By Rick Schwerd |
Our investment team remains committed to sharing updates and market insights to keep you informed. Please look for our next update on August 21.
Markets Surge to All-Time Highs
Strong earnings reports and a slight deescalation in the Middle East lifted markets during the past week. From last Wednesday, July 29, through Wednesday, the S&P 500 jumped nearly 6 percent, with the index crossing 7,700 for the first time. The broad market index is now up 13 percent for the year. The tech-heavy NASDAQ had an even better run over the same period, surging more than 8 percent. The index remains 2 percent below its early June all-time high.
A slew of strong earnings reports across diverse sectors, along with talk of a possible agreement with Iran earlier this week, helped drive the surge. Oil prices fell below $75 per barrel after briefly topping $93 per barrel a couple of weeks ago. The yield on the benchmark 10-Year Treasury, which has been moving in tandem with oil prices, also fell back from recent highs.
With approximately 75 percent of the S&P 500 having reported earnings so far, we remain on track to see another 20-plus percent year-over-year earnings growth quarter. One thing we are watching is the estimates for future earnings reports. Estimates continue to rise for the third and fourth quarters. However, they are increasing at a slightly slower rate than they were in the first quarter, which may indicate that we have passed peak earnings growth for the current cycle.
This is by no means a sell signal or a sign that the current bull market is ending. It is simply something that we will continue to monitor and could lead us to become a little more conservative as we move through the second half of the year.
Situational Capital
A portion of the selling in previous high-flying tech stocks during June and July may be traced to the blow-up at the hedge fund Situational Awareness, run by 24-year-old wunderkind Leopold Aschenbrenner, who became valedictorian of Columbia University at age 19. Given that it’s the relatively slow summer season, we thought this would be a good reminder of the pitfalls of excess risk and leverage.
"Situational Awareness" began as a 165-page essay published in June 2024 by Aschenbrenner, a former OpenAI researcher. The paper argued that rapid scaling would produce artificial general intelligence (AGI) and superintelligence by 2027, emphasizing severe national security risks, nationalization and competition with geopolitical rivals like China.
Capitalizing on the essay's viral acclaim across Silicon Valley, Aschenbrenner launched a namesake hedge fund, Situational Awareness LP. Backed by prominent tech figures, the fund placed hyper-concentrated, heavily leveraged bets on AI infrastructure, data center supply chains and semiconductor companies. The fund was rumored to be three to four times leveraged at its peak.
While the fund initially skyrocketed by more than 1,000 percent alongside the AI boom, growing to more than $45 billion in assets under management, its aggressive use of debt left it extremely vulnerable to market swings. During June and July, a sharp correction in semiconductor and hardware stocks triggered massive margin calls from lenders.
Forced into fire sales to cover debt collateral, the fund suffered a catastrophic drawdown, losing roughly two-thirds of its value in a single month and unloading major positions to rival firms. It became a high-profile Wall Street lesson on the dangers of pairing short-term leverage with tech volatility.
Aschenbrenner’s thesis may ultimately prove correct and many of the companies that the hedge fund held in its portfolio have already rebounded significantly off their lows. However, the use of leverage leaves firms and investors open to financial ruin from even relatively typical equity market pullbacks.
As always, if you have any questions or concerns regarding markets or your financial planning needs, please reach out
to us at (518) 415‑4401.
About the Author: With almost three decades of financial industry experience, Rick serves as a
Senior Investment Officer at Arrow Bank. He oversees individual and corporate retirement plans, personal trusts,
investment management accounts, foundations and not‑for‑profit relationships.