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) SPCX 0.00%↑ and Meta META 0.00%↑ 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 NVDA 0.00%↑ 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.
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