The second quarter of the year started with arguably the most volatile macro situation since 2020. Brent crude has surged to $141 per barrel, with supply disruptions in the Middle East threatening to prolong the shocks. Inflation risks are reaccelerating, growth expectations are softening, and recession probabilities are climbing.
Yet AI-linked equities are rallying sharply. Alphabet Inc. (NASDAQ:GOOG) rose 8.54%, according to Benzinga Pro, while Broadcom Inc. (NASDAQ:AVGO) gained around 12%. Automated systems leader Teradyne, Inc. (NASDAQ:TER) surged 28.8% on an upgrade to Outperform from Baird.
Memory stocks also did well. SanDisk Corporation (NASDAQ:SNDK) is up 20% month to date. Micron Technology, Inc. (NASDAQ:MU) is up around 16.5%, while Western Digital Corporation (NASDAQ:WDC) climbed approximately 20.7%.
Communication component manufacturer Lumentum Holdings Inc. (NASDAQ:LITE) is up 22% after receiving an upgrade from Mizuho, with a new price target of $930.
One explanation could be second-quarter capital rotation, as institutional money rebalances the books after the first quarter. However, given the fundamentals, the rally increasingly looks like a speculative hiding spot rather than a reflection of improving market conditions.
Fundamental Friction
The Federal Reserve is trapped between the renewed inflation fears (owing to energy volatility) and a rising probability of recession—30% per Goldman Sachs.
Policy rates remain stuck at 3.5%–3.75%, limiting flexibility. This reality is what makes the rally in memory and semiconductor stocks appear fundamentally fragile.
Micron and Western Digital benefit from AI-driven demand narratives, particularly around data center expansion and storage needs. However, these same companies are highly exposed to cyclical enterprise spending, which tends to contract when GDP slows.
Goldman has already trimmed its U.S. growth forecast to 2.1%, a level that historically has pressured hardware investment. Rising energy costs further squeeze margins across the supply chain.
The strong push in Lumentum indicates the broader momentum and investors treating anything adjacent to AI infrastructure as an opportunity. Also, it notes how far the capital is willing to chase.
While Micron, Western Digital, and SanDisk trade at price-to-sales ratios of 7x to 12x, Lumentum’s ratio is 27.7x. Investors are paying nearly $28 for every $1 in revenue the company generates.
AI as a Margin Killer
BCA Research offers a critical counterpoint to the prevailing AI optimism. In its March report, the firm argues that AI may ultimately erode, not enhance, the profit engines of large technology companies.
While productivity gains are likely, history suggests that faster productivity does not guarantee higher profits. BCA sees parallels with the 1995–2005 period, when efficiency surged, but margins didn’t rise proportionately.
AI threatens traditional competitive moats such as scale, network effects, and proprietary technology. Software could become commoditized, while platforms risk devolving into mere content repositories. With technology stocks now accounting for nearly half of the S&P 500 market capitalization, the implications of such margin compression are significant.
For investors, this reframes the current rally as an “irrational” opportunity. BCA’s 2026 positioning— short QQQ/TLT, long RSP/SPY, long EEM/ACWI, and long metals —reflects a belief that real assets, not digital infrastructure, will outperform in an inflationary, supply-constrained world.
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