Paul Hickey 2.1 7 ideas

The consumer discretionary sector has seen negative sentiment heading into earnings season, which sets a low bar, and could therefore see positive surprises as companies report.

The Nasdaq's 11-day streak reflects market optimism that we are seeing a resolution to concerns; the underlying economy is strong with high bank loan growth, low unemployment, and positive Beige Book reports, so the market is looking past the short-term energy shock disruptions which, if they last only one month, are not a problem, but if they last three months could become an issue.

Semiconductors, represented by the Philadelphia Semiconductor Index (SOX), are the leading indicator of the digital economy; they are hitting new highs and showing relative strength versus the S&P 500, making them a critical area to watch for future market direction.

AI infrastructure stocks are still hitting new highs and represent an area to look for going forward as part of the digital economy transformation.

"Margin guidance [for Cisco] was weaker than expected. And the culprit there is memory... It's been great for SanDisk. It's been great for Western Digital." One company's expense is another company's revenue. If Cisco is complaining about high memory costs crushing their margins, that explicitly means memory producers (Micron, Western Digital) are exercising pricing power and expanding their margins. Long the commodity producers (Memory) who have pricing leverage. Cyclical downturn in semiconductor demand or oversupply in late 2025.

"Cisco finally gets that 2000 high and then now it's pulled back... margin guidance, which was weaker than expected." Cisco is an integrator. They buy components (memory) to build boxes. When component costs rise (inflation) and they cannot fully pass that on to customers, their gross margins compress. They are on the wrong side of the hardware inflation trade. Avoid hardware integrators suffering from rising input costs. Cisco successfully raises prices to offset input costs faster than expected.