Stocks navigated a turbulent start to September, with rising oil prices and Treasury yields casting a shadow over investor enthusiasm for the market’s leading artificial intelligence plays. For the week, the S&P 500 managed a modest 0.1% gain, while the Nasdaq closed up 0.4%, staging a recovery after an initially challenging week in what is historically a difficult month for equities. Both major indices extended their streaks of positive weekly performance to five out of the last six.
A robust August jobs report released on Friday injected upward pressure on bond yields, pushing the 2-year Treasury yield to its highest point since January 2025. This economic data point amplified existing inflation concerns, which had already been exacerbated by surging oil prices amidst heightened geopolitical tensions. The market’s perception of the Federal Reserve’s monetary policy also shifted, with the probability of a September interest rate hike climbing to 58%, up from 49.4% the previous day, according to CME’s FedWatch tool.
Against this backdrop, portfolio managers are recalibrating their strategies, seeking a more balanced approach.
**Rebalancing AI Exposure and Embracing Defensive Assets**
Significant adjustments were made to our portfolio last week, as we strategically reduced our exposure to some of the most prominent beneficiaries of the artificial intelligence buildout, which have recently seen a cooling of investor favor. Concurrently, we increased our allocation to more defensive sectors.
Even Nvidia’s stellar earnings report from the prior week failed to ignite a broad rally across AI-related stocks, underscoring a growing sentiment that investors are becoming more discerning in rewarding performance within the sector.
On Monday, we trimmed our position in Palo Alto Networks ahead of its earnings announcement on Tuesday evening, effectively locking in a substantial gain of approximately 148% on shares acquired in August 2024. This decision was driven by a desire to crystallize profits after the stock’s impressive rally of over 80% year-to-date. While the stock has seen some pullback from its mid-August all-time highs, this move does not diminish our fundamental conviction that artificial intelligence will be a significant driver of increased cybersecurity spending.
We divested our entire position in Corning on Tuesday, securing an average gain of 52%. Despite remaining up 70% for the year, Corning shares have experienced a decline of more than 40% from their late June record highs.
On Wednesday, we strategically redeployed a portion of the capital from these sales into BNY Mellon and Kimberly-Clark, initiating positions with approximately 1% weightings in the portfolio for each. BNY Mellon offers a financial services exposure that is less cyclical and driven by fee-based income. Kimberly-Clark, on the other hand, presents a more attractive valuation, a compelling dividend yield of 4.75%, and a potential upside catalyst from its pending acquisition of Kenvue.
Further bolstering our conviction in the AI narrative, we increased our stake in Micron Technology on Thursday, bringing its weighting in the portfolio to roughly 1%. Our outlook for Micron remains highly positive, driven by the persistent demand for AI-powered memory solutions, which continues to outpace supply. This trend is further supported by the bullish long-term forecasts emanating from industry leader Nvidia.
**When Good Earnings Aren’t Enough: Navigating Market Skepticism**
Despite delivering better-than-expected revenue and earnings, coupled with an optimistic long-term outlook for artificial intelligence, the market has shown continued reluctance to fully reward Broadcom’s growth trajectory. CEO Hock Tan has significantly elevated his fiscal 2027 AI revenue forecast to $115 billion, with projections indicating a doubling to $230 billion by fiscal 2028. However, persistent concerns regarding customer concentration, vendor financing practices, and potential pushback from data center operators continue to weigh on the stock’s valuation.
Consequently, we have lowered our price target for Broadcom to $430 from $480, while maintaining our “hold-equivalent” rating of 2. Shares concluded the week down 3%. Prior to its earnings release, we had sold half of our remaining Broadcom position to reduce our exposure to the AI data center buildout.
This sentiment was echoed in market commentary, with observations that “the only regret I have is… I didn’t just get rid of it all.” Despite this, a willingness to hold the remaining position exists, partly due to Broadcom’s deepening engagement with AI startup Anthropic, which is slated for an initial public offering this fall.
Palo Alto Networks also reported strong financial results after the market close on Tuesday. The reported quarter reinforced our thesis that artificial intelligence represents a significant tailwind for the cybersecurity sector. Following a sharp sell-off in the stock on Wednesday, we were pleased with our decision to reduce our exposure prior to the earnings announcement. We subsequently upgraded Palo Alto Networks to a hold-equivalent 2 rating from our previous “sell-on-strength” 3 rating, following the post-earnings pullback. Our price target was also revised upward to $400 from $380.
CEO Nikesh Arora highlighted the critical need for modernizing approximately $1 trillion in global cybersecurity infrastructure to effectively defend against evolving threats. He emphasized that “You cannot deploy AI successfully if you do not get cybersecurity right.” Despite these strong fundamentals and industry insights, shares experienced a sell-off driven by profit-taking, making Palo Alto Networks the portfolio’s weakest performer last week, with a decline of over 10%.
**Nvidia Fortifies its AI Moat Through Strategic Acquisition**
Nvidia’s recent $12.9 billion acquisition of Hugging Face represents a significant move to further solidify its ecosystem around its leading-edge chips. This strategic acquisition grants Nvidia access to a powerful open-source AI platform utilized by over 18 million developers. The parallels to Microsoft’s transformative acquisition of GitHub in 2018 are notable.
Rather than aiming for direct monetization of the platform, Nvidia’s strategy appears focused on deepening developer loyalty, establishing its hardware and software as the natural choice for deploying AI models, and crucially, preventing a key strategic asset from falling into the hands of competitors. This acquisition also serves as a crucial hedge against the increasing development of custom chips by hyperscale cloud providers.
The underlying demand for compute power remains robust, irrespective of whether developers opt for open-source or proprietary AI models. As the adoption of artificial intelligence continues its exponential expansion, Nvidia is exceptionally well-positioned to capitalize on this trend.
Despite an impressive year-to-date gain of roughly 22%, Nvidia is currently trading at a valuation of just 14 times next year’s expected earnings. This valuation appears remarkably attractive given the company’s sustained growth trajectory and its ever-expanding artificial intelligence ecosystem. Furthermore, an increased share buyback program could serve as another significant catalyst for the stock, which rose 6% last week, inching closer to its mid-May record highs.
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