Good morning investors,
TSMC crushes earnings with 35% profit surge and guides Q1 revenue up 38% year over year as AI chip demand accelerates, with the stock surging 6% premarket. Small caps shine again with Russell 2000 hitting fresh all time highs, outperforming the S&P 500 for nine straight sessions, a streak not seen since 1990.
Trump imposes 25% tariffs on certain AI chips including Nvidia H200 and AMD MI325X while China simultaneously blocks H200 imports, creating impossible situation for chipmakers. BlackRock hits record $14 trillion AUM as markets rally lifts fee income, with Goldman Sachs and Morgan Stanley reporting today to round out bank earnings.
Opening Bell: Chips Lead Recovery
Dow ($DIA ( ▼ 0.46% )) futures up 58 points with S&P ($SPY ( ▼ 0.31% )) and Nasdaq ($QQQ ( ▼ 0.65% )) futures gaining 0.4% and 0.7% respectively as semiconductor strength offsets bank weakness. TSMC ($TSM ( ▼ 1.3% )) jumps 6% premarket with Micron up 3% and Nvidia/AMD each gaining over 1% on blowout Taiwan Semi results.
European chip stocks exploding with ASML up 7%, ASM International surging 9.7%, and BE Semiconductor gaining 5.4% as TSMC's $52-56 billion capex plan for 2026 validates equipment demand.
TSMC's AI Validation
The world's largest contract chipmaker delivered its eighth consecutive quarter of profit growth with Q4 net income surging 35% to NT$505.74 billion, crushing NT$478.37 billion consensus. Revenue of NT$1.046 trillion beat estimates with Q1 guidance of $34.6-35.8 billion implying 38% year over year growth.
CEO C.C. Wei's announcement of Arizona land purchases for "many fabs" in a gigafab cluster addresses tariff concerns while maintaining technology leadership. The 2nm mass production ramp and $52-56 billion 2026 capex (up from $40.9 billion) shows AI demand isn't slowing, it's accelerating.
High performance computing now represents 55% of sales with advanced chips (7nm or smaller) at 77% of wafer revenue. This concentration in cutting edge AI processors for Nvidia and AMD makes TSMC the indispensable bottleneck for the entire infrastructure buildout.
Small Caps Historic Run
Russell 2000 ($IWM ( ▼ 1.29% )) posting its fourth gain in five sessions while hitting fresh all time highs validates my highest conviction call. Outperforming the S&P 500 for nine straight sessions, last achieved in 1990, signals regime change from large cap dominance.
Small/mid cap stocks had their expectations cut heading into earnings while large cap bars were raised. Recent quarters show small caps beating estimates by over 800 basis points. With 15% earnings growth expected for small caps and 14% for mid caps in 2026, the outperformance has legs.
AI Chip Tariff Chaos
Trump's 25% tariff on H200 and MI325X chips creates confusion with exemptions for U.S. data centers, startups, and public sector applications. The narrow targeting attempts balancing national security with domestic AI development needs.
Simultaneously, Chinese customs declaring H200 chips prohibited while instructing companies not to purchase them unless necessary escalates the standoff. Nvidia caught between U.S. restrictions and Chinese bans faces impossible navigation.
Bank Earnings Disappointment
Wells Fargo falling 4% on profitability miss while Bank of America dropped 3% as expense outlook offset solid results shows expectations too high. Citigroup executives tempering enthusiasm about regulatory progress added to sector weakness.
The universal pushback against Trump's 10% credit card rate cap proposal, with banks warning of "significant slowdown" from credit restriction, shows industry unity. Lower credit score customers would lose access entirely - unintended consequences of populist policy.
BlackRock's Milestone
Larry Fink's firm hitting $14.04 trillion AUM up from $11.55 trillion year ago demonstrates asset gathering machine's power. Fixed income inflows of $83.77 billion versus $23.78 billion prior year shows bond allocation returning after rate stabilization.
Adjusted EPS of $13.16 beat consensus with fee income benefiting from market rally. The 4.4% YTD gain lagging S&P 500 suggests catch-up potential as earnings momentum builds.
Geopolitical Tensions Persist
Denmark reporting "fundamental disagreement" over Greenland ownership after White House meeting shows Trump's acquisition push creating real friction. The autonomous region's strategic importance for rare earths and Arctic access explains persistence.
Trump signaling potential restraint on Iran strikes saying "killing is stopping" provides relief after oil's rally. The administration's Venezuela intervention, Greenland demands, and Iran threats create unusual geopolitical volatility for markets to navigate.
Google's Apple Victory
Securing Apple's AI partnership away from OpenAI and Anthropic marks massive strategic win. As search evolves, Google ensures its product remains central to millions of users' experience while denying OpenAI crucial revenue and prestige.
The $4 trillion market cap milestone reflects successful AI repositioning after initial ChatGPT disruption. Boxing out the former AI frontrunner for Apple's "sacred brand" partnership validates Google's comeback.
Final Thought
TSMC's blowout results with 38% revenue growth guidance and massive capex increase shows AI infrastructure spending accelerating, not moderating. My top 2026 pick in the tech space delivering exactly as expected with technology leadership, geographic diversification, and pricing power intact.
Small caps' nine session outperformance streak signals historic rotation gaining momentum. The Russell 2000 at all time highs while large caps struggle confirms regime change underway. Years of underperformance created coiled spring now releasing with 15% earnings growth ahead.
Bank earnings disappointment reflects expectations perfection rather than fundamental weakness. The sector's 2025 rally raised bars too high for solid but unspectacular results. Pullbacks create opportunity in quality names as underlying trends remain positive.
Markets' resilience amid Venezuela intervention, Greenland tensions, Iran threats, and Fed independence attacks demonstrates remarkable composure. The lesson from April's tariff shock holds - those who don't panic outperform. Retail's higher pain tolerance and dip buying mentality changes market dynamics fundamentally.
As always, feel free to reach out with questions about navigating these crosscurrents.
Best regards,
Dan Sheehan
This newsletter is for informational purposes only and should not be considered as investment advice. Please consult with your financial advisor about your specific situation.