Stocks Took the Stairs Down and the Elevator Up | TCAF 237
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Summary
- The market showed remarkable resilience to a significant geopolitical shock (Iran/Straight of Hormuz), with the S&P 500 down only ~1% despite oil up ~47% and rate cut expectations evaporating over a one-month period. The lesson learned from recent history is that geopolitical dips are buying opportunities.
- A stark divergence is occurring within the market: while the S&P has rallied, the software sector (IGV) has crashed to new relative lows, with a historic 2-day move where the S&P was up over 3% while software was down over 5%. This is attributed to fears of AI disruption.
- Conversely, semiconductor and hardware stocks (e.g., SMH) are near all-time highs, acting as the "picks and shovels" for the AI infrastructure build-out, creating a near-zero correlation between semis and software.
- International/emerging market equities (e.g., EEM) are showing strength, with consensus 2026 EPS growth estimates at +35% (driven by heavy semiconductor exposure like TSMC) and technical charts suggesting a continuation. This is supported by shareholder-friendly reforms in countries like Japan and Korea.
- Earnings season is approached with skepticism regarding beats, as ~75% of companies typically beat by ~5%. The focus is on guidance and free cash flow. Despite war and higher input costs, estimates have continued to rise, suggesting underlying business strength.
- Major upcoming IPOs (SpaceX, potentially OpenAI, Anthropic) pose a potential "existential risk" to market supply/demand dynamics, threatening to absorb massive capital from existing indices and disrupt the favorable supply/demand balance of recent years.
- Market sentiment and options skew (probability "cone") prior to key events signaled a high probability of a rally, which materialized, demonstrating that the market was not underpricing the geopolitical risk.
- The "closet indexer" phenomenon means investors are heavily exposed to AI whether they want to be or not, as Mag 7/related names comprise a large portion of the S&P 500.
Trade Ideas
The software sector (IGV) is in a "bloodbath," failing to hold bounces while the broader market rallies. There is a historic 2-day divergence where the S&P is up >3% and software is down >5%. The narrative is that AI tools will disrupt these businesses, and fears are amplified by stories like Anthropic finding thousands of bugs in published software. The market is pricing in a severe reduction in the terminal value of software companies due to AI disruption, ignoring current record earnings. This creates a negative feedback loop of selling. The sector is to be AVOIDED because the negative psychology and narrative are overpowering strong fundamentals, with no clear floor in sight. The extreme relative underperformance indicates a structural re-rating, not a temporary correction. Software companies demonstrate several quarters of sustained earnings growth that convince the market the disruption threat is overblown.
Microsoft stock is back to March 2024 lows despite the business's success, acting as a public proxy for OpenAI. The narrative has soured, partly due to OpenAI being "tarnished" and the shift in its business model from high-margin cash generation to significant capital expenditure and borrowing for AI infrastructure. As a Mag 7 "hyperscaler," Microsoft is pot-committed to massive AI spend, which the market fears will pressure future margins and free cash flow. Its stock performance is disconnected from its current earnings. WATCH because it represents a key battleground in the AI trade. Its current valuation may price in significant pessimism, but the stock needs a catalyst to change the negative narrative surrounding capital intensity. The company successfully demonstrates that its AI investments will generate high returns without severely damaging profitability.
Consensus estimates for 2026 EPS growth in Emerging Markets are +35%, a massive outlier. This is driven by the index's heavy weighting in semiconductors (21%, including TSMC, Samsung) and technology (32%). International stocks are also less exposed to the struggling software sector. The EM index has reinvented itself from a resources/energy proxy to a tech/semi leader. Combined with shareholder-friendly reforms in countries like Japan and Korea focusing on earnings growth and valuation, this creates a compelling fundamental and technical setup. LONG because EM offers exposure to the working AI/hardware theme through semis, benefits from a potential rotation to value/international diversification, and is supported by positive technical charts suggesting a continuation higher. A sharp downturn in global semiconductor demand or a reversal of the US dollar strength.
Up Next
This The Compound News video, published April 10, 2026, features Steve Sosnick, Michael Batnick, Sam Ro discussing XLK, MSFT, EEM. 3 trade ideas extracted by AI with direction and confidence scoring.
Speakers: Steve Sosnick, Michael Batnick, Sam Ro · Tickers: XLK, MSFT, EEM