This Top AI Stock Just Overtook One of the Worst

By Michael Salvatore, Editor, TradeSmith Daily

In This Digest:

Why there’s reason to doubt the tariff status quo
A “wild card” portfolio to hold for dear life
Why tariffs and Hassett both lead to these stocks
The top AI growth stocks in Jason Bodner’s crosshairs
Why silver may collapse starting this week

Prepare for volatility this Wednesday…

That’s when the Supreme Court is set to rule on the legality of President Trump’s tariffs.

And according to popular prediction market Polymarket, there’s just a one in four chance of the Court ruling in his favor.

That’s not the only event that could roil markets.

Another big decision coming down the pike is Trump’s replacement for Jerome Powell as Federal Reserve chair.

And news that the Justice Department has opened a criminal investigation into Powell centering on a renovation project at the central bank’s Washington, D.C., headquarters has spiked Hassett’s chances of being next in line.

Hassett’s closest rival is a Kevin Warsh, a former Fed governor, who’s widely seen as more of an institutionalist.

Hassett, the current National Economic Council director, is more of an outsider… and more closely aligned with Trump’s vision for aggressive rate cuts.

If the Justice Department is already at war with the Fed, betting on an insider suddenly looks like the wrong play.

What does this all mean for us as investors?

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It means that our investing gameplan could soon change…

The last three years have been all about large-cap stocks. In that time, the large-cap S&P 500 ETF (SPY) has returned more than 80%, while the small-cap Russell 2000 ETF (IWM) has returned just 43% – almost half as much.

But if Hassett becomes the next Fed chair, he’ll waste no time cutting rates. And that favors small-cap stocks.

Small caps tend rely more heavily on bank financing, so lower rates hit their bottom lines faster. Lower rates also ensure sidelined cash earns less in Treasury bill yields. That makes risk more attractive, and small caps are where that shift shows up first.

Small caps are also less exposed to global supply chains and overseas revenue, which makes them more insulated from tariffs than multinational large caps.

S&P 500 stocks generate about 41% of their revenue internationally. The stocks in the small-cap Russell 2000 index generate about half that, at 20%.

For both the potential decisions at hand, small-cap stocks are the ones to own.

And to further narrow the field, let’s focus on the Financials, Energy, Utilities, Materials, and Industrials sectors. These companies tend to be more domestically aligned – especially when they’re smaller.

Just as we did last week, we’ll use TradeSmith’s Screener – the best way to filter the stock market using our top indicators and filters.

For this new screen, all we’re changing are the market cap class and the sectors. It’s still looking for stocks in the Short-Term Health Green Zone that have both a Business Quality Score and a Quantum Score above 70. We just only want to see stocks that are mid-caps or lower (the largest stock in the mid-cap S&P 400 benchmark is worth $24 billion).

Across the thousands of stocks in the Russell 2000, small-cap S&P 600, and S&P 400, only 51 meet these criteria. Here are the top 10, sorted by recent Short-Term Health signal:

Let’s look at this list through the lens of TradeSmith’s various tools, starting with the Business Quality Score (BQS).

Our proprietary Business Quality Score measures how durable a company’s business is – focusing on balance-sheet strength, margins, and earnings consistency. In a pro-tariffs environment, that matters. Higher costs and uneven policy tend to punish weak companies first.

That’s why names like Armstrong World (AWI) and Graco (GGG) stand out with high Business Quality Scores. These are domestic-focused industrial and materials companies with pricing power – traits that matter when trade barriers stay in place.

Next is Quantum Score.

This is a different kind of rating system built by our own Jason Bodner. It combines high fundamental growth rates in areas like earnings, profit margins, and revenue with strong price momentum. The secret sauce is how it factors unusually strong trading volumes – a hallmark of institutional buying pressure.

Here, AWI and Curtiss-Wright (CW) score well, showing that these stocks aren’t just aligned with the tariff thesis on paper – they’re attracting buyers now.

Finally, Short-Term Health helps with timing.

The green flag shows a stock is in a strong near-term trend, and the day or week marker shows how long that strength has lasted.

Stocks like Graco (GGG) and Hamilton Lane (HLNE) have seen new Short-Term Health green signals starting just three days ago.

Taken together, this group shares the same traits: domestic exposure, strong fundamentals, and confirmed momentum. That’s makes this a great watchlist for a world where tariffs stay in place and the Fed runs hot.

If you want to trade AI, Jason has you covered there, too…

It’s no exaggeration to say AI has been the beating heart of the stock market since 2023. It’s added collective tens of trillions of dollars in value to the top tech companies.

That’s because AI promises unparalleled productivity in a wide array of fields. Productivity is what powers any economy… and that economic efficiency is earning a huge premium.

We don’t have to look far for the proof. The Tech (XLK) and Communications (XLC) sectors – both heavy with big tech firms – have each returned around 134% from the start of 2023. Meanwhile, the next-best sector is consumer discretionary stocks (XLY) at an 88.4% return.

On our TradeSmith Finance dashboard, we regularly track the top 10 AI stocks by Quantum Score.

Some stocks may not surprise you. But a couple, like General Dynamics (GD) and Intuitive Surgical (ISRG) below are relatively new entrants:

We also can’t ignore the dominance of Alphabet (GOOGL). We called out GOOGL as both the best-rated stock in the Magnificent 7 back in September, while also being the cheapest.

GOOGL is no longer the cheapest Mag 7 stock, but it certainly still has the highest Quantum Score. And it recently took the #2 spot for world’s most valuable company away from Apple (AAPL) – which, by the way, has the lowest Quantum Score of the group at 55.3.

The Quantum Score is a powerful tool – especially when you can pair it with an early indicator like Short-Term Health.

Of the above, GD has the second-most recent Short-Term Health Buy signal, flashing three days ago. And AMZN’s flashed just two days back. Those are key stocks to watch.

Finally, let’s talk about an asset you should steer clear of right now…

After many months of underperforming gold, silver has entered the spotlight in a big way.

Since gold’s bull market really began back in 2024, silver has consistently lagged gold. But over just the last couple months, SLV has surged far past gold prices, notching a 3-year return of 225%.

A lot of this has to do with China’s new export controls, enacted Jan. 1. The country now requires government licenses to export silver in order to secure it as a strategic tech metal.

Silver is a critical metal for solar panels, electric vehicles, and various other electronics. China is choking off supply for silver just as the global demand for electronics of all types to build AI infrastructure is going parabolic.

Regardless of the reasons behind silver’s rise, price action never lies. And our colleague Lucas Downey, editor of AlphaSignals, thinks silver prices have gotten way too hot and are due for a cooling off. Potentially a very long cooling-off period.

Lucas is a master of signal studies. Beter than anyone I know, Lucas knows how to quantify the current moment in any asset, and then look to history for examples of when these rare sets of conditions have occurred before.

A perfect example is the fact that SLV just crested 85 on its Relative Strength Index – an level it’s seen just nine times since 2006.

That’s not an overbought level history says you want to buy into…

Over the months and years to follow, SLV is rarely higher. Over the next month, SLV has been lower 70% of the time for an average loss of 7.9%. And going further out to two years, SLV has been lower 89% of the time in a total wipeout, averaging 27% losses.

Safe to say, these stats show us the silver trade has run out of hand, and it isn’t the time to buy in. And if you own silver – first of all, congratulations. But second and more important, you might want to consider taking some profits to the bank.

This Top AI Stock Just Overtook One of the Worst