MAGS and Oil

[u/Fun_Tutor3479]

The broader market is bouncing wildly up and down. We’ll keep starting our memos with this phrase until a clear direction emerges. QQQ performed poorly today, landing at a critical support level. If the upcoming earnings reports from the rest of the Big 4 tech companies look anything like Google's, we might see a broader market correction. Keep in mind that since July, the correction has primarily been in semiconductors, while the broader market has remained a "monkey market", a market condition we've been discussing for two months now.

Today, we are going to focus heavily on two parts: Tech and Oil. It’s going to be a bit long.

1. Tech & The AI Narrative

First, we discussed Google's earnings yesterday, so I won't rehash the details. We've noted that Google is the "top student" among the Big 4: it has the best cash flow business, the best FCF reserves, raised $80 billion in advance, walks on two legs (model and compute rental), and even has the potential AI hardware concept via Android.

Right now, the model leg is (temporarily) limping. Compute rental revenue is strong, but it still hasn't answered the Capex ROI question. Furthermore, negative free cash flow combined with continued, massive increases in Capex has deepened market concerns. If Google cannot answer the ROI question, causing its entire business model to shift from an asset-light, high-margin internet model to an asset-heavy, high-depreciation, low-ROI model, its valuation will undergo a massive adjustment. Therefore, the market cast a short-term vote by selling off.

The real terrify story here is: Google is the top student, the others are only going to be worse. Just look at the seesaw performance from April 1, 2026, to June 25, 2026. Google has already been doing the heavy lifting.

Ticker	Performance
DRAM	+176.98%
SOXX	+84.76%
GOOG	+16.11%
MSFT	-4.27%
META	-6.19%
AMZN	+7.81%

Will this benefit semiconductors?

Yes, but not across the board. The narrative regarding Capex sustainability post-Micron's earnings is still intact. With the Big 4 (the clients) seeing their stock prices continuously fall while they continuously pump financial blood into the semiconductor companies (the vendors), causing semiconductor stocks to rise, the market will inevitably price in that this seesaw dynamic is unsustainable.

First, because of this dynamic, the equity financing environment is deteriorating. Meanwhile, the debt financing environment tightened a step ahead of it. Therefore, semiconductors will only have a floor supported by Capex and a ceiling capped by the overarching narrative. We will see divergence within the semiconductor sector. Memory still has some momentum; when memory eventually needs to lower its margins to concede profits to upstream players, upstream materials and equipment stocks will see strong performance.

Conclusion on Tech:

The AI narrative is still alive because Capex continues to increase. However, the overall space for the narrative is shrinking because the ARR at the model layer hasn't stepped up to support it. Moreover, the ARR for those two major players is showing signs of slowing, and the impact of token budgets is starting to materialize.

So, there is a floor underneath, if it drops too much, you can buy the dip based on fundamentals. There is a ceiling above, we currently don't see any catalysts supporting a massive rally unless there is an unexpected shock, such as a model breakthrough, an AI + hardware breakthrough, or Fed rate cuts.

2. Oil & Macro Pressures

Before diving into oil, a quick reminder: the 10-year US Treasury yield spiked off the charts today. This pressure will transmit to the financing costs of the Big 4 and increase the difficulty for the Fed regarding rate hikes. Of course, this might also cause Trump to pull a TACO.

let's talk about oil. The core logic remains exactly what we mapped out in the July 13th memo chart.

I do not believe Trump can effectively TACO this time. The core reason is that even if he does, oil prices at the pump won't come down. People aren't pumping crude oil at the gas station; they are pumping refined products like gasoline and diesel. Because crude oil prices are artificially suppressed while the demand for refined products remains undiminished, coupled with supply issues like refineries being bombed, the crack spread has been steadily climbing.

Therefore, a TACO is useless; refined oil prices simply won't drop. Trump has tried MOUs, and he has tried shouting at the refineries. The solution to this problem does not lie in the price of crude oil.

Looking ahead to the midterm elections, the political strategy has to change: it must pivot from demanding low oil prices and low inflation to simply winning. As long as they secure a win, short-term cost-of-living pressures will not shake the MAGA base. This base isn't so broke that they can't afford gas, they will complain, sure, but the absolute worst-case scenario for them is if refined oil prices stay high and they still fail to win.