Wall Street has a new message for TSMC, straight out of The Godfather: Take the profits, leave the capex.

Despite announcing record revenue of $40 billion (beating expectations), net income of $22 billion (a 77% year-over-year increase) and beefed-up guidance for the rest of the year, US-listed shares of the premier semiconductor manufacturer still dropped more than 2% on Thursday following its second-quarter earnings call. Why? Because TSMC also pledged to invest an additional $100 billion (yes, billion) into its Arizona-based chip fab, igniting enough concern about AI over-investment on Wall Street to burn the rest of the sector with it.

Boom and Gloom

TSMC’s second-quarter figures were a sign that the AI buildout is still white hot; its forecast and capex plans were a sign that it sees no slowdown in sight. In fact, with the additional $100 billion, the company is now committing to a cumulative $265 billion investment in the US, the single largest foreign direct investment in history, CEO C.C. Wei said on an earnings call Thursday. And that’s not all. The company said it’s also planning more leading-edge chip packaging plants in its home country in the next few years. “Our conviction in the AI megatrend is very strong,” CFO Wendell Huang said. “The capex in the next three years will be even more, significantly higher than in the past three years.”

Wall Street, on the other hand, is fretting that the AI industry is hallucinating its projections for future AI compute demand. TSMC was just the tip of the selloff: Nvidia fell 2.4%; Arm, 5.4%; Micron, 5.6%: Marvell, 8.7%; and newly US-listed memory maker SK Hynix, more than 13%. The Philadelphia Stock Exchange Semiconductor Index slid 4.2%, more than lapping the 0.5% fall on the S&P 500 overall. Of course, the question of how low they can go is only relevant because they’ve already climbed so high:

• The chips sector now accounts for just under 20% of the S&P 500 by weight, according to LSEG Datastream figures, up from just 5% in 2022.
• Meanwhile, at least some of the selloff appears to be led by hedge funds cashing out their significant chip stakes. Goldman Sachs prime brokerage analysts said in a note this week that hedge funds’ net exposure to a basket of AI and chip stocks is now at its lowest level this year.

From Fab to Mag: So where will all that cashed-out capital flow? Possibly to the Magnificent Seven and hyperscaler stocks that have grown stagnant this year, Goldman’s note suggested. So that’s what the AI circle of life looks like.

Headline numbers don’t tell the whole story.

Retail sales rose 0.2% in June from the prior month, the Commerce Department reported Thursday, a sharp decline from May’s revised 1% increase and lagging the 0.3% that economists polled by FactSet expected. There’s a reason that’s a good thing.

Grumble and Spend

“Cooler headline growth of retail sales in June is actually good news, reflecting lower gas prices,” said Bill Adams, chief US economist for Fifth Third Commercial Bank. Indeed, consumer price data (CPI) released by the Labor Department earlier this week showed energy costs fell 5.7% last month, with the price of gas at the pump tumbling a welcome 9.7%.

Since March, energy prices have been under more pressure than a Martha Stewart Instant Pot recipe, with hostilities between the US and Iran disrupting crude oil shipping in the Persian Gulf. Prices are rising again this week amid renewed tension, but diplomatic thawing in June brought them down considerably. The price of Brent crude oil, the global benchmark, stood at about $84 a barrel yesterday, above the $72 going rate from one year ago but well below the $126 it touched in late April.

That’s reflected in the headline retail sales number, which was dragged down by a 5.3% drop in gas station sales. In fact, excluding gas stations, sales climbed a solid 0.7%. Additional underlying data shows the top number masking what was actually a solid month:

• Discretionary spending was very strong: Sales rose 15.2% year over year at sporting goods, hobby, musical instrument and book stores; 14.2% at nonstore retailers (like Amazon); 8.6% at electronics and appliance stores; and 6% at car dealerships.
• “As they have throughout the post-pandemic expansion, consumers are grumbling about the state of the economy in surveys, then turning around to spend open-handedly,” Adams noted. At least the Consumer Price Index showed inflation fell 0.4% last month, the biggest drop since April 2020 and cause for a tiny bit less grumbling.

See the Revision: Thursday’s good news goes back a few months, as the Commerce Department revised the April-to-May increase from 0.9% to 1%. That signals a boost for second-quarter GDP, and for retailers set to report in the next few weeks: The VanEck Retail ETF, which tracks the largest US retailers, rose 1.6% Thursday.

Big Pharma is taking another trip into psychedelics.

On Thursday, Eli Lilly announced an agreement to buy the psychedelic drugmaker AtaiBeckley for $2.8 billion upfront and pay up to $1 billion more if certain conditions are met. The deal gives the world’s largest pharmaceutical company access to BPL-003, AtaiBeckley’s psychedelic-based nasal spray that studies have shown reduces treatment-resistant depression with a single dose, as competitors expand their footprints in the space.

“We have validation that we are achieving what so many people thought was impossible: Psychedelics have reached mainstream awareness and acceptance,” Christian Angermayer, founder, largest shareholder and chairman of AtaiBeckley’s board, said in a post on X.

New Perspectives

The buzz around Eli Lilly in recent years has been dominated by the explosive surge of its blockbuster weight-loss and diabetes drugs Mounjaro and Zepbound. But while the company continues to make strides in that arena, it has parlayed the financial growth of those treatments into a bold push into the future of medicine. In May, for instance, a flush-with-cash Lilly announced three acquisitions meant to boost its infectious disease portfolio.

Neuroscience isn’t a new space for Lilly. Its legacy includes introducing Prozac, arguably the best-known antidepressant, in the late 1980s, and its first medicine to treat Alzheimer’s disease in 2024. Its latest foray into neuroscience comes just after the White House ordered the Food and Drug Administration in April to fast-track research and approvals for psychedelics.

The acquisition is just the latest evidence that the drug class has transitioned from a speculative biotechnology boom to a space in which Big Pharma is ready to invest time and money:

• In October, AbbVie bought Gilgamesh Pharmaceuticals’ lead drug Bretisilocin, which is designed to treat major depressive disorder, for up to $1.2 billion.
• Johnson & Johnson’s stake in the game is depression drug Spravato. After a slow start when the drug became available in 2019, sales have more than doubled since 2023, growing to $1.7 billion.

Journey Ahead: Wall Street seems to have fully bought into the psychedelic craze. Bloomberg reported that analysts estimate the market could generate about $7 billion in annual sales by 2032 if more psychedelic-adjacent therapies win approval.