AI and Data Center Spending Confirms the AI Trade is Very Much Alive and Well
On deck, earnings from Apple & Amazon plus upcoming economic data to watch
Market Recap
Markets held strong through the day up until the Fed rate inaction announcement and subsequent press conference. Broad equity indexes did bounce back slightly but ended the day mixed. Mag 7 exposure in Communication Services (0.31%) and Technology (0.22%) sectors helped lift the Nasdaq Composite 0.15% while the S&P 500 fell 0.12%, the Dow dropped 0.38% and the Russell 2000 closed 0.47% lower. Sectors were lower except for the two mentioned earlier and Utilities (0.74%). The remaining sectors saw results ranging from -0.18% (Healthcare) to -2.02% (Materials).
The Tematica Select Model Suite saw mixed results today. Leadership came from Guilty Pleasure (GUILT), buoyed by a strong earnings surprise from Wingstop (WING). Despite seeing its first same-store sales decline in three years, the company exceeded analysts’ expectations and posted beats in revenue and EPS, pushing the name 26.85% higher. EPS Diplomats (DIPLOMATS) and Digital Lifestyle (DLIFE) also topped the leaderboard. Laggards included Luxury Buying Boom (LUXE), Cybersecurity (CYBR), and Homebuilding & Materials (HOMES), as that strategy was weighed down by an unmoving Fed.
AI and Data Center Spending Confirms the AI Trade is Very Much Alive and Well
Fueled by the beat and raise quarters posted by Microsoft (MFST) and Meta Platforms (META) last night, equity futures are shaking off Fed Chair Powell’s sobering comments about rate cut prospects, pointing to a strong market open later this morning. Microsoft guided Azure growth to 37% year over year in the current quarter and hiked its capital spending for the period to $30 billion, confirming AI demand remains robust and the data center infrastructure shortage continues.
During the June quarter, Meta doubled its capital spending levels year over year to $17 billion, bringing that spending to just over $29 billion for 1H 2025. While Meta narrowed its 2025 capital spending forecast to $66-$72 billion, up from $39.2 billion in 2024, that implies larger spending in 2H 2025. Meta management also shared it sees “another year of similarly significant Capex dollar growth in 2026.” Those collected comments are lifting shares of chip companies Nvidia (NVDA), Marvell (MRVL), and Broadcom (AVGO), and bode very well for our Digital Infrastructure (DIGI) model.
Microsoft, Meta, and Nvidia shares alone account for just over 18% of the S&P 500’s weighting, which helps explain the level of strength we’re seeing in equity futures. Comments and guidance from Microsoft, Meta, and Alphabet (GOOGL) last week set the table for Amazon’s (AMZN) June quarter results and updated capital spending outlook. While it may be a bit premature to say, it sure looks to us like the AI and data center arms race isn’t slowing down. Based on comments already received, we know 2H 2025 capital spending levels will be higher, comments from Amazon will help us better determine how high that spending may be.
While we enjoy the follow-through from last night’s developments, let’s not make a rookie mistake and get so caught up in it that we forget to pay attention to other things going on today and tomorrow. We have the June Personal Income & Spending data out at 8:30 AM ET, which brings with it the latest Personal Consumption Expenditure (PCE) Price Index figures. Expectations for the headline and core PCE do not call for any meaningful improvement.
While we will review the findings, given the inflation comments in the July Flash PMI report, we’re going to focus more on what is found on that front in tomorrow’s July Manufacturing PMI reports and next week’s July Service PMI ones. To be blunt, we do not expect to see any meaningful improvement in their Price data. That collective PMI data will also give us another vantage point on the overall economy and its prospects as we move deeper into the current quarter.
In addition to Amazon’s quarterly results, Apple (AAPL) will also be reporting its June quarter performance, as will a sea of other companies. We expect the usual picking over of Apple’s performance for what is the seasonally weakest for its iPhone business. We expect management to focus on strides in other businesses, but we will be focusing on the mix shift toward the company’s high-margin, recurring revenue Service business.
Our take is that while the market continues to focus on Apple’s hardware business, it is missing the growing influence of the Services vertical, which is helping smooth the company’s earnings profile and delivering cash flow. We suspect Apple will remain somewhat tight-lipped about its upcoming device launches, but we also expect management will need to explain a bit more on its AI strategy, which by all accounts has been rather underwhelming thus far. With that in mind, we are curious to see if management shares any AI usage metrics, especially after the ones Qualcomm (QCOM) discussed last night on its earnings call regarding Samsung:
AI usage in smartphones is increasing. For example, Samsung noted that 70% of Galaxy S25 users are utilizing Galaxy AI, and usage of Google Gemini AI has nearly tripled among S25 users compared to the S24. ~ Qualcomm’s CEO, Cristiano Renno Amon
From our perspective, that comment from Qualcomm reinforces our view that AI adoption in the enterprise, consumer, and government verticals will translate to tight network capacity levels, driving the need for higher enterprise networking and carrier infrastructure spending. Another reason why we are long-term bullish on our Digital Infrastructure (DIGI) model.
The Strategies Behind Our Thematic Models
Aging of the Population - Capturing the demographic wave of the aging population and the changing demands it brings with it.
Artificial Intelligence – Software, chips, and related companies that facilitate the collection and analysis of large data sets and autonomous generation of solutions given non-machine language prompts.
Cash Strapped Consumers - Companies poised to benefit as consumers stretch the disposable spending dollars they do have.
CHIPs Act – Capturing the reshoring of the US semiconductor industry and the $52.7 billion poised to be spent on semiconductor manufacturing.
Cloud Computing – Companies that provide hardware and services that enhance the cloud computing experience for users, such as co-location, security, and edge computing.
Core Holdings – Companies that reflect economic activity and are large enough to not get pushed around by day-to-day market trends. Low-beta, large-cap names able to better withstand economic turmoil.
Cybersecurity - Companies that focus on protecting against the penetration of digital networks and the theft, ransom, corruption, or destruction of data.
Data Privacy & Digital Identity - Companies providing the tools and services that verify authorized users and safeguard personal data privacy.
Digital Infrastructure & Connectivity - Companies that are integral to the development and the buildout of the infrastructure that supports our increasingly connected world.
Digital Lifestyle - The companies behind our increasingly connected lives.
Digital Payments - Companies benefitting from the accelerating structural adoption of digital payments and financial technology (FinTech).
EPS Diplomats - Profitable large capitalization companies proven to produce above-average EPS growth and provide investors with the benefit of multiple expansion.
EV Transition - Capturing the transition to EVs and related infrastructure from combustion engine vehicles.
Guilty Pleasure – Companies that produce/provide food and drink products that consumers tend to enjoy regardless of the economic environment and potential long-term health hazards associated with excessive consumption.
Homebuilding & Materials – Ranging from homebuilders to key building product companies that serve the housing market, this model looks to capture the rising demand for housing, one that should benefit as the Fed returns monetary policy to more normalized levels.
Market Hedge Model – This basket of daily reset swap-based broad market inverse ETFs protects in the face of market pullbacks, overbought market technicals, and other drivers of market volatility.
Nuclear Energy & Uranium – Companies that either build and maintain nuclear power plants or are involved in the production of uranium.
Luxury Buying Boom - Tapping into aspirational buying and affluent buyers amid rising global wealth.
Rebuilding America - Turning the focused spending on rebuilding US infrastructure into revenue and profits.
Safety & Security – Targeted exposure to companies that provide goods and services primarily to the Defense and security sectors of the economy.
Space Economy – Companies that focus on the launch and operation of satellite networks.
The Strategies Behind Our Dividend Income Models
Monthly Dividend Model – Pretty much what the name indicates – this model invests in companies that pay monthly dividends to shareholders.
ETF Dividend Model – High-yielding ETFs that provide a range of exposures from domestic equities, international equities, emerging market equities, MLPS, and REITs.
ETF Enhanced Dividend Model – A group of high-yielding ETFs that utilize options to enhance yield through collecting option income.
Don’t be a stranger
Thanks for reading and if you have a suggestion for an article or book we should read, or a stream we should catch, email us at info@tematicaresearch.com. The same email works if you want to know more about our thematic and targeted exposure models listed above.