AI Trade Phase 2 Begins: Q3 Earnings to Split Winners From Losers

This week’s update at a glance

• Micron proved AI demand is real. The AI infrastructure build-out is no longer just a story. The evidence is showing up in demand, pricing and supply constraints.
• The market is moving into the economic proof phase. Strong demand alone is no longer enough. Investors now need to see margins, cash conversion, pricing power and credible returns on enormous AI capex.
• Q3 earnings are now pivotal. The July reporting window should tell us which companies can monetise AI and which companies are simply paying the bills.
• The AI trade is starting to fragment. The next phase is unlikely to lift all boats. Stock selection, money flows and risk management matter more now.

What you’ll learn

• Why Micron’s result was an important confirmation of the AI infrastructure build-out.
• Why the market now wants hard economic proof, not just AI excitement.
• The key questions Q3 earnings need to answer for hyperscalers, suppliers and software companies.
• Why the next AI winners may not be the same as the winners from the first phase.
• How to think about risk, volatility and portfolio positioning before the July earnings window.

The thinking shift

The first phase of the AI trade was relatively simple. Buy the theme, own the obvious beneficiaries, and the rising tide did a great deal of the work.

That phase has likely passed. The next phase is about identifying who captures the economics. Demand is real, but demand is only part of the equation. The more important question is whether companies can convert that demand into pricing power, margins, free cash flow and a credible return on the hundreds of billions being spent.

This is where surface-level reporting can become misleading. Investors need to understand who benefits, who pays, who depends on whom, and where the market is confirming or rejecting the story through money flows.

What history shows

Major market themes often start with broad participation. Early in a powerful trend, the market tends to reward anything attached to the theme. Later, the opportunity usually becomes more selective.

That is where the largest gap can open between the genuine long-term winners and the passengers. The market eventually demands evidence. In the AI trade, that evidence now needs to come through the earnings chain: suppliers, hyperscalers, software businesses and the companies funding the build-out.

Historically, those transition points can be volatile. They can also create substantial opportunity for investors who have a process and are prepared to respond to evidence rather than emotion.

Where I’m focused now

• Q3 earnings: The July 15 to July 31 window is likely to be one of the most important reporting periods of the year for the AI trade.
• Hyperscaler guidance: Google, Amazon, Apple, Microsoft and Meta need to show whether higher AI hardware costs can be absorbed and monetised.
• Economic proof: Pricing power, backlog quality, cash conversion, margins and capex payback now matter more than theme exposure alone.
• Money flows: The charts will tell us where investors are confirming the next winners and where they are walking away.
• Risk management: The opportunity may be larger than first thought, but it is also becoming more demanding. A clear plan is essential.

Important information

_{Any advice in this video is general advice only. Neither your personal objectives, financial situation nor needs have been taken into consideration. Accordingly, you should consider how appropriate the advice, if any, is to those objectives, financial situation and needs before acting on the advice. Garry Davis (AR No: 317590) is an authorised representative of Primary Securities Ltd (AFSL No. 224107).}

_{Note to traders: The publishers of this article/information/promotion wish to disclose that they may hold stocks mentioned in their portfolios and that any decision to purchase any stock should be made only after the purchaser has made their own enquiries as to the validity of any information in this article/information/promotion.}

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