These underperforming trades could yield big returns over next six months

ETF Action co-founder Mike Akins argues for a second-half catch-up trade in underperforming AI-related software/cloud stocks, citing “rosy” earnings growth scenarios after declines from “nosebleed valuations.” He also highlights the Magnificent Seven as roughly flat YTD (down vs Nasdaq-100 by >2% in H1) but up about 5% in early H2 while Nasdaq-100 is about 1% lower, suggesting momentum may be shifting. Broadly, small caps are leading with Russell 2000 up nearly 20% vs S&P 500 up ~11%, supported by expectations for both earnings growth and multiple expansion.

Analysis

This is a positioning story more than a fundamental inflection. The near-term edge is in owning the parts of the AI complex that still have room for multiple expansion, not the obvious hardware winners that already absorbed most of the capex narrative. That argues for software/cloud exposure where cash flow is real, margins are less supply-constrained, and investor under-ownership can matter more than incremental revenue beats.

The second-order risk is that the trade becomes a crowded factor rotation rather than a durable earnings upgrade. If yields drift up or growth disappoints into earnings season, the weakest balance sheets in mid/small-cap disruptive tech will give back gains fastest, while mega-cap software with net cash and buybacks should hold up better. The market is also still conflating AI demand with AI monetization; if buyers do not see visible productivity ROI in software budgets over the next 1-3 quarters, the re-rating can stall even if the theme remains popular.

Contrarian view: the consensus may be underestimating how much of this is simply mean reversion after a narrow semis-led tape. That favors a relative-value expression over an outright beta chase. The highest-quality Mag 7 names can still work as a catch-up trade over the next 1-3 months, but the broader small/mid-cap thematic basket is more fragile and should be treated as a trading vehicle, not a long-duration compounder. Falsifiers are clear: rising 10-year yields, downward software earnings revisions, or any evidence that AI spend is not broadening beyond infrastructure.

Key Decisions for Investors

• Long IGV / short SMH for 1-3 months: express rotation from AI infrastructure into application-layer software. Best if software earnings hold while semis face valuation fatigue; cut if SMH regains leadership on revision momentum.
• Buy MAGS on pullbacks for a 4-8 week catch-up trade, with preference for MSFT, AMZN, and GOOGL exposure over TSLA. Risk/reward improves if yields stay range-bound and July/August earnings confirm still-healthy cloud demand.
• Treat ARKK or a broad disruptive-tech basket as a tactical long only, not a core position. Use a tight risk limit because the upside depends on multiple expansion, which is most vulnerable if real rates back up over the next 1-2 months.
• Watch software earnings revisions versus the Nasdaq-100 over the next quarter; if revisions flatten while price keeps rallying, fade the move. That is the cleanest alert for a squeeze ending and a rotation back into the highest-quality mega-cap names.
• For a lower-beta expression, buy a 6-month call spread on IGV or XSW instead of outright small-cap thematic longs. This captures a likely re-rating in software while limiting downside if the market’s broadening-out narrative proves temporary.