Sell in May and go away is a phrase often quoted but rarely followed.
Looking at a chart of the S&P 500 one could argue that the vertical move that began at the end of March – the year-to-date low point was on March 30th and it crested almost perfectly on the 1st of June and has since become far more volatile.
Of course, a move of that magnitude in that short of a time frame invites both rampant speculation and a pile of hangers-on and that type of rapid move higher can, and in this case did, come with a bit of a hangover.
The headline indices also do not capture some of the rotation underneath, which has been brutal, as AI has been rumored to be the downfall of several industries. On one hand, software has been critiqued as obsolete due to AI while on the other integral to the new agentic AI future, depending on the week. This rotation had been extreme, as hardware soared while bets on software were taken off only to have that reverse course after hardware, including memory stocks, had gone parabolic. Since the end of June, the SOX has corrected lower.
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That trade and its reversal are being blamed as the cause of at least one hedge fund demise, Situational Awareness, in July after very punchy performance prior. News reports had the fund up 439% in the first six months of the year with a drop of 67% in July alone. Leverage does have its downside, as the Korean Kospi Index meltdown made clear. There were reports that 10% of Korean investors, or one in 30 adults were caught up in margin calls as levered bets, in some cases on single stock ETFs, came down, not necessarily to earth but from the rarified atmosphere of parabolic moves.
There has been recent good news ...
during second quarter earnings season on the ROI front as Microsoft and Amazon saw accelerating growth in demand for cloud, which is important for the AI investment thesis. As we saw last year with DeepSeek, once again Chinese competition and concerns over pricing had investors questioning the “spend until you drop” premise. The results were not even, and the bifurcation between those who are executing on the strong demand for compute and those that are behind was clear in the market reaction to earnings from Meta, where investors are not convinced the AI strategy is correct versus Microsoft and Amazon where the reaction post earnings was highly favorable.
What about earnings?
Earnings from Apple were a disappointment but from our standpoint a high demand and an inability to supply that demand is not the same problem as a drop in demand. While input prices such as memory may stay elevated and drag on margins in the near term, the problem should be manageable over the medium to longer term. So, while this may hold earnings growth back in the near term, we do not see it as a fundamental change in the picture for earnings in the long term.
The Middle East remains a source of risk and volatility as oil prices once again spiked up on non-compliance and a resumption of hostilities. Oil and natural gas remain volatile as stockpiles continue to draw down, potentially setting up for product shortages as crack spreads stay elevated and product prices are once again moving higher.
The Federal Reserve and its new chairman are in a tough spot
Would higher rates on the short end curtail demand enough to lower inflation or does that exacerbate the pain consumers are already feeling as inflation remains stubbornly high? The recent downticks are unlikely to continue as that was largely a function of lower oil, and that has reversed recently.
The drop in the semiconductor index and memory stocks was an example of perhaps too high a level of enthusiasm and leverage, some of which is now out of the system. While we have exposure to both AI infrastructure and companies that are benefitting from the build out, we also see opportunity in other sectors of the market.
It pays to be nimble in this environment as equity indices make new highs while sector rotation continues. We would also point to the interest rate backdrop as a key variable heading into the fall. With the S&P 500 near record highs and the 10-year Treasury yielding close to 4.7%, valuations leave less room for error, and the path of Fed policy will matter more than usual for market direction. August CPI and PPI prints will be closely watched, particularly any inflation pressure stemming from energy prices, as this could complicate the timeline for further rate cuts.
We continue to see a broadening opportunity
Beyond the mega-cap technology names that have led the market for the better part of three years, small-cap value in particular stands out, trading at a meaningful discount to large caps by historical standards, and we believe a more diversified approach that blends AI infrastructure exposure with quality names in defense, healthcare, and other overlooked sectors is the more prudent way to navigate a market where breadth has narrowed even as headline indices grind higher.
As always, we remain focused on companies with balance sheet strength and the strategic flexibility to adapt as this AI investment cycle matures, rather than chasing the momentum of the moment.
The information in this commentary has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. The opinions, estimates and projections constitute the judgment of Alpine Saxon Woods and are subject to change without notice. This commentary is for information purposes only and is not intended as an offer, recommendation or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the investor’s objectives, financial situation and particular needs. The investments or investment strategies discussed herein may not be suitable for every investor. There is no assurance that any investment strategy will be successful.
