AI's Long Shadow: Crypto, Chips, and CPI

Every morning before the opening bell, the Schwab Market Update sets the stage for the day ahead, covering key market movers, economic developments, and emerging themes. Each edition includes "Three things to watch" and every Thursday features a weekly section, "Crypto currents." This recap revisits select items for those who may have missed them, helping traders head into the weekend better informed.  

Recent Wall Street softness reflects several factors, including a lack of near-term tech earnings catalysts following Oracle (ORCL), the spike in Treasury yields, and possibly some liquidation of tech to raise capital for upcoming initial public offerings. Additionally, there may be some concern about economic growth amid worries about potential rate hikes later this year, actual rate hikes in Europe and perhaps Japan, and the fact that this month's Consumer Price Index data confirmed inflation is growing more quickly than wages. This dynamic, if it lasts, can hurt consumer purchasing power and ultimately drag on gross domestic product. "The lack of progress in peace talks with Iran is just another overhang on sentiment," said Nathan Peterson, director of derivatives research and strategy at the Schwab Center for Financial Research, or SCFR. "The fundamental story is still intact, and it's still an AI driven and capex backed market, but that doesn't mean you can't get a 5% to 10% pullback."

The tech sector's recent swoon puts the spotlight on an important touchstone for investors: The value of the S&P 500^® Index increasingly reflects the ups and downs of a handful of its members. This makes it less valuable as a tool to measure market performance, and investors may want to check the S&P 500 Equal Weight Index (SPXEW). It weighs all components equally rather than by market capitalization, offering a better understanding of what's happening under the surface. By early this week, 10 S&P 500 stocks represented nearly 40% of the index's value, The Wall Street Journal noted. All 10 have some connection to AI. "A majority of the earnings growth for 2026 is narrowly focused in the tech sector, accounting for nearly half of U.S. expected earnings growth," said Michelle Gibley, director of international equity research and strategy at SCFR. "Market returns have also been concentrated on the tech sector and industrial companies that participate in the AI build out. The economic outlook is improving, which means cyclical sectors such as financials, industrials, energy, and materials could also do well, making an allocation to international stocks a potential diversification buffer to AI-concentrated portfolios."

The Schwab Trading Activity Index (STAX) rebounded last month after declines in March and April, though some of the same themes persisted. Three of the 10 most net-bought names were diversified exchange-traded funds, down from five in April but still suggestive of broader positioning and a continued effort to reduce concentration risk. Overall, the STAX, which is a measure of trading activity by Schwab clients, rose 9.94% to 55.08 from 50.1 in April. Nvidia (NVDA) went from the top net-sold stock in April to the heaviest net-bought name in May, while memory chipmaker Micron (MU) ranked just behind it. Intel (INTC) was another semiconductor name that drew strong client interest during the month. At the same time, clients trimmed exposure to some other AI rally winners, including Advanced Micro Devices (AMD) and Oracle (ORCL). They also took both sides of the software trade as that sector continued to recover. It's a dramatic change from April, when clients were big sellers of semiconductors and buyers of software.

Another bitcoin sell-off, another round of handwringing in the world of crypto. What's to blame? The AI trade sucking up capital? Surging inflation and possibly higher interest rates? Digital asset treasury company Strategy's small but symbolic sale of bitcoin? Perhaps all of the above. Or maybe it was just a normal test of a previous low in what is still a relatively young bear market, as bitcoin goes. Flows data also tells a story. Net outflows from spot bitcoin exchange-traded products totaled $5.4 billion over the past four weeks, the most since spot ETPs launched in early 2024, according to Glassnode data. But bitcoin's recent decline also coincided with a steep drop in net accumulation by long-term holders, whose holdings have an average purchase date of more than 155 days. That cohort had been on a buying spree since March 1, helping drive the price about 25% higher over two months. But their net buying fell off a cliff last week, dropping by more than half as bitcoin's price fell 17% over just five days last week. Last Friday, it totaled just about a quarter of the daily average over the previous three months.

The 4.2% rise in headline CPI year over year matched analysts' consensus and was the highest since April 2023. Still, even after the data, futures trading indicated a 98.2% chance that the Fed keeps its target range between 3.5% and 3.75% at next week's meeting, staying parked right where it's been since the most recent rate cut last December. The market doesn't build in 50% odds of a rate hike until this December's meeting, when chances are nearly 70% for at least a 25-basis point increase, according to the CME FedWatch Tool. "We expect the Fed to remain on hold for the time being," said Cooper Howard, director of fixed income research and strategy at SCFR, adding that this week's data has no near-term Fed implications. Checking under the hood, May CPI showed flat goods prices but a 0.3% gain in services. Gas prices charged 40.5% higher year over year, accelerating from April's 28.5% gain. The energy index surged 3.9% monthly in May, accounting for over 60% of the total monthly increase, continuing the oil shock that pushed energy up 3.8% in April and 10.9% in March. Shelter remains sticky at 0.3% monthly but did get a downtick from April's 0.6% rise. Monthly headline and core CPI rose less than in April.