Thank you to everyone who joined us for the Expert-in-Conversation session, High Conviction Investing with Andrew Hollingworth!

Andrew Hollingworth has over 30 years investment experience, 15 years of which were in top tier investment banks advising institutional investors on stock ideas. Andrew established Holland Advisors in 2008, setting up the fund in 2011 and converted it to UCITS in June 2021. Andrew is also the largest investor in the fund.

The Investment Approach

The fund looks for sustainable businesses that can grow their intrinsic value consistently over time while retaining strong defences against the threats that emerge from innovation and new competition. They call this an SCA or ‘Sustainable Competitive Advantage’. The main forces that determine the growth of a company’s intrinsic value are:

• the speed by which it can grow its sales and profits

• its return on existing capital and on the capital it reinvests in itself

• how any excess cash flow is allocated by management

A company that is labelled ‘growth’ will often look good on the first of these measures, but a company they consider attractive will excel in all three. Furthermore, they build a margin of safety by only investing when such a company is trading at a discount. This can occur if its business model is misunderstood, or its owner manager out of favour (e.g. Meta in 2022 or Netflix in 2023). Their focus is on the long term compounding their investments can deliver as this will ultimately drive unit holder returns.

The running order is below. Enjoy!

00:00 | Intro

00:58 | Andrew’s Career Path

07:15 | Founding Holland Advisors

12:15 | An Evolving Philosophy

18:27 | Constellation Software

24:37 | Circle of Competence

29:48 | The Meta Investment

37:58 | Fund Concentration

43:00 | AI and CEOs

46:49 | *Nothing Beats a Jet2 Holiday

52:24 | Nu Holdings

1:00:18 | Portfolio Construction Outro

In the news over the last week, the headlines out of France have painted a distinctly chaotic picture. Significant political unrest, looting, protests spilling into the streets, and a general sense of domestic gridlock have dominated the front pages.

If you were a tourist, you might cancel your trip to Paris. Unless you’re these folks, and you’re not bothered:

If you were an investor with exposure to France, your instinct on seeing this unfold might be to sell it all. Yesterday, I ran a no-peeking poll of 120 investors to see what people thought the CAC 40 had done in the five days since the unrest kicked off. Here are the results:

Nearly 80% thought it was flat to negative and nearly 60% thought it went down - both of which, to be fair, are reasonable responses. Observing how the market performed though, you might be scratching your head - when I launched this poll the index was up.

Despite the intense domestic turmoil, France’s benchmark stock index remained stubbornly resilient.

How does the stock market of a country experiencing acute political stress just shrug it off?

The answer lies in the DNA of the CAC 40 itself.

SUMMER IN FRANCE, WINTER ABROAD

The most crucial characteristic of the CAC 40 is that it is structurally disconnected from the French domestic economy; the companies that make up the index are overwhelmingly global.

Over two-thirds of their revenue and their workforce come from outside of France. When you buy the CAC 40, you aren’t exposed to the French consumer or the domestic political climate; you are buying a globally diversified portfolio of multinational titans that just happen to be headquartered in Paris. A strike in Marseille or a political stalemate in the National Assembly has virtually zero impact on whether a consumer in Shanghai buys a designer handbag or an airline in Dubai orders a new commercial jet.

TOP 15 COMPANIES - CAC 40 - c.80% of Index Weight

As an aside, you might also notice that LVMH is the third-largest company by weight in this table, even though it is often the most valuable company in Europe by total market cap.

The CAC 40 is weighted by free-float market capitalization. This means it only counts the shares available for the public. Because the Arnault family owns nearly half of LVMH, those insider shares are not included in the index calculation. The same applies to the Bettencourt family’s massive stake in L’Oréal, and the Hermès family’s ownership of Hermès. I have included a free float % column in the above table to indicate how much of the market cap is being valued.

Even with those insider shares stripped out, the luxury sector still commands a massive chunk of the index, all while making the vast majority of their money in the U.S. and Asia.

LUXURY, ENERGY and GLOBAL HEALTH

Because it rewards sheer global scale, the top of the index is dominated by sectors that are somewhat immune to local French politics:

• Luxury Behemoths: LVMH, Hermès, Kering, and L’Oréal. These companies rely on the economic health of the U.S., China, and broader Asia, not the domestic French retail market.

• Industrial and Defence Titans: Airbus (aerospace), Schneider Electric (global energy tech), and Safran (defence) are driven by global defence spending and international trade cycles.

• Energy and Pharma: TotalEnergies and Sanofi are massive global players. TotalEnergies sells oil and gas worldwide, currently enjoying elevated prices, while Sanofi’s drug pipelines are focused heavily on the U.S. healthcare market.

While French domestic banks (like BNP Paribas or Société Générale) and local utilities might feel the squeeze of rising domestic bond yields or local regulatory fears during times of political stress, they simply do not carry enough weight in the index to drag it down.

EARNINGS VS POLITICS

Earnings results last week were generally good. The tone was set early in the week by LVMH, as mentioned in our recent How the Wave Broke. In spite of weakness in China, a major market of theirs, they came in with slight growth on revenues.

The momentum carried through the week with other multinational reports, including advertising heavyweight Publicis and spirits giant Pernod Ricard, while investors actively positioned for L’Oréal’s upcoming numbers. Energy giant TotalEnergies is also a major beneficiary of the unrest in the Middle East. EssilorLuxottica also beat estimates, aided by its smart glasses revenues.

CONCLUSION

Headlines do not always convey the stock market story. Look a little deeper and you might find that your portfolio is not nearly as exposed as you think.

The Earnings Slate: Tech Giants and Consumer Bellwethers

This week brings a fascinating mix of earnings reports. Many of these tech names have been hard-hit recently, with Meta standing out as the potential exception for year-to-date performance.

• Meta: The focus here remains firmly on the AI narrative and the massive capital expenditure required to fund it. Investors will be scrutinizing the return on this heavy investment.

• Tesla: Always a highly anticipated event, a Tesla earnings call is an experience in and of itself. Expect volatility and closely watch the forward-looking guidance.

• Netflix: Netflix currently holds a dominant position, but the stock has a habit of coming off its highs. The core question is innovation: are they losing ground to creator-led platforms like YouTube and TikTok? We will be watching to see if management introduces new features to revitalize the narrative. For instance, while social platforms allow users to clip and share music, Netflix could theoretically introduce a feature allowing users to legally clip and share iconic TV and movie moments.

  

• Spotify: A recent community poll confirmed what we already knew, Spotify remains the dominant audio platform.

  

• However, possessing a great product and running a highly profitable business are two different things. Investors are demanding to see more in terms of margin expansion and financial payback.

  

• Nestlé: Moving away from tech, Nestlé will serve as a crucial bellwether for the global consumer. This report will provide a direct read into consumer inflation resistance, pricing power, and the current state of global supply chains.

The Macro Picture: Inflation Beyond the US

Remember, the US is not the only game in town - a principle we frequently emphasize at BREAKINGWATERS. This week, we are looking past the Federal Reserve to gauge the global inflationary environment.

We will see fresh inflation figures coming out of Canada, the UK, and Japan. Collectively, these reports will paint a broader picture of global monetary health, dictating how international central banks might pivot and, ultimately, how we should be allocating capital.

BREAKINGWATERS Updates

• Global Small Cap Strategies: Join us this Friday at 11:00 AM for a live conversation with William Lough of Otis Capital. We will be diving into the mechanics of global small-cap investing - www.bit.ly/TomorrowsMegacaps

• High Conviction Investing: Keep an eye out for our newly uploaded conversation with Andrew Hollingworth, where we discuss his worldview and the framework behind high-conviction investing.

• Book Club: We are currently reading Buffett’s Early Investments by Brett Gardner. There is still time to grab a copy and get caught up before our live Q&A with Brett on November 6th. www.bit.ly/BuffettsEarly

Have a great week!

Glossary of Terms

• Capital Expenditure (CapEx): Funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment (highly relevant to Meta’s AI investments).

• Consumer Inflation: The rate at which the prices of goods and services bought for everyday life increase over time.

• Earnings Call: A teleconference or webcast in which a public company’s management discusses the financial results of the most recent quarter with analysts and investors.

• High Conviction Investing: An investment strategy where a portfolio manager places large bets on a smaller number of carefully researched stocks they strongly believe will outperform, rather than heavily diversifying.

• Macroeconomics (Macro): The branch of economics that studies the behavior and performance of an economy as a whole, focusing on trends like inflation, unemployment, and gross domestic product (GDP).

• Pricing Power: The ability of a company (like Nestlé) to raise prices without reducing demand for its products.

• Small Cap Strategies: Investment approaches focused on companies with a relatively small market capitalization (typically between $250 million and $2 billion), which often offer higher growth potential but come with increased volatility.

The Semiconductor Story: Timing is Everything

This week saw key updates from some of the heavyweights of the AI and semiconductor space.

ASML delivered a solid beat on earnings, driven by improved margins and the relentless drumbeat of AI demand. However, they slightly missed revenue estimates. For those familiar with ASML, this is a known quirk: due to the massive size of their systems, revenue is only booked upon delivery. If a shipment slips by a single day at quarter-end, revenue swings disproportionately relative to a typical company. Consequently, despite the strong underlying fundamentals, the stock is trading down 6% since.

TSMC, on the other hand, reported major growth with clean beats on both the top and bottom lines. Yet, just like ASML, the stock fell after the results.

Meanwhile, we await full results from Samsung, which has only provided pre-guidance so far, with their official earnings expected in the coming weeks.

Luxury’s China Problem

Outside of tech, LVMH caught our attention. The luxury conglomerate missed slightly on earnings and posted flat revenue growth. The culprit? Weaker-than-expected demand in China. For years, the Chinese consumer has been the engine of LVMH’s revenue and earnings growth. This slowdown is a notable red flag and something investors should monitor closely as a bellwether for the broader luxury sector.

Financials: A Mixed Bag of Treasuries and Trading

The banking sector delivered a highly mixed bag, heavily influenced by turbulence in the treasury market. Elevated inflation, rising rates, and volatility in fixed-income markets have pressured the fixed-income divisions of major banks.

However, there were bright spots. JPMorgan managed to guide higher on its net interest margin (NIM) outlook, anticipating that elevated inflation and higher rates will continue to support Net Interest Margins. This structural advantage allowed the stock to edge higher.

Goldman Sachs reported a massive, unexpected beat in its equities division. Yet, in a recurring theme for the week, the broader market malaise meant it wasn’t enough to lift the stock, which fell regardless of the strong fundamental performance. Similarly, BlackRock announced a staggering $200 billion in asset inflows, pushing their total AUM to $15 trillion.

The Macro Driver: Inflation Bites Back

Why are companies beating earnings estimates only to see their stock prices flatline or fall? The answer lies in the macroeconomic data.

U.S. inflation data was released this week, with CPI coming in at 3.7% year-over-year, running hotter than the 3.4% anticipated by analysts. Even stripping out energy, core inflation remains higher than the market, and the Federal Reserve, wants to see.

Source: Wall Street Journal

This hotter-than-expected print is the true driver of this week’s price action. It explains the rotation we are witnessing: tech and financial stocks are struggling to catch a bid despite strong earnings, while defensive names like Johnson & Johnson and UnitedHealth ticked updward. Investors are actively shifting into defensive positioning in response to the “higher for longer” interest rate reality.

Podcast Highlights: Masterclasses in Capital Allocation

Finally, if you haven’t already, check out our recent conversations on the podcast:

• The Future is Uncertain with Sean Peche: A masterclass in money management and career longevity. The feedback on this episode has been phenomenal, packed with actionable nuggets and insights for investors.

• Andrew Hollingworth: A fascinating look at pure business analysis. Andrew’s approach to finding great businesses without getting bogged down in extraneous analysis is refreshing, and his story about a crucial lesson learned from an Apple holding a decade ago is required listening for any investor - set to drop in the coming days.

That’s how the wave broke this week. Keep an eye out for The Coming Wave in the next couple of days. Have a great weekend.

📖 Glossary of Terms

• AUM (Assets Under Management): The total market value of the investments that a person or entity (like BlackRock) manages on behalf of clients.

• Core Inflation: A measure of inflation that excludes volatile items like food and energy prices, providing a clearer picture of underlying inflation trends.

• CPI (Consumer Price Index): A measure that examines the weighted average of prices of a basket of consumer goods and services. It is the primary indicator used to track inflation.

• Defensive Stocks: Shares in companies that provide consistent dividends and stable earnings regardless of the state of the overall stock market (e.g., healthcare, utilities, consumer staples like Johnson & Johnson).

• Fixed Income: Investments that pay a fixed schedule of interest or dividend payments, such as government or corporate bonds (Treasuries).

• Net Interest Margin (NIM): A profitability metric for banks, measuring the difference between the interest income generated by banks and the amount of interest paid out to their lenders (depositors). Higher rates generally improve NIM.

• Pre-guidance: Financial estimates provided by a company’s management prior to the official release of their full quarterly or annual earnings report.

• Treasuries: Debt obligations issued by the U.S. government. They are highly sensitive to interest rate changes and inflation expectations.

• YoY (Year-over-Year): A method of evaluating two or more measured events to compare the results of one time period with those of a comparable time period on an annualized basis.

1pm today, join us for a Q&A with Andrew Hollingworth, PM Holland Advisors (London) Limited Global Equity Fund.

Andrew invests with high conviction - 5 companies - 🛩️ Jet2 📦 Block 🏦 Nu 💸 Wise Group and 👨‍👩‍👦‍👦 Meta - make up c.34% of this PM's holdings. But why does he invest with such conviction? And why does he look for owner-managed companies?

Registration link - www.bit.ly/HighConvictionInvesting

Sean is the Portfolio Manager and Founder of the Ranmore Global Equity Fund, which has consistently been one of the leading global equity funds available to investors since 2008, beating peers and the benchmark across the board. Even more remarkably, Sean is a dedicated value investor and has not relied on the “Magnificent Seven” or other tech stocks to power his outperformance. Any investor will benefit from listening to someone with Sean’s experience and insights.

Sean’s investment career began in South Africa in 1997 when he joined Old Mutual Asset Management as an equity analyst. In 1999, he joined Decillion Capital as a founding member and co-managed the successful BigRock Fund, a South African-based hedge fund. He relocated to London in 2001 with Decillion Fund Management to co-manage a US/European hedge fund. In 2003, he joined London-based Orbis Investment Advisory before leaving in 2008 to establish Ranmore Fund Management Ltd.

The running order is below. Enjoy!

0:00 | South Africa to London
5:03 | Launching Ranmore
5:55 | Absolute Returns Style
9:44 | Decillion to Orbis
12:31 | Breaking Down the Price
14:55 | A 2008 Launch
24:26 | No Private Jets
28:08 | Shongololo
30:37 | Allocation Limit
34:10 | 25% in China vs. 72% in US
35:30 | Passive Bubble
42:00 | Macro at Ranmore?
46:05 | Has the Investment Process Changed?
48:45 | Managing Business Growth
54:09 | Why Those Names?
1:00:55 | There Shouldn’t be a China Discount

Upcoming Sessions - all in UKT:

• Weds 14 Oct 2026 1:00pm | EiC | Andrew Hollingworth, PM Holland Advisors Global Equity

• Fri 23 Oct 2026 11:00am | EiC| William Lough, PM Otus Capital Global Small Caps

• Fri 6 Nov 2026 2:00pm | Books | Brett Gardner, Author Buffett’s Early Investments

YouTube | Spotify | Apple | WhatsApp | Facebook | Instagram | TikTok

If you have any queries or comments, please do not hesitate to reach out bryan@breakingwaters.com.

But this week, the spotlight shifts squarely to earnings. We have a deluge of reports coming out, and it starts with the major U.S. financials.

FINANCIALS REPORT

All the banking heavyweights are reporting, including Goldman Sachs, JPMorgan, Morgan Stanley, BlackRock, State Street, and Wells Fargo. These reports will give us a read into both the lending and trading environments.

My expectation is that this is a pretty sweet environment for banks and financials right now. Interest rates have come up, which directly bolsters their net interest income (NII). Meanwhile, on the consumer and credit default front, we have yet to see any major red flags.

Add in the fact that market volatility remains high which is excellent news for their trading desks and the operational backdrop looks very strong. Last quarter was a record for most of these banks, and I suspect this quarter will look very similar. While some bank stocks pulled back recently (likely due to investors feeling they had run up a bit too fast), let’s see what their forward guidance tells us.

THE AI TRADE

We’re also getting crucial updates from the tech and semiconductor space, specifically TSMC, Samsung Electronics, and ASML.

TSMC and Samsung have already released astonishing provisional guidance, posting huge numbers that beat all estimates.

It is clear that the AI trade remains in full swing. This momentum should flow directly through to ASML. While ASML typically reports with a degree of caution and conservatism, TSMC has reaffirmed its commitment to ASML’s ultra-high EUV technology. The structural tailwinds here remain firmly intact.

HEALTHCARE AND MACRO

We will also get a pulse check on the healthcare sector with earnings from UnitedHealth and Johnson & Johnson, which will offer a read on the pharmaceuticals space and general lifestyle health trends.

On the macroeconomic front, the main figure I’ll be watching this week is the U.S. Inflation Rate. This is the key data point that will dictate the Federal Reserve’s next moves on interest rates.

We may already be seeing the story unfold through corporate earnings - for instance, Pepsi recently noted that its North American division is struggling, hinting at an increasingly price-sensitive consumer.

PEPSI Revenue Growth Q3 2026

Upcoming Events & Reading

• Breaking Waters Live Q&A: Next week, we are speaking with Andrew Hollingworth of Holland Advisors. Andrew is an excellent, high-conviction fund manager who targets founder- and owner-managed companies. It’s going to be a fantastic conversation. Sign up for the live Q&A here: www.bit.ly/highconvictioninvesting.

  

• Book Club: Don’t forget, we are currently reading Buffett’s Early Investments. I am thoroughly enjoying it, so make sure you pick up a copy. We’ll be speaking to the author, Brett, in November!

  

Stay nimble, and let’s see what the data brings.

We were keeping an eye on PepsiCo, Tesco, and Delta Air Lines - to gauge the strength of the consumer in both the US and the UK.

• PepsiCo: a mixed bag report with a negative tilt. While the company did manage to show overall revenue growth, the bulk of that was driven by international markets. Their core North American market is struggling, with revenues in some areas running flat to shrinking. This provides some insight into a US consumer that is feeling the pinch and actively withholding spend.

  

  Source: PepsiCo Q3 10Q Report

• Tesco: The UK grocer reported pretty good results, though top-line growth was modest at just a couple of percent. Operating profit grew at a faster clip, largely driven by a favorable sales mix. However, Tesco’s position in the mid-range of the grocery market makes it difficult to draw a definitive read on the broader UK consumer. It is hard to gauge exactly how much of their success is organic versus consumers “trading down” from higher-end supermarkets like Waitrose and Marks & Spencer. Overall, it is a positive story for Tesco, with no glaring negatives.

• Delta Air Lines: Delta reported a record breaking quarter for revenues but this did not fall to the bottom line as elevated fuel prices due to the Iran conflict ate away the potential profit. The airline also slashed its profit forecast going forward for the same reason.

Macro Developments: US Jobs and Australian Consumer Confidence

• US Jobs Report: The September jobs report came in drastically below expectations. The US economy added just 29,000 jobs last month, falling far short of estimates that hovered closer to 90,000.

  

  As the last jobs report before the US elections, this data has significant implications. On the positive side for markets, a cooling labor market reduces inflation fears and lessens the inclination for the Federal Reserve to hold rates higher for longer. However, the fundamental reality is that such a stark miss is not a great sign for the underlying economy.

• Australia in Focus: We have also been tracking the situation in Australia, where the macro picture is declining. The latest consumer confidence survey, taken across September, showed a considerable drop following the central bank’s decision to raise interest rates at the end of the month.

  

  Source: Westpac-Melbourne Institute Consumer Sentiment Index

  In fact, consumer sentiment has plummeted to its lowest level since the early 1990s. When paired with falling house prices in the region, it is clear that Australian consumers are feeling the strain, and their forward outlook is deteriorating.

The AI Boom Continues: TSMC and Samsung

While the consumer sectors show signs of fatigue, the AI growth story continues to have wind in its sails.

This week, semiconductor heavyweights TSMC and Samsung Electronics released preliminary pre-report guidance, and the revenue figures are nothing short of astonishing:

• TSMC: Preliminary revenues are up approximately 54% compared to the same period last year, driven entirely by insatiable AI demand.

• Samsung Electronics: The numbers here are even more staggering. Samsung’s operating profits have rocketed up roughly ninefold over the last quarter.

Both companies will report their full numbers next week, which will provide deeper insights into the sustainability and scale of this ongoing AI hardware supercycle.

Content Updates

• The full World for Sale and Odyssey conversations are up.

• Part one of my conversation with Sean Peche is available in the next 24 hours.

• Nike Deep Dive: Following up on last week’s note about Nike’s 80% decline over the last five years, I have published a dedicated piece examining the company’s faltering performance through the pandemic and beyond. Thank you to everyone who requested more detail on this please keep the feedback and comments coming.

Have a great weekend.

Note: This article is for educational and informational purposes only and does not constitute investment advice in any way.

In my recent How The Wave Broke update, I mentioned that Nike and the Nike stock price has had about as bad a 5 years as you can have, as demonstrated by this chart:

Several people reached out to me wanting more of my thoughts on the company and I too was wondering if the decline had run too far given the size of the fall. So below is are my thoughts.

NIKE - the Origin story

The story of Nike is one of the great American business stories and Phil Knight’s book, Shoe Dog is a must read for investors and entrepreneurs. Several years ago, I enjoyed it, along with other quintessential americana, on a train I took from Portland, ME through Boston and on to New Haven, CT.

Knight was a student at Stanford University as well as an avid runner with a quirky, experimentative, innovative coach, Bill Bowerman. While at Stanford, Knight wrote a paper for his entrepreneurship class proposing that cheap, high-quality Japanese running shoes could break the American market dominance of German brands like Adidas and Puma, just as Japanese cameras had done to German cameras. After graduating in 1962, Knight took a trip around the world. Knowing that Japan was at the forefront of manufacturing, he traveled to Kobe, Japan, specifically looking to explore his thesis. While in Kobe, he found shoes made by Onitsuka Co. under the “Tiger” brand. Impressed by their quality and low cost, he cold-called the company requesting a meeting.

He had no business, little money and no experience. He was bluffing but, it so happened, that the Japanese shoe company were keen to explore opportunities in the US so they took him on face value and invited him to talk.

Knight met with Onitsuka executives in their boardroom. Pretty quickly, the executives asked which company he represented, and Knight realized he didn’t actually have one. Thinking on his feet, he recalled the blue track-and-field ribbons given to winning athletes and gave birth to a company, telling them he represented “Blue Ribbon Sports”.

He pitched them his thesis and incredibly, he secured the distribution rights for Onitsuka in the US. He ordered a few samples, and with his former track coach, Bill Bowerman, they went into business. In their first year, they went to race meets and they sold 1,300 pairs out of the trunk of Knight’s car, grossing $8,000. It continued to grow and they needed working capital. Domestic lenders were not supportive of their plans so, on the advice of their Japanese partners they turned to Japanese trading houses. Known locally as sogo shosha (総合商社), they are massive, highly diversified conglomerate companies that trade in a vast array of products and materials globally. They originally acted as simple middlemen to import raw materials into resource-poor Japan and export finished goods, they evolved into complex global investment and lending firms.

FROM THE FLAMES OF BLUE RIBBON

With their working capital secure and demand high, all goes well for several years until growing pains arise and Blue Ribbon and their Japanese partners part ways. Blue Ribbon rebrand to Nike, the Greek Goddess of Victory. In the rebrand they commission a graphic design student, Carolyn Davidson, $35 to design a logo for the new brand. Davis creates one of the most, if not THE most, iconic logos in history, the NIKE Swoosh.

Although she only billed Phil Knight $35 for the Swoosh design in 1971, Davidson received a massive surprise twelve years later. In 1983, Knight and Nike executives held a surprise party in her honour to formally recognize her contribution to the brand’s explosion and present her with two gifts:

1. A custom gold ring cast in the shape of the Swoosh, embedded with a diamond.

2. 500 shares of Nike stock.

Through decades of aggressive stock splits and company growth, that original 500-share gift grew to be worth many millions of dollars, assuming she didn’t sell.

The new company has an immediate and existential problem though - Onitsuka is gone and they no longer have product, cool innovative product that people want. They look inward for inspiration and Bill Bowerman the running coach exec raises the idea of developing a concept he’d been dreaming of for a better running shoe, the moon shoe. He creates a prototype of his vision by pouring rubber into his wife’s waffle iron, with the aim of creating a lightweight sole with superior traction. The resulting “Moon Shoe” and subsequent Waffle Trainer become the company’s first major proprietary bestsellers.

Source: Artsy / Nike, Waffle Trainer (1974) | Artsy

This recipe of obsessed and slightly crackpotty runners innovating in their kitchen with waffle irons is central to Nike’s success and is something that has been lost in recent years.

THE 70’s - THEY CALL IT YOGGING

The company rides this wave of innovating on their own proprietary designs for a decade but it had built its empire entirely on the 1970s running craze. By 1983, that boom had plateaued. The market for running shoes was saturated, and Nike, which was still viewed almost exclusively as a “track and field” company, saw its core sales stall. By early 1984, Nike reported its first-ever quarterly loss since going public. Inventory was piling up in warehouses, the stock price had plummeted, and Knight was forced to lay off roughly 400 employees (about 10% of the workforce). The company was facing another existential crisis and desperately needed a lifeline.

Here, again, Nike showed a spirit they lean into in such times. When the chips are down, they believe in themselves in a way they want you, the athlete wearing their gear to believe in yourself. They eat their own cooking so to speak.

Faced with extinction, they had one last play, $500k to spend on a non-running strategy. They decided on basketball but instead of spreading their $500,000 of endorsement across several solid NBA players (the standard industry practice), they decided to bet the entire budget on a single unproven rookie who could serve as the face of the brand. L

This is an insane move, a wild, crazy, completely audacious move.

We are of course talking about Michael Jordan but at the time, Jordan was earmarked for a good career but Nike was essentially betting its entire budget, and maybe its existence, on a rookie guard in a league ruled by towering centers and established veteran superstars like Magic Johnson and Larry Bird. It was a massive gamble.

Source: Air. Directed by Ben Affleck, Amazon MGM Studios / Warner Bros. Pictures, 2023.

The release of the Air Jordan 1 in 1985 revolutionised sports marketing and sneaker culture, turning a performance shoe into a billion-dollar lifestyle sub-brand.

When Jordan stepped out in his new black and red Nike basketball shoes, the NBA banned them because they violated the league’s strict uniform policy, known informally at the time as the “51% rule.” All players’ shoes had to be at least 51% white and must match both the team’s uniform colours and the shoes worn by their teammates. Jordan’s striking black and red shoes blatantly ignored this standard, leading the league to issue a formal letter to Nike threatening to fine Jordan $5,000 for every game he wore them.

Instead of backing down or pulling the shoe, Nike recognized the opportunity and turned the penalty into one of the most successful marketing campaigns in history. Nike executives gladly offered to pay the $5,000 per game fines so Jordan could keep wearing the shoes on the court. They saw that the media coverage was worth far more than the penalty. The ban gave the sneakers an instant anti-establishment appeal. Teenagers and fans rushed to buy the shoes the NBA deemed “illegal,” transforming the Air Jordan 1 from a performance athletic shoe into a must-have cultural status symbol.

Today, the Jordan Brand generates approximately $7 billion in annual revenue for Nike. Michael Jordan receives 5%, forever, which is why you always see his name in the top 10 best paid athletes list every year.

THE JORDAN PLAYBOOK

On the back of this momentum, their new found cultural cache and their escape from being just an athletics brand, Nike began to grow and in 1988 they launched their Just Do It tagline. The 90’s and noughties were a time of win after win after win in marketing and culture. Their signing of Tiger Woods for example, had a reception from the golf establishment and traditionalists that was largely hostile, sceptical, and marked by a culture clash but Woods’ dominance put them again atop the pedestal as the brand of champions.

Remember this:

Source: The Masters | Tiger Woods’ Chip on 16 | Iconic Masters Moments

Priceless marketing with the swoosh front and center.

In the 2010’s the company moved to a dominant position, becoming the exclusive uniform provider for the NFL in 2012 and the NBA in 2017. Its SNKRS app became a major hit too, driving direct-to-consumer sales and creating manufactured scarcity for limited releases.

THE COVID-19 PANDEMIC

But then the pandemic came.

With people locked at home with little to do and in the US, with support cheques now in their pockets, the second-hand market for sneakers exploded. This was also happening in watches, trading cards and vintage apparel. This was happening at the same time retail traffic and revenues dried up due to lockdowns. Nike though, made the mistake of thinking this was the new status quo. They explicitly detailed this strategy in 2020/21, branding it as the “Consumer Direct Acceleration” (CDA). In their earnings calls and 2021 Annual Report, Nike explicitly stated they were actively reducing their reliance on what they termed “undifferentiated wholesale accounts” - corporate phrasing for independent sneaker shops and mid-tier retail chains that Nike felt didn’t offer a premium or unique presentation of their products. At the time Nike Direct accounted for c.39% of revenues which grew to 42.3% by Q3 2022 and Nike execs announced a target of 60% but once retail shops were reopened, demand returned to retail stores but now the relationships had been severely damaged. Nike had openly declared to retail footwear and apparel stores - tough businesses to make money on at the best of times - that they were no longer important or needed. Decades of partnerships cast aside almost on a whim. That includes specialty running stores, where Nike’s core, OG, customers - runners - go to talk to experts about the everything running, but especially the shoes. Nike had severed their connection to their original and spiritual partner, runners.

As this was happening, a host of high quality operators who had been waiting in the wings seized the opportunity. Hoka, ON and Brooks. They courted retail operators, especially specialty running shops, lavishing them with time, attention, enthusiasm, inventory and innovative new products that excite consumers. They took the shelve space and Nike will have to do something special to get it back. They need to innovate, rebuild retail TLC and tap into the spirit that got them there again.

WIN NOW, BUT WAIT, PACE IT

So what have they been doing about it?

Nike has initiated a multi-year turnaround effort, catalysed in late 2024 with the replacement of CEO John Donahoe with Nike veteran Elliott Hill, brought out of retirement for the role.

Hill is a Nike veteran who climbed from a 1988 internship to oversee its global operations before retiring in 2020. This was relatively short lived however, as he was brought out of retirement in 2024 to become President and CEO to lead the turnaround effort.

Hill began with an initial “Win Now” strategy, which focused on returning to their core approach, rebuilding retail partnerships, focusing back on performance athletics over lifestyle sneakers and reducing the supply of classic retro shoes. While the “Win Now” plan successfully cleared out billions in stale inventory and stabilized the running category, the broader product turnaround has taken longer than expected, leading Hill to introduce the more drastic, long-term “Pace” restructuring plan only in the last few days.

The more aggressive “Pace” restructuring plan focuses on:

• Pivoting Back to Wholesale: Reversing a costly over-reliance on Direct-to-Consumer (DTC) digital sales. Hill is actively repairing relationships with wholesale retail partners (like Foot Locker and Dick’s Sporting Goods) to reclaim physical shelf space ceded to competitors.

• Sport-Specific Restructuring: Nike reorganized its internal product teams back into sport-specific categories (e.g., running, basketball, soccer) rather than broad demographics (men’s, women’s, kids). This aims to speed up product innovation and tailor footwear more closely to athletes’ actual performance needs. Conway’s Law comes to mind.

• The “Pace” Cost-Cutting Plan: targeting roughly $2.5 billion in savings. This includes geographic restructuring and a fresh round of job cuts to streamline operating overhead amid continued weakness in Greater China and its legacy Jordan brand.

• Pricing Power & Inventory Cleanup: To protect brand equity, Nike is actively clearing stale inventory and weaning its digital platforms off constant promotions. Concurrently, the company has implemented targeted price hikes across core footwear and apparel categories to offset rising supply chain costs and tariffs.

• New Retail Partnerships: To capture under-penetrated consumer segments, Nike has begun introducing new wholesale partnerships, such as placing inventory with the popular women’s fashion retailer Aritzia.

WHERE WE STAND

Nike reported fiscal Q1 2027 revenue of $11.21 billion, below the $11.32 billion consensus, while EPS of $0.48 topped the $0.44 estimate.

The company is expanding its restructuring, targeting $2.5 billion in savings through fiscal 2031, and forecast a high-single-digit revenue decline for fiscal 2027.

As they say though, nobody ever cut their way to growth.

Weakness in China and other markets is driving further changes, including planned job cuts, a three-region operating model and removal of online sales rights from some large Chinese retail partners.

Analyst views shifted lower overall, with several firms cutting price targets and BofA Securities and Berenberg downgrading. DA Davidson upgraded the stock to Buy despite lowering its target.

Nike Brand revenue was $10.95 billion and Converse revenue was $263 million, both below consensus estimates. Management cited continued pressure in China and EMEA, as well as challenges in sportswear and the Jordan brand; CEO Elliott Hill said restoring performance in key segments will take time as Nike rebalances its product portfolio.

Analyst actions were mixed but predominantly cautious.

Other developments included a $200 million, 10-year apparel partnership with the University of Miami and the appointment of Alexandre Arnault to Nike’s board. Converse, Nike’s wholly owned subsidiary, apologized for and removed an advertisement after public criticism; soccer player Kylian Mbappé also ended his Nike partnership and joined On as a global ambassador.

THE BULLS AND BEARS

The bull and bear scenarios for Nike’s stock, hinge on the company’s ability to execute innovation, rebuild its retail partnerships and navigate macroeconomic pressures, especially China.

The Bull Case

The upside potential of relies predominantly on it rebuilding its relationships with 15,000 retailers in the US and a turnaround in its China business.

The Bear Case

The downside case is basically an inability to deliver on the bull case targets while also seeing market share continuing to be eaten by newer brands.

For me, is straddling two equally likely futures, where the upside potential doesn’t pay for the risk of the downside. Although the price is down c.80% in five years, at this price I would need the business to have some truly attractive, and more likely an upside, or I would need the price to be much more compelling, i.e. in deep value territory. One to keep watching.

Some insightful pieces on Nike I came across in writing this:

Evan Sohn of Revelio, Nike’s Next Layoffs Haven’t Started. Its Headcount Is Already Down 8,843.

, Nike Just Did IT, then Undid it

The Week Ahead in Equities:

Next week’s equity market outlook - the overall earnings calendar is relatively quiet, a handful of bellwether reports will provide critical read-throughs on the consumer sector, inflation, and energy costs. On the macroeconomic front, investors should watch key US jobs data alongside a notable sentiment indicator out of Australia.

Earnings Watch: Inflation and the Consumer

Earnings volume may be muted, but reports from major industry players will offer valuable insights into current macroeconomic pressures:

• PepsiCo (NASDAQ: PEP) & Tesco (LSE: TSCO): These consumer staples serve as barometers for global inflation. Their reports will shed light on pricing power, margin resilience, and whether consumer demand is softening in the face of sustained price increases.

• Delta Air Lines (NYSE: DAL): Delta’s results will be particularly relevant for assessing the impact of energy costs. The report will provide visibility into how fluctuating oil prices are feeding through to operating margins and whether the broader travel sector can maintain its pricing leverage.

  

  Source: Trading Economics

Macroeconomic Drivers: US Employment and Australian Sentiment

The macroeconomic slate features two primary data points to monitor:

• US Non-Farm Payrolls: The upcoming US jobs report will be closely watched, though consensus expectations currently anticipate no major surprises. It remains an important metric for understanding the US consumer, particularly coming in to elections.

• Australian Consumer Confidence: Throughout 2026, Australian house prices have declined by approximately 3% to 5% across various regions, following interest rate hikes earlier in the year. With inflation persistently squeezing disposable incomes, a drop in consumer sentiment is highly likely and could serve as a leading indicator for broader economic cooling in the region.

  

  source: Trading Economics

Media Updates and Upcoming Manager Conversations

Over the coming weeks, we are releasing a series of exclusive interviews and deep-dive discussions with leading fund managers and financial authors.

Recently Uploaded & Imminent Releases:

• Dr. Martin Kuypers: The first part of our Odyssey Conversation is now live.

• Javier Blas: Part one of our discussion with the co-author of The World for Sale is available now, with the second part scheduled to go live today.

• Sean Peche: Our conversation from last week with the Portfolio Manager at Ranmore Fund Management will be released early next week.

Upcoming Live Events:

• Andrew Hollingworth (Holland Advisors): Scheduled for the 14th of October at 1:00 PM. Hollingworth is an exceptional manager who strikes a precise balance between value, quality, and growth investing. Details here

  

• William Lough (Otus Capital Management): Scheduled for Friday the 23rd at 11:00 AM. We will be speaking with Lough, the Portfolio Manager of the Otus Global Smaller Companies Fund, to discuss the current equity landscape and opportunities in global small-cap equities - the place where all the greats started from. Details Here

  

• Brett Gardner (Author Book Club): Scheduled for November 6th. We are currently reading Buffett’s Early Investments, an excellent deep-dive into Warren Buffett’s foundational years. Gardner will join us to discuss the book and the core research methodologies modern investors can apply today. Details Here

  

The week has come to an end.

Things that went down this week.

It was a pretty quiet week in terms of earnings. Not much to report on. Some things that jumped out to me this week were...

UK Housebuilders

UK housebuilders popped about 15% earlier in the week and that was driven by a change coming through in policy for buy to lead for first time buyers. So that’s trying to spur some activity in In the housing industry in the UK, which has been pretty stagnant for several years.

Source: UK Government Housing Statistics & Westminster White Papers on Housing Supply vs Demand

Companies themselves are pretty nice companies. Great balance sheets, well run, long established, but just a very, very...

They have a high beta to sentiment. So sentiment improves. They tend to follow more so. Sentiment declines. They tend to fall more so than the actual what’s going on. So they popped about 15%.

JAPAN

Elsewhere, Japan jumped, I noticed, about 5%, which ordinarily mightn’t be cause for reflection or looking at it. But this was of interest because most of the... Other markets and sectors fell during the week. So this was kind of an anomaly and stood out.

Source: google finance

The reasons were unclear. Tech was the sector that jumped most. The drivers behind it were unclear. I saw some reports that said it was.

Good earnings from AI companies in the US, but equally interest rates in Japan got up recently. Although the tech companies are doing well and the earnings are strong, those companies weren’t rewarded in the U.S. So it’s a bit strange.

Source: google finance

I’m not quite sure what’s happening. I think maybe they’re getting some fallout from so recently Korean stocks and Taiwanese stocks are doing very well, in particular chip stocks. So maybe some of those people invested in those. The first one, I’m not sure. But one to watch, and that’s Japan.

CARNIVAL CRUISES

So other things that jumped out, Carnival Cruises did very well, jumped about 15%. Their earnings report was very strong.

They raised their forward guidance, so they expect demand to remain strong. I think the interesting point here, I can’t tell you if Carnival is an investment or not or worthwhile, but what’s interesting to take away from this is that experiential... Investments, experiences still are getting a lot of demand and cruises in particular.

And I don’t think post-COVID is the only reason for that. You know, in the industry, people said, OK, you’ve been locked up. Now you want to have experiences. You want to go. You want to travel. You want to fly. You want to go on cruises. You want to do the shows. You want to whatever.

But that’s, you know, that time is now gone. We can do that. We’ve been able to do that for a long time. So I think it’s probably actually linked to the house builders in a way in that People are struggling, this middle layer is struggling to get on the housing ladder. They have disposable income, not enough maybe.

To get on a housing ladder, but enough to say, well, okay, I still have to live my life and I want... And, you know, this new world of technology and social media means people go to these places and they put it on their Instagrams and they spend a bit more money on that

than they would have, you know, 10 years ago, 15 years ago. I think that’s... That base level of demand is here to stay. Um... What else?

NIKE - JUST NOT DOING IT

Nike is reporting. I’m recording this on Thursday. So Nike haven’t yet reported, but Nike’s been a bit of a dog for the last five years.

During COVID, they came out with a strategy to be entirely digital online. They burned a lot of their relationships with their retail base. And that has deeply affected them. Other brands have come in, the Hokas and the Ons. And so they’ve lost a lot of luster. But then part of me questions, has it gone too far?

You know, they’re still an incredible brand. It’s still probably the go-to for many, for a lot of things. So something I’m going to look at, look into is, yeah, well, has this gone too far? Let’s see what the report is like tonight.

US <> China Meeting

And then the only other thing for this week was the Trump-Xi Jinping meeting.

And that was a bit of a damp squib. One commentator called it Diplotainment, which is quite funny. Yeah, nothing really came out of that. They’re going to open an AI dialogue, but what that means is not clear. So not much from that.

These are the commodity traders. You’ve probably never heard of them. But, like it or not, you’re one of their customers.

September - October Book

If you enjoyed this and would like to join the book club then jump in, it is open to all! We are currently reading Buffett’s Early Investments by Brett Gardner who we will be talking to on November 6th. Further details can be found here.

Please subscribe at www.breakingwaters.com or join our WhatsApp channel to get future updates first.

These are the commodity traders. You’ve probably never heard of them. But, like it or not, you’re one of their customers.

September - October Book

IF you enjoyed this and would like to join the book club then jump in, it is open to all! We are currently reading Buffett’s Early Investments by Brett Gardner who we will be talking to on November 6th. Further details can be found here.

Please subscribe at www.breakingwaters.com or join our WhatsApp channel to get future updates first.

For July and August we read Emily Wilson’s translation of the Odyssey, we went to see Christopher Nolan’s movie and then we spoke to Dr. Martine Cuypers, who teaches Greek language and Greco-Roman literature and culture in the Department of Classics at Trinity College Dublin to unpack one of the world’s most enduring and important stories.

It was a super fun and hugely interesting conversation where we covered themes such as homecoming, faithfulness, social values, immortality, gender roles and the complicated person in Odysseus.

Here is the full recording with a brief intro.

Hope you enjoy!

September - October Book

If you enjoyed this and would like to join the book club then jump in, it is open to all! We are currently reading Buffett’s Early Investments by Brett Gardner who we will be talking to on November 6th. Further details can be found here.

Please subscribe at www.breakingwaters.com or join our WhatsApp channel to get future updates first.

BREAKINGWATERS | Expert-in-Conversation | The Future’s Uncertain with Sean Peche

REGISTER HERE

Today, Friday 18th September 2pm - 3pm (UK time)

The future’s uncertain, so don’t pay too much for it- Sean Peche

Sean is PM and founder of the Ranmore Global Equity Fund which, since 2008, has consistently been one of the leading global equity funds available to investors, beating peers and the benchmark across the board. Even more remarkably, Sean is a dedicated value investor and has not relied on the Mag7 or other tech stocks to power his outperformance. Any investor will be better for listening to someone like Sean.

Sean’s investment career began in South Africa in 1997 when he joined Old Mutual Asset Management as an equity analyst. In 1999, he joined Decillion Capital as one of its founding members and co-managed the successful BigRock Fund, a South African-based hedge fund. In 2001, he relocated to London with Decillion Fund Management and co-managed a US/European hedge fund. In 2003, he joined London-based Orbis Investment Advisory, before leaving in 2008 to establish Ranmore Fund Management Ltd.

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REGISTER HERE - https://forms.gle/HMqmg1vCaXkCogwEA

'Gripping' Economist

'Jaw-dropping' Sunday Times

'Riveting' Financial Times

'Fascinating' Reuters

We are entering an age of energy crises and food shortages. This book reveals why. Meet the swashbuckling traders who supply the world with energy, food and metal. Their goal: To make billions by buying and selling raw materials - flogging Russian gas to Europe, Saudi oil to America and Congolese metals to Silicon Valley. Their methods: Whatever it takes - whether funnelling cash to Vladimir Putin's sanction-stricken Kremlin, schmoozing Russian metal oligarchs after the collapse of the Soviet Union, or striking deals with the Libyan rebels at the height of the Arab Spring.

These are the commodity traders. You've probably never heard of them. But, like it or not, you're one of their customers.

Javier Blas and Jack Farchy are two of the world's best-known journalists covering energy, commodities and trading houses. They both work for Bloomberg News, where Blas is chief energy correspondent and Farchy is a senior reporter covering natural resources. Previously, they covered commodities for the Financial Times.

REGISTER HERE - https://forms.gle/HMqmg1vCaXkCogwEA

Invite details available on registration.

© BREAKINGWATERS Media Ltd.

I want BREAKINGWATERS to be a conversation on equities but equally I don’t want to be bombarding you with emails - markets are always moving, thinking is updated daily and insights develop in real time so I’ve launched a BREAKINGWATERS WhatsApp channel!

A Whatsapp channel will allow me to keep emails to a sensible level while also offering a more nimble and personal experience where you will be first to see content, you can check in at your convenience on eveything that’s going on, you can emote, respond, reply, forward and interact as you see fit!

HOW TO JOIN

To get signed up, follow this link - https://whatsapp.com/channel/0029VbD3RAr4dTnMlKKI5q2h

or, if that won’t work, then this QR code will get you added:

Once it hits 100 followers, you will be able to go into your WhatsApp and beside “Chats” down the bottom, you will see “Updates”

Open the search function in “Updates”

And type in BREAKINGWATERS (Large or small caps shouldn’t matter)

PLEASE NOTE!!!!

Until the channel reaches 100 followers then it won’t be a searchable channel but it is there - you’ll have to use one of the first two methods above, the link or QR code in that instance but that will really help me out as getting it to be searchable will be a lot easier!

If you have any issues please let me know and I can help you get it set it up. I hope you enjoy the new experience.

Best,

Bryan

“𝙎𝙥𝙚𝙣𝙙 𝙚𝙖𝙘𝙝 𝙙𝙖𝙮 𝙩𝙧𝙮𝙞𝙣𝙜 𝙩𝙤 𝙗𝙚 𝙖 𝙡𝙞𝙩𝙩𝙡𝙚 𝙬𝙞𝙨𝙚𝙧 𝙩𝙝𝙖𝙣 𝙮𝙤𝙪 𝙬𝙚𝙧𝙚 𝙬𝙝𝙚𝙣 𝙮𝙤𝙪 𝙬𝙤𝙠𝙚 𝙪𝙥.”

- 𝘾𝙝𝙖𝙧𝙡𝙞𝙚 𝙈𝙪𝙣𝙜𝙚𝙧

The BREAKINGWATERS schedule for Autumn is out! We have some top-notch speakers for you!

The September calls are below - sign up now as spaces are limited!

BOOKS | THE WORLD FOR SALE

This coming Friday, we’re discussing 𝗧𝗵𝗲 𝗪𝗼𝗿𝗹𝗱 𝗳𝗼𝗿 𝗦𝗮𝗹𝗲 with authors Javier Blas, Energy and Commodities Columnist, and Jack Farchy, Chief Commodities Correspondent, Bloomberg. Their book outlines the rise of the global commodity trader, with incredible stories from behind the curtain of this opaque, morally ambiguous yet incredibly lucrative industry. We will also get their thoughts on where we are today and which commodity or commodities, if any, we should be focusing on! Sign up here - bit.ly/WorldForSale

EiC | THE FUTURE IS UNCERTAIN with SEAN PECHE

The following Friday (Sep 18), we have the excellent Sean Peche, PM Ranmore Fund Management Ltd. Sean has been operating a true value approach for 18 years. His performance has been exceptional, reflected by his ratings, but amplified when you realise it has been delivered with a highly differentiated set of exposures compared to the typical global equity fund. He is equally known for his insightful, entertaining LinkedIn posts and no-nonsense observations on some of the rationale at play in markets. These have earned him a minor cult following in the industry.

You’ll want to hear what he has to say - register at bit.ly/SeanRanmore

BOOKS | BUFFETT’S EARLY INVESTMENTS

Finally, our next BREAKINGWATERS book club event is officially lined up - complete with an author Q&A - so it’s time to get reading!

Most investors have a simplified and often misguided understanding of Warren Buffett’s investment approach, pieced together from the mountain of material out there. Author Brett Gardner wasn’t satisfied with second-hand explanations. Instead, he took a deep dive into 10 of Buffett’s early investments from the 1950s and 60s to recreate his perspective and understand exactly how and why those decisions were made. Thankfully, he shared his findings with us! His book reveals Buffett’s true framework: one that is ahead of its time and highly adaptable, shifting seamlessly across many frameworks, value, event-driven, distressed, and private equity, amongst others. Brett will be joining us on the 4th of November to talk us through it - so grab your copy, have a great read, take some notes, and join us for a great discussion! Call details TBA.

Stay up to date with BREAKINGWATERS by subscribing at breakingwaters.com or follow us on our WhatsApp channel, ‘BREAKINGWATERS’ using this link - https://bit.ly/3SSrlZn

It has come to my attention that someone has copied the imagery and branding of BREAKINGWATERS and is actively contacting my subscribers via Substack chat.

It looks like this;

This impersonator is sending messages claiming that I am setting up an "invite-only" chat and asking you to hand over your email address.

Please be aware that this is a scam.

I am not setting up a private chat in this manner, and I will never unexpectedly message you to ask for your email address, personal information, or financial details. All official communications from me will only ever come directly through this verified Substack newsletter.

If you receive one of these fake messages, please take the following steps:

1. Do not reply and do not provide your email address.

2. Do not click on any links they might send.

3. Block and report the account to the platform immediately.

Thank you so much to those of you who spotted this and flagged it to me. Your vigilance helps keep our whole community safe.

Best regards,

Bryan

Note: None of the material or content contained herein constitutes investment advice. It is solely for educational and informational purposes. Past performance is not an indicator of future performance. copyright BREAKINGWATERS Media Ltd.

As Summer Ends

As we say goodbye to the warmer, longer evenings, daily ice-creams and the near empty suncream bottles, sprays and roll-ons, there are 4 items we should be watchful of in markets right now. Below, I outline the concerning items, what’s driving them and at the end, I suggest 3 ways of positioning your portfolio for them.

1. IS THE AI NARRATIVE ALREADY TURNED?

Investors spent the first half of the year getting into and sitting firmly on the AI price wave but always with one eye open for any sign of trouble. July brought those first signs when AI price action turned and investors who were over exposed, suffered.

The poster child became Leopold Aschenbrenner and his fund Situational Awareness which lost over $30bn through highly levered bets on AI. He had to sell the public portion of his book to Ken Griffin’s Citadel in a distressed asset sale.

Scepticism over the AI story, at current prices, has been building since then and although everyone can agree that AI will change the world immeasurably, it is not yet clear how profitable LLM’s will be, or how defensible their offerings are. Revenues are growing, profits are unclear, competitive differentiation is unclear, but CAPEX is astronomical - the top five hyperscale tech companies are projected to spend c.$750bn on AI infrastructure in 2026, an 80% increase over 2025.

Speaking of Astronomy; SpaceX (xAI) and Meta recently decided that it is a better business for them now to rent their AI servers out to the other, more prominent LLM companies. Likely, they recognised they were not up there with the major players in terms of consumers adopting their LLM’s and they have yielded to the front runners, Anthropic, OpenAI and Gemini. The field has narrowed, so it stands to reason that the narrative around hyperscalers has too.

Most recently, Nvidia reported their revenues - $96bn in one quarter, up 106% year-on-year. Net income was $58bn, a 60% margin and earnings jumped 128% year-on-year. These are absolutely staggering numbers. Yet, the stock is only up 4.4% in the few days since to the time of writing this. Investor trepidation has set in and it looks like the needle has stopped moving - what if those numbers had missed, would the reaction but just as muted? I wouldn’t think so.

2. KEVIN IS IN AND JEROME IS OUT (ISH)

Jerome Powell has moved on from his role as chair of the Federal Reserve and he has been replaced by Kevin Warsh. Warsh has a different approach entirely. He favours strict inflation targeting, aggressive balance sheet reduction, and rejects forward guidance. Powell though, remains on the board as a voting member, creating a conflict within the voting.

While inflation has cooled significantly from its peak in recent years, it remains stubborn. The U.S. Consumer Price Index (CPI) registered at 3.4% in July 2026. Because inflation continues to be above the Federal Reserve’s 2% target, bond yields remain elevated, keeping borrowing costs restrictive and putting pressure on the US Consumer. Overall, the data around the consumer looks supportive, but there are areas of rising concern. Credit card delinquencies, student loan defaults and auto loan delinquencies are rising and at, or, approaching post-2008 levels.

A misstep here could set off a slew of issues, and the market is watching.

3. GEOPOLITICS, ENERGY AND INFLATION

We’re currently reading The World for Sale by Javier Blas and Jack Farchy - please join us for a chat with them on September 11th at 2pm UKT. They are the perfect people though, to try get a better understanding of this more volatile geopolitical landscape and what it means for energy and commodity markets. Energy prices have risen, albeit not as much as many feared but it is feeding through to inflation and creating margin pressure, except for Energy companies.

I recently asked the BREAKINGWATERS community what sectors they thought were doing best and worst year to date and only 16% got it right. Energy has been the best performing sector and Consumer Discretionary the worst performing (in the US).

Energy has been leading sector performers for the year with over 40% return in the US and over 30% in Europe driven by volatile Middle Eastern geopolitics - with further escalation only yesterday. Earlier in the year, the breakout of conflict in the Middle East saw the S&P 500 drop nearly 10%. Another drop like that would erase nearly all the gains for the year so far.

4. A RISING TIDE LIFTS ALL A SELECT FEW BOATS

A significant portion of index market cap in the US is driven by a very small basket of mega-cap technology and AI-related companies. This concentration risk means that if these specific leaders experience a correction (see point 1), it could heavily impact returns and portfolios with even the index amount of exposure to these names.

JP Morgan recently published a chart detailing the scale of the problem.

Source: JP Morgan, Q2 2026 Chart Pack, The Era of Transformation via Tilo Marotz on LinkedIn

Buybacks, the rise of retail, the power of passive, fewer IPO’s, the dominance of technology are all factors contributing to the fact that the top 10 companies by market cap in the S&P 500 now account for c.38% of the total index market cap. AI is also the primary theme running through the 10 companies. Clearly, if the theme falters or if the companies’ prospects falter it will have a major impact on the index and any portfolios holding similar exposures. I am currently putting together a separate piece on this phenomenon so watch out for that in the coming days.

BEFORE THE LEAVES CHANGE

There are 3 things you should do before the leaves, and the markets, change.

Firstly, review and adjust your AI exposure to sensible levels if you’re overexposed to hyperscalers.

Second, accept that geopolitical volatility will remain elevated for the near to medium term and position accordingly. Remember the US suggesting the takeover/acquisition of Greenland? That was this year. A lot has happened and my expectation is that more will continue to happen. Energy is a great hedge if you haven’t already got exposure.

Third and finally, review your exposure to the US/Mag 10. There is no need to be overly reliant on these names, there are returns to be had all over the world and they come with much better risk characteristics.

If you enjoyed this piece please give it a like and/or share it with someone you think might enjoy it. Also, make sure you’re subscribed to breakingwaters.com to hear about the range of conversations we have lined up over the coming months with top tier Fund Managers and successful authors.