NASDAQ gained ~4% in August, driven by MAG7 up ~7% and software (IGV) up ~16%, while semis (SOXX) were flat after recovering from a leverage unwind in July that caused a ~21% drop in semis.
The semis leverage unwind ended with Korean regulators tightening leveraged-ETF rules and forced sellers like Situational Awareness (4x leverage) getting cleared out. Korean Finance Minister Koo Yun-cheol apologized in parliament for launching the products without thinking through how they would trade, as the regulatory body plans to increase restrictions on leveraged ETFs and stocks.
August also saw a shift in Fed rate expectations. With core PCE stuck at 3.3% and increasingly hawkish comments from Fed officials and Chair Warsh, we see higher rates as the likely next move. Fed rates disproportionately affect the valuation of growth companies, i.e., most AI names.
As markets move from pricing rate cuts to rate hikes, the growth rally becomes more selective, and the bar for stock momentum rises from reasonable beats to blowout earnings. We believe this is the time to stick to high-conviction names where we expect sustained earnings beats and have valuation comfort.
Improved AI Capex Outlook & Broadening of AI trade:
The semis index rallied ~10% in early August and gave it all back as markets gauged the longevity of the capex cycle. Nvidia’s earnings offered a partial answer in the final week.
Nvidia delivered another beat-and-raise quarter; more importantly, it guided to ~70% revenue growth in FY28, higher than what analysts had modeled. Nvidia’’s outlook increases our confidence in AI capex-driven names into 2026–27.
The AI trade is expanding beyond semis to AI beneficiaries. Salesforce’s Agentforce ARR crossed $1.5B, up 240% YoY, and it deepened its commercial partnership with Anthropic. The stock rallied 22%, one of its best days ever, on strong AI revenue.
In August, IGV rallied ~16% (vs SOXX up ~0.7%) as markets started to re-rate SaaS companies (Adobe, NOW, WDAY, etc.) as AI beneficiaries rather than businesses being disrupted by AI. While we don’t want to call CRM a clear AI winner yet, Salesforce’s earnings gave a clear view of how a well-executed AI transformation can turn a SaaS company into an AI firm.
For us, software companies benefiting from AI and the corresponding SaaS rally are a good AI-ecosystem indicator. They address the AI revenue question and justify the AI capex buildout.
However, in the near term, finding new AI beneficiaries can drive capital rotation out of semis and into companies (SaaS and others) benefiting from AI adoption.
We see this as an opportune moment to add companies that benefit from AI, extending beyond the enablers providing hardware infrastructure. As part of this, we have added Uber, and we will cover more direct AI beneficiaries going forward.
Exiting August, we are more comfortable backing AI infra builders, with better visibility on AI capex through 2027. We are also more cognizant that the market is starting to reward AI beneficiaries beyond the infra builders. We will shift the portfolio accordingly over the next few months.
Now moving to MS portfolio performance
Portfolio Update:
Our portfolio returned ~6% in the month, in line with NASDAQ and ahead of SOXX. Performance was helped by a stronger recovery in memory names, our largest allocation, along with some other high-performance-compute bottlenecks.
Our best performers in August were