September Market Update

Market Recap

The S&P 500 rose 2.68% in August, bringing its year-to-date return to 12.48%. Emerging markets, represented by the EEM ETF, showed strength in August after a volatile July, finishing the month up 4.57% and gaining 22.05% year-to-date.

After a strong run from April through June, small-cap U.S. stocks, represented by the IJR ETF, have cooled off. They fell 0.65% in August but remain up 20.25% year-to-date.

Portfolio Notes

After a noisy and volatile summer, the macro picture is again moving in the direction we have been highlighting. Emerging markets and commodities are showing strength, the U.S. dollar is weakening, and yields are rising. The opportunity set continues to broaden beyond U.S. large-cap stocks.

For much of the past two decades, a U.S.-centric buy and hold approach benefited from low interest rates, quantitative easing, and expanding global trade. Asset-light technology companies could scale with relatively little capital investment, generating cash for share buybacks and dividends. Long-term investors benefited tremendously.

Several of those tailwinds are changing. In particular, the AI buildout is making some of the largest technology companies much more capital intensive. As this shift develops, we continue to gain confidence that we are experiencing a meaningful change in market leadership.

We aren’t calling for the end of buy and hold, but we do think this is a good time to consider a more dynamic approach with clear risk controls and broader diversification. Our job is to follow the price-based evidence and adjust positioning as trends change.

Chart(s) of the Month

The capital expenditure point mentioned above is an important one. For decades, asset-light technology companies were able to scale with relatively little capital investment. Free cash flow grew rapidly and supported large, consistent share buybacks and dividends. Long-term investors benefited tremendously. That picture is now shifting, with cash flow and substantial amounts of borrowed money being poured into capital-intensive AI infrastructure projects.

This is not necessarily a bearish tech comment. It is a commodity supercycle comment, something we have been talking about at Incline since 2020. Demand for commodities, rare earths, and energy is coming from multiple directions including AI infrastructure, electrification, and deglobalization, after years of underinvestment on the supply side.

In our view, we are still in the early stages of this commodity cycle. We also believe that this cycle is not a repeat of the early 2000s, which was fueled by China’s industrialization and expanding global trade. This cycle is developing against a backdrop of persistent inflation pressure, rising interest rates, and deglobalization. Those differences matter for both the opportunities ahead and how we manage risk along the way.