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In July, U.S. equity markets entered a period of consolidation following strong gains earlier in the year. While the S&P 500 ended the month essentially flat, AI and the semiconductor complex logged their worst month of the year.
- Geopolitical Risk Resurfaces: The Middle East conflict escalated as hostilities with Iran resumed in early July, driving a notable surge in global oil prices.
- Inflation Fears Return as Interest Rates Climb: Higher oil prices reignited inflation fears and pushed interest rates higher. Markets began pricing in the possibility of a Federal Reserve rate hike rather than the cuts anticipated earlier in the year. Consequently, long-dated Treasury yields climbed meaningfully.
- AI Scrutiny Sparks Market Rotation: It turned out that the rapid rise in AI and semiconductor stocks earlier in the year was partially fueled by leveraged buying. In July, rising inflation and the threat of further Fed rate hikes led investors to question the sustainability of the capital-intensive AI investment cycle. Tech stocks declined sharply, and the sell-off was exacerbated by margin calls and forced deleveraging. This triggered a historic rotation out of tech and into blue-chip value and equal-weighted indices, with the latter reaching new all-time highs.
- Energy and Financials Outperform: While technology faced heavy profit-taking, the energy and financial sectors stepped up to anchor the broader market. Both posted strong monthly gains, fueled by higher oil prices and robust second-quarter earnings from major banks.
Our Portfolio Performance
After a strong run in the first half of 2026, our portfolio underperformed the major market indices in July due to our overweight position in AI and semiconductor equities. While we maintain long-term conviction in the AI theme, we tactically reduced our semiconductor exposure and increased our allocation to the energy and healthcare sectors. Furthermore, amidst the intense sell-off driven by leveraged investors, we purchased put options on the QQQ and semiconductor ETFs to effectively hedge the portfolio against further downside risk.
August 2026 Market Outlook
- Anticipating a Tech and Semiconductor Rebound: We expect technology and semiconductor equities to recover in August. During the recent sell-off, hedge funds heavily shorted these sectors to aggressively force margin calls on leveraged investors. With that forced deleveraging now largely complete, these assets are technically oversold and positioned for a strong rebound, particularly given that the long-term fundamental thesis for AI remains fully intact.
- Broadening the AI Playbook: The growing availability of low-cost open AI models is rapidly accelerating enterprise adoption. Moving forward, the primary beneficiaries of this next phase of AI development will be the hyperscalers hosting these models, enterprise IT hardware providers—such as Cisco and Dell—and AI implementation specialists like Palantir that help enterprises integrate these technologies into their core operations. Furthermore, select software companies that successfully embed AI capabilities present a compelling opportunity. Following steep year-to-date drawdowns, many of these software names are now trading at highly attractive valuations, offering significant upside potential.
As always, our priority remains the ruthless preservation and compounding of your capital. Thank you for your continued trust and partnership.
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