One big beautiful AI (trade)
Coming off a stellar corporate earnings season, the market was confident about the prospect of a continued rally of tech stocks into the rest of the year. Analysts have said that the whole market is now one big AI trade. To be fair, the current AI trade is dominating the tech stocks’ volatility, and investors entering this year are almost eyeing perfection in corporate earnings. The S&P 500 hit a record high in May as renewed hopes for the US-Iran deal drove investors to continue focusing on earnings and growth.
But misses do occur, and with elevated valuation expectations, the AI trade has become fragile and sensitive to any surprises, whether that is macro geopolitics or changing views from Fed officials.
The far better-than-expected job numbers and worsened CPI in May left investors feeling uncertain yet again about the Fed’s future interest rate decision and cast doubt on the sustainability of the current AI spending by big tech and chipmakers. The AI trade’s exhaustion was signaled by heavy sell-offs, which saw the Nasdaq plunge 4% in its worst day in over a year and the S&P 500 drop more than 1.2%. This was further evident from the market reaction to the May job numbers, which saw 172,000 jobs added instead of the 88,000 expected. The tick-up in US Treasury yields renewed uncertainty about the Fed’s path forward, leading many to call a rate hike inevitable if the current inflation level persists.
Despite the latest decision to keep the rate unchanged, the Fed is leaning hawkish and is committed to price stability. Bloomberg reported that “interest-rate swaps showed traders are still fully pricing in a rate hike by December.”
A cooling summer
The capital rotation away from risk assets has laid bare a few uncomfortable truths for crypto. Even MicroStrategy (now Strategy), the biggest corporate Bitcoin buyer, sold 32 BTC for $2.5 million in late May, its first sale since 2022, to cover dividends. Though the amount is tiny relative to its ~844,000 BTC holdings, the move rattled sentiment and contributed to downward pressure on crypto prices.
Bitcoin, long marketed as a hedge against monetary debasement, has struggled to hold that narrative as inflation readings climb higher. Rather than serving as a refuge, Bitcoin has once again behaved more like a high-beta extension of US tech stocks, rising when sentiment soared earlier in the year and now drifting sideways as that enthusiasm cools. The anti-inflation thesis has not disappeared, but it has become more complex. In an environment where real yields remain elevated, and the dollar draws strength from AI-driven capital flows back into US assets, Bitcoin’s safe-haven appeal is caught in a difficult crossfire. And yes, the SpaceX IPO not only sent its stock to a new high since its debut but also took a decent chunk of attention away from crypto.
On the institutional front, the promise of DeFi as the next frontier for large-scale capital deployment remains elusive, and a recent investment led by a16z shows Wall Street likes blockchain companies that build with institutional needs in mind. The recurring exploits, such as bridge failures and oracle manipulation attacks, have kept risk-averse allocators firmly on the sidelines, while the long-awaited crypto market-structure bill, the Clarity Act, continues to stall in Washington.
Without a coherent regulatory framework, compliance teams at major institutions have little room to maneuver, and what could have been a summer of structural inflows has instead turned into one of watchful hesitation. Tokenized real-world assets, maturing cross-chain infrastructure, growing on-chain liquidity, and other pieces for a DeFi breakthrough are quietly assembling, but the regulatory runway needed to land institutional capital at scale remains frustratingly out of reach.
Road ahead
Following the latest Fed rate decision that left the rate unchanged, investors are closely watching the progress of the peace deal between the US and Iran, which could ease concerns about oil shock-induced inflation. In a year dominated by the AI trades, the closely monitored IPOs by OpenAI and Anthropic will surely excite investors. Some might say the AI bubble is here, comparing it to that of the dot-com era, while others believe the fundamentals of the economy remain resilient.
Looking past the Middle East crisis, central banks are continuing their gold purchases, which bodes well for the precious metal. Innovation never stops. Crypto is accelerating its ETF era again with the Hyperliquid ETF, such as Bitwise’s BHYP and 21Shares THYP, which quickly attracted around $160 million in inflows shortly after launch in May despite the broader crypto downturn. Meanwhile, the prediction market is becoming an important tool for investors to grasp fast-changing economic conditions. Crypto is becoming more and more entrenched in mainstream finance, and that is a sign of progress, an unthinkable feat a decade ago.
With contributions from LVRG Research.
Yiwei Wang is a passionate blockchain enthusiast who aims to create interesting storytelling at the intersection of crypto, economics, and public policy. He navigated the complex landscape of the blockchain industry with effective financial communications and has worked with various industry leaders and companies.
LVRG Research serves as the research and analysis division of LVRG PR. It delivers data-driven insights on market trends, macroeconomic developments, and industry shifts, with its frequent media presence underscoring its reputation as a trusted source for timely and thought-provoking narratives.
By combining deep industry expertise with tailored solutions, ranging from PR and marketing strategy to analytical research, LVRG Research assists clients in strengthening their visibility across both Web3 and mainstream markets.
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Featured image: Vladislav Maslow on Unsplash