Why AI stocks are down, plus 3 names Morgan Stanley likes heading into earnings

The market experienced profit-taking and rotation today, notably impacting AI-related stocks like Nvidia and Broadcom following reports of a significant scale-back in the Softbank-OpenAI 'Stargate' AI project, which Barclays analysts view as a risk to the AI capex bull thesis despite OpenAI's new partnership with Oracle. Separately, Treasury Secretary Bessent indicated a likely extension of the China tariff deadline, while Danaher reported better-than-expected earnings. Morgan Stanley expressed confidence in Eaton, Eli Lilly (anticipating a Q2 earnings beat driven by diabetes/weight loss drugs), and Nvidia ahead of their respective earnings reports.

Analysis

The market is exhibiting a distinct rotational dynamic, characterized by profit-taking in high-momentum sectors and a shift toward less volatile assets. This is most evident in the AI space, where key names including Nvidia (NVDA), Broadcom (AVGO), GE Vernova (GEV), and Eaton (ETN) declined following a Wall Street Journal report that the Softbank-OpenAI 'Stargate' project has been significantly scaled back from its initial $100 billion scope to a smaller, near-term data center project. Barclays analysts have identified this development as a 'clear risk to the bull thesis' on AI capital expenditures. Mitigating this sentiment somewhat is OpenAI's separate announcement of a partnership with Oracle (ORCL) to develop 4.5 gigawatts of new data center capacity. On a company-specific level, sentiment is mixed. Danaher (DHR) reported stronger-than-expected earnings. Meanwhile, Morgan Stanley issued a confident outlook on several companies ahead of earnings, anticipating Eli Lilly (LLY) will beat Q2 sales estimates by approximately $760 million on its Mounjaro and Zepbound drugs, and expecting an acceleration in revenue and EPS for Nvidia. This creates a conflicting narrative for AI stocks, caught between near-term project headwinds and strong underlying analyst expectations.

Key Decisions for Investors

• Investors in AI-related stocks like Nvidia and Broadcom should weigh the near-term sentiment risk from the reported 'Stargate' project scale-back against strong analyst conviction in upcoming earnings reports.
• Eli Lilly presents a potential event-driven opportunity, as Morgan Stanley projects a significant Q2 sales beat of roughly $760 million, driven by high-demand diabetes and weight loss drugs.
• Given the observed market rotation and profit-taking in 'hot stocks', it may be prudent to assess exposure to high-momentum names and monitor portfolio concentration in the AI sector.
• Note the likely extension of the August 1st China tariff deadline, which removes a near-term macroeconomic overhang and could provide a more stable backdrop for equities.