The AI bull market enters a "stress test" phase: Can QQQ continue to reach new highs?

On July 8, 2026, in the early hours of Beijing time, all three major U.S. stock indexes closed lower. The Dow Jones Industrial Average fell 0.25% to 52,925.15 points; the S&P 500 declined 0.45% to 7,503.85 points; and the Nasdaq Composite dropped 1.16% to 25,818.69 points. The Invesco QQQ Trust (QQQ), which tracks the Nasdaq 100 Index, also came under pressure, with the Nasdaq 100 falling 1.8% to 29,173.02 points on the day.

This is not an isolated technical correction. Over the past few weeks, the AI sector has been experiencing persistent volatility, with growing skepticism in the market about whether the artificial intelligence industry can generate sufficient profits to justify massive capital expenditures. The Cboe NDX Volatility Index has risen to around 27, reaching its highest level relative to the S&P 500 Volatility Index (VIX) since 2002. The one-month correlation among Nasdaq 100 constituents is significantly higher than that of the S&P 500, indicating that AI trades have become relatively crowded.

Is the AI bull market nearing its end? As the core tracking tool for the Nasdaq 100 Index, QQQ's future trajectory matters not only to U.S. equity investors but also profoundly impacts the pricing logic of global risk assets—including the crypto market. From four dimensions—index composition, valuation levels, fund flows, and the macroeconomic environment—this analysis breaks down the conditions and headwinds for QQQ to reach new highs.

QQQ's AI Exposure: Weight Structure and Narrative Dependence

The Nasdaq 100 Index tracked by QQQ consists of the 100 largest non-financial companies by market capitalization in the Nasdaq Composite. Over 60% of the index weight is composed of technology stocks, giving it high exposure to the AI industry. As of July 2026, among QQQ's top five holdings, Nvidia, Micron, Microsoft, and Amazon are all deeply involved in or highly exposed to the AI spending wave.

The quarterly rebalancing of the Nasdaq 100 in June 2026 further reinforced this characteristic. AI hardware and computing-related companies such as CoreWeave, Astera Labs, Nebius, Rocket Lab, and Teradyne were added to the index, while some software companies were removed. Currently, the weight of semiconductors and AI hardware in the index has approached 25%. Meanwhile, the "Magnificent Seven" (Mag7) still account for approximately 37% of the Nasdaq 100 weight.

This means QQQ's performance is highly dependent on the overall performance of the AI industry chain. In the first half of 2026, the Nasdaq 100 Index accumulated a gain of about 20%, with ten stocks—almost all AI-related chipmakers and storage hardware companies—contributing the vast majority of the increase. This concentration is both the reason QQQ has outperformed the S&P 500 over the past year and a half and its current greatest vulnerability: once the AI narrative faces challenges, QQQ lacks sufficient sector diversification to cushion downside pressure.

Valuation Debate: The Logic Behind a 36.5x P/E Ratio

As of early July, QQQ's weighted average price-to-earnings (P/E) ratio stood at approximately 36.5x. This level is far above the S&P 500's long-term average and also above QQQ's own historical median. High valuations alone do not constitute a bearish argument—in a low-interest-rate, high-growth environment, growth assets commanding a premium is reasonable. However, the current market environment is changing.

Goldman Sachs derivatives experts point out that investors are underweighting U.S. tech stocks, especially the "Magnificent Seven." Options market pricing shows that the cost of downside hedging for QQQ is now significantly higher than for comparable small-cap stocks. This indicates that market participants are paying higher premiums to insure against a decline in QQQ—a defensive signal, not an offensive positioning.

The core of the valuation debate lies in a fundamental question: Can AI investments generate enough profits to support current stock prices? If the massive capital expenditures in AI infrastructure cannot translate into sustainable earnings growth, then the high-valuation constituents of QQQ that rely on the AI narrative will face revaluation pressure. The answer to this question remains unclear. Samsung Electronics reported a sharp profit increase in the second quarter, but it fell short of the even higher expectations of buy-side investors, causing its stock to plunge and dragging down the global semiconductor sector. This event reflects a broader reality: market expectations for AI-related companies have become so high that it is "almost impossible to deliver results that exceed expectations."

Fund Rotation: Crowdedness and Divergence in AI Trades

The market action on July 8 clearly illustrated the divergence within the AI sector. The Philadelphia Semiconductor Index plunged 4.65% on the day, with Intel falling over 9%, Western Digital and SanDisk dropping over 7%, and Micron Technology declining over 4%. However, Nvidia's stock bucked the trend, closing up 0.71% at $196.93.

The divergence was even more pronounced in the options market. Nvidia's call option volume exceeded 1.5 million contracts, while put options were fewer than 690k contracts, meaning call buying was more than double put buying. There was also a large block trade—an investor reportedly spent approximately $3.5 million to buy call options with a strike price of $200 expiring at the end of July. In contrast, the options structure for the Semiconductor ETF (SMH) showed the opposite picture: put buying was nearly four times call buying.

This divergence suggests that the market is not systematically exiting the AI sector but rather conducting fine-grained selection—capital is flowing from sub-sectors like memory chips, which had rallied sharply earlier, into core AI chip names represented by Nvidia. Goldman Sachs describes this phenomenon as the AI trade shifting from a "beta bull market" to "alpha divergence." For QQQ, this means that the broad-based rally logic at the index level may be unsustainable, and future performance will depend more on the relative strength and weakness among its constituents.

Macro Variables: Interest Rates, Geopolitics, and Volatility

Beyond the fundamentals of the AI industry itself, QQQ's trajectory is also constrained by multiple macro variables.

Interest Rate Path: AI benefits stock valuations on the earnings side by boosting revenue, orders, and profit expectations. However, it is not necessarily favorable for the near-term rate-cut path—AI makes the economy more resilient to high interest rates and gives the Fed less reason to rush into cutting rates. If the Fed maintains higher rates for longer due to economic strength, QQQ's high-growth exposure will face greater valuation pressure than the broader market.

Geopolitical Risks: On July 7, the U.S. Central Command began a series of strikes against Iran in response to Iranian attacks on commercial shipping in international waterways. The U.S. Treasury also revoked the general license that allowed Iranian oil sales on the same day. Geopolitical conflicts pushed up oil prices, with light crude oil futures for August delivery on the New York Mercantile Exchange rising 2.76% to $70.44 per barrel. Higher oil prices intensify inflation concerns, further compressing valuation room for growth stocks.

Volatility Structure: The 30-day realized volatility of the Nasdaq 100 has risen to 29.7. SpaceX was officially added to the Nasdaq 100 Index on July 7 and dropped 6.83% on its first day. As a high-volatility IPO, the inclusion of SpaceX is expected to widen the volatility gap between the Nasdaq and the S&P 500. A high-volatility environment is unfavorable for QQQ's trend-following rallies, as institutional investors tend to reduce positions or increase hedging when volatility rises.

Conclusion: Conditions and Path to New Highs

Returning to the core question: Can the AI bull market continue to push QQQ to new highs?

On the supporting side, for QQQ to reach new highs, several conditions must be met: First, AI industry capital expenditures must continue to translate into corporate earnings, with growth rates exceeding the already highly optimistic market expectations. Second, fund rotation must shift from "full embrace of AI" to "selective AI core assets," but QQQ's index structure is inherently not conducive to such fine-grained allocation. Third, the macro environment must remain relatively stable, with geopolitical shocks and rising interest rates not occurring simultaneously.

On the resistance side, QQQ currently faces four pressures: elevated valuations, crowded trades, rising volatility, and escalating geopolitical risks. The Nasdaq 100 Index has accumulated a gain of about 30% since the end of March, with short-term profit-taking piled up. Goldman Sachs warns that if the AI industry driving this rally reverses, the massive unrealized gains and losses in the market could turn into selling pressure, with a potential maximum drawdown of up to 50%. While this is an extreme scenario, it underscores the vulnerability of current positioning.

The market action on July 8 provides a partial answer: the AI bull market is not over, but it has entered a "stress test" phase. Nvidia's resilience and bullish options bets indicate that core AI assets still command capital recognition. However, the sharp decline in memory chips and the 1.8% drop in the Nasdaq also show that market scrutiny of the AI narrative is becoming increasingly stringent.

For long-term investors in QQQ, historical data shows that buying QQQ when the Nasdaq is at historic highs rarely results in truly poor long-term entry points. But the short-term path is bound to be bumpy. The story of the AI bull market driving QQQ to new highs is not over—it is just that the next phase's driving force will shift from "valuation expansion" to "earnings validation"—and this validation process has only just begun.

FAQ

Q1: What is QQQ, and how is it related to the AI bull market?

QQQ is an exchange-traded fund issued by Invesco that tracks the Nasdaq 100 Index. The index has over 60% weight in technology stocks, and core AI companies such as Nvidia, Microsoft, and Amazon are among QQQ's top ten holdings. Therefore, QQQ's performance is highly dependent on the health of the AI industry and market confidence in the AI narrative.

Q2: What is the current valuation level of QQQ?

As of early July 2026, QQQ's weighted average P/E ratio is approximately 36.5x. This level is above its historical average and also above the S&P 500. High valuations alone do not constitute a bearish argument, but against a backdrop of sustained high interest rates and AI earnings not yet fully realized, the risk of valuation compression is worth noting.

Q3: How does fund rotation in the AI sector affect QQQ?

Currently, capital is flowing from sub-sectors like memory chips, which had previously rallied excessively, into core AI chip names such as Nvidia. This divergence means QQQ's index-based structure may struggle to capture alpha—the relative strength and weakness among its constituents will limit the index's overall upside unless core AI assets can consistently deliver above-expectation results.

Q4: What are the core conditions for QQQ to reach new highs in the future?

QQQ needs three conditions to reach new highs: AI industry capital expenditures must continuously translate into above-expectation earnings; during the rotation from "full embrace of AI" to "selective core assets," the index must still receive sufficient support; and the macro environment must remain relatively stable, with interest rates and geopolitical factors not posing systemic shocks.