The stock market has experienced a notable upward swing since our last CNBC Investing Club Monthly Meeting, largely propelled by a resurgence in the artificial intelligence trade. The tech-centric Nasdaq Composite led the charge, marking a significant gain of 2.7% during the period. The broader S&P 500 followed suit, advancing 2.6%, while the Dow Jones Industrial Average notched a respectable 2.3% increase. These gains, however, occurred amidst underlying volatility, most notably the forced liquidation of Situational Awareness, a highly leveraged hedge fund heavily invested in AI, which temporarily put pressure on some of the market’s leading performers.
On Thursday, the market demonstrated further upward momentum. Honeywell Aerospace, which would have been our portfolio’s weakest performer, down 19.5% since our last monthly discussion, was strategically exited last week. This decision was prompted by management’s revised guidance in its inaugural standalone earnings report, which cited persistent supply chain execution challenges. This development significantly eroded our conviction in the stock, as our initial investment thesis was predicated on flawless execution post-spin-off. We maintain our position in Honeywell Technologies.
Ahead of our August Monthly Meeting livestream, commencing at noon ET, we offer a comprehensive review of the key drivers behind our top and bottom performing stocks since our previous meeting.
### Top Performers
**Microsoft: Up 22.8%**
Microsoft’s latest quarterly results signaled a profound shift in investor sentiment, vividly illustrating the tangible returns of strategic AI investment. Following the market close on July 29, the cloud and software titan reported robust growth while demonstrating disciplined capital expenditure, simultaneously generating an impressive $19 billion in free cash flow. This potent combination instilled greater confidence among investors, affirming that Microsoft’s substantial AI investments are indeed translating into meaningful financial outcomes. As one observer noted, Microsoft has “gone from most hated to most loved,” a sentiment echoed with an urging to “stay long. Do not touch it.”
**Eaton: Up 16.1%**
The electrical equipment manufacturer experienced a sharp rebound following its strong quarterly performance. Eaton surpassed both revenue and earnings expectations and revised its full-year organic growth and earnings outlook upward. Simultaneously, orders and backlogs surged across its electrical divisions. These results, released on the morning of July 31, arrived at a critical juncture, particularly after the forced selling associated with the Situational Awareness unwind had impacted AI infrastructure stocks. This hedge fund blow-up was characterized as a “clearing event,” and Eaton’s robust quarter provided investors with a compelling reason to re-engage with the sector. We continue to view Eaton favorably as a “picks and shovels” play on the burgeoning data center buildout, offering AI exposure without direct bets on the underlying technology itself.
**Salesforce: Up 12%**
The enterprise software company saw a significant rally as investors revisited the software sector. This comes after concerns earlier in the year that AI might disrupt traditional software-as-a-service (SaaS) business models. Initially affected by ServiceNow’s July 22 earnings report, Salesforce staged a comeback as the Situational Awareness implosion accelerated a rotation out of semiconductors and into previously undervalued enterprise software stocks. Strong performances from Microsoft and Palantir further fueled this resurgence. While Salesforce remains a “show-me story,” this rally underscores the rapid shifts in market sentiment when expectations are low enough for positive news to gain significant traction.
### Bottom Performers
**Linde: Down 7.9%**
The industrial gas leader experienced a sharp decline subsequent to its second-quarter earnings report, which was released before the market open on July 31. This downturn occurred despite the company exceeding both earnings and revenue expectations. Investors instead focused on weaker-than-anticipated guidance and challenges within Linde’s healthcare segment, where elevated labor costs and changes in insurance reimbursement policies impacted margins. While this was not the cleanest quarterly report in our five years of holding the stock, we perceived the post-earnings sell-off as a opportune moment to acquire more shares rather than an indicator of a fundamental shift in the long-term narrative. As one analyst stated, “You buy the stock. It’s one of the greatest stories of our time. It is.”
**Apple: Down 9.3%**
The technology giant, known for its iPhone, had demonstrated resilience until its latest earnings report triggered a decline in its shares. Apple surpassed Wall Street’s revenue and profit expectations with its quarterly results released on the evening of July 30. However, elevated memory costs, supply chain constraints, and more conservative guidance overshadowed these positives. The company has already implemented price increases on select Mac and iPad models to offset rising memory costs. Notably, Apple has largely sidestepped the intense AI infrastructure spending race, opting instead to leverage its partnership with Alphabet’s Gemini to enhance its AI capabilities. We maintain our positive outlook on this capital-light strategy and view the broader rollout of Apple Intelligence later this year as a significant catalyst. September is poised to be a pivotal month for Apple, with Tim Cook transitioning to Executive Chairman on September 1, handing over the CEO role to hardware chief John Ternus. The company is also expected to hold its annual iPhone launch event, where we anticipate further memory-driven price adjustments, similar to what was observed with Macs and iPads.
**Meta Platforms: Down 12.9%**
The parent company of Facebook and Instagram has transitioned from being one of our strongest performers leading into July’s Monthly Meeting to one of our weakest ahead of August’s gathering. This shift is attributable to its July 29 after-hours earnings report, which reignited concerns regarding Meta’s substantial AI expenditures. While its advertising business remained robust, investor focus gravitated towards a more cautious revenue outlook, increased capital spending, and a nearly 91% reduction in quarterly free cash flow. Meta CEO Mark Zuckerberg’s commentary on the earnings call did little to assuage Wall Street’s doubts about the near-term generation of meaningful returns from these investments, despite confirming plans for a public cloud buildout last month.
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