-to-Earnings (P/E) ratio.
That is exactly what has occurred this year. Projected corporate profits are expected to surge +31%, causing the S&P 500’s valuation multiple to decline even as the index has reached record levels. One of my favorite long-term charts (below) illustrates this relationship perfectly. While stock prices can deviate from fundamentals over shorter periods, they ultimately follow the direction of corporate earnings.
Source: Yardeni Research
Economic Momentum Is Improving
Another encouraging development is the improving economic backdrop. The ISM Manufacturing Index remains one of the most reliable gauges of economic activity. Readings above 50 signal expansion, while readings below 50 indicate contraction. Recent data show both the United States and the Eurozone moving back into expansionary territory, suggesting manufacturing activity and economic momentum are strengthening after an extended slowdown.
Source: Calafia Beach Pundit
THE WORST OF TIMES
As I discussed in my earlier article, The SaaSpocalypse Has Arrived?, the AI revolution is creating a palpable anxiety attack as broad swaths of Americans worry about AI agents stealing their $180,000 managerial positions for a $200/month subscription fee.
There are many reasons to remain optimistic about AI’s long-term benefits, but investors should also recognize several risks that could quickly shift today’s “best of times” into the “worst of times.”
Speculative Valuations
Although the overall market appears far more reasonably valued than during the peak of the Dot-Com Bubble, speculation has clearly returned to select areas of the market.
The recent public debut of Elon Musk’s SpaceX serves as a prime example. Despite generating billions in operating losses and burning -$9 billion in cash in its recent quarter, investors have assigned the company a valuation exceeding $2 trillion. Based on trailing revenues of approximately $19 billion, investors are effectively paying more than 100 times annual sales. Such valuations require extraordinary execution over many years to ultimately justify today’s prices.
Nor is the enthusiasm limited to SpaceX. Reports indicate AI leaders Anthropic and OpenAI are preparing their own public offerings, with expected valuations approaching $1 trillion despite annual revenues that remain a fraction of those levels. History teaches us that transformative technologies often create enormous long-term winners — but periods of genuine innovation can also produce speculative excess.
Geopolitical Risks
Although a tentative ceasefire currently exists between the United States and Iran, geopolitical conditions remain fluid. Markets have largely looked through the recent conflict, but history reminds us that geopolitical events can change quickly and unexpectedly. A deterioration in the Middle East could rapidly reverse investor sentiment.
AI-Driven Layoffs
The labor market remains relatively healthy, with unemployment near 4.3%. However, beneath the surface, signs of workforce restructuring continue to emerge as companies invest aggressively in automation and artificial intelligence.
Technology companies have announced approximately 125,000 layoffs this year—roughly 66% more than during the same period last year. Oracle recently announced plans to eliminate an estimated 21,000 positions. Robinhood is reducing its workforce by approximately 10%, while Cisco revealed it is slashing its workforce by 5% (4,000 jobs). Although today’s labor market remains resilient, investors should monitor whether AI-driven productivity gains ultimately translate into broader employment weakness.
Source: Wall Street Journal
Final Thoughts
Last month’s mixed market performance reflects an investment landscape filled with both optimism and uncertainty.
If Charles Dickens were writing today, his Tale of Two Cities might instead be titled A Tale of Two Markets. The speculative excesses we experience in every technological revolution could lead to the “worst of times” but for now, the “best of times” is currently prevailing as investor optimism over AI’s productivity benefits remains front and center.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
Disclosure: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in MU or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Each investor’s situation is unique so please work with a professional financial adviser, tax accountant or legal representative, as applicable, to develop an individualized plan or address any questions you may have. Investing involves risk including the possibility of loss of one’s investment.
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