AI Optimism Lifts Tech as Small Caps Extend Historic Rally

Stocks bounced back Thursday, driven by renewed AI enthusiasm following a bullish outlook from Taiwan Semiconductor (TSMC). Tech regained leadership while small caps extended their impressive run, signaling growing investor confidence in broader market participation. Stronger-than-expected macro data reinforced the soft-landing narrative, while bond yields climbed on signs of labor market resilience. Oil prices sank sharply after President Trump appeared to dial down geopolitical tensions with Iran.

Key Headlines & Market Movers:

• AI-Led Tech Rebound Anchored by TSMC: TSMC's robust 2026 capex and revenue guidance reassured investors that the AI buildout remains on solid footing. Its $56B capital plan and 30% revenue growth forecast ignited a rally across chip stocks, pushing the Philadelphia Semiconductor Index to new highs. Nvidia and ASML gained as optimism returned to the supply chain. Analysts noted the move stabilizes the recent rotation out of megacap tech rather than reversing it outright.

Small-Cap Strength Signals Broader Market Health: The Russell 2000 outperformed the S&P 500 for the 10th consecutive session, the longest streak since 1990, reflecting investor appetite for cyclical and risk-sensitive stocks. Improved breadth and more attractive relative valuations are supporting the rotation into mid- and small-cap equities. Analysts point to stronger 2026 earnings expectations as justification for continued outperformance in these segments.

• Strong Economic Data Lifts Rates: Initial jobless claims fell to a multi-month low, and New York factory activity expanded, reinforcing the narrative of a resilient U.S. economy. Treasury yields rose, with the 10-year touching 4.17%, as markets recalibrated expectations for Fed cuts. Fed officials maintained a cautious tone, reiterating the need to keep policy restrictive until inflation is more convincingly under control.

AI Policy, Capex, and Geopolitics in Focus: The U.S. struck a trade deal with Taiwan involving over $250B in chip investments on U.S. soil, paired with capped tariffs, a tailwind for domestic semiconductor infrastructure. Meanwhile, the Commerce Department’s AI chip export restrictions continue to cast uncertainty over Nvidia’s China exposure. Oil prices slid nearly 5% as Trump signaled restraint on Iran, reducing near-term geopolitical risk.

S&P 500 Sector Performance

Looking Ahead

Investors appear willing to embrace risk again, encouraged by strong corporate earnings, improving breadth, and durable macro conditions. However, with bond yields creeping higher and AI valuations still elevated, selectivity remains key. This earnings season will be pivotal in gauging how well firms can translate AI enthusiasm and economic resilience into sustainable profit growth. Continued rotation beneath the surface, both across sectors and within tech, may offer fertile ground for tactical opportunities.

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