Monthly Market Commentary

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i-squared Wealth Management Inc. Market Update

There were two events in August that could have a lasting impact on markets. The first event was actually two instances in which the Treasury used historically unconventional ways to defend Treasury yields. The first instance was the US intervening to support the Japanese Yen for the first time since 1998. The intervention came after the Yen hit a 40YR low against the dollar. The US intervened to prevent the Japanese from selling Treasuries to support the Yen, which would have driven our rates up. The second instance was the Treasury Secretary doubling the long-term Treasury buyback. The buyback amounts to a third of issuance. He said he will do more if necessary. While the new Fed Chair has made it clear that he wants the market to do the heavy-lifting in setting short-rates, the Treasury Secretary is taking leadership in managing the long-end. The power has now shifted to the Treasury. There is a clear bond put in place from Treasury. It is a form of yield curve control. Treasury wants to push issuance to the front end, where rates are lower. They want to stimulate new forms of demand for the short-end, such as from stablecoins and banking de-regulation. Treasury knows it has to keep rates below a certain level to help finance the deficit. Interest expense as percentage of GDP is now near a historic high. From a market’s perspective, it means that the debasement trade continues to have legs. Gold particularly looks like a good way to play it.

The second is major Wall St. firms partnering with Nvidia to provide $500bn of outside capital for the datacenter buildout. Nvidia will provide depreciation insurance. The importance of this is that it creates new sources of capital to finance the AI buildout. It will create a new asset class securitizing compute. You will soon get a call from your broker to buy “CBS” – compute-backed securities. The SEC eased rules around such securities to further promote them. If there is even modest success, Wall St. will make this a much bigger asset class.

With the Treasury defending yields, it means that these types of securities and the AI-buildout continue to get financed. The latest data from across the AI-supply chain should ease depreciation and payback concerns. Perhaps one of the most controversial AI-stocks, CoreWeave reported earnings in August. CoreWeave grew revenue 112%, grew its backlog to $104.2bn, and said near-term capacity is sold out. Perhaps more important to broader AI depreciation concerns, CoreWeave reported that A100s, 6-year-old silicon was contracted through 2029, while pushing a 25% price increase in July. Similarly, neo-cloud Nebius reported 454% year-over-year growth. They said the expected payback period for their associated cap-ex was 1-year and 10 months, down from two to three years. We are seeing returns on the spend across the value chain. The hyperscalers all reported accelerating growth in their cloud business. Google and Microsoft showing 82% and 43% growth, respectively. Analysts expect hyperscaler margins to rise to nearly 50% from about 30%. Amazon said on its earnings call, that, “We’ve long believed AWS could become a few hundred billion dollars revenue business and now believe it will be at least double that and very possibly be $1 trillion annual revenue business for us in time with very appealing accompanying free cash flow and return on invested capital.” They said one trillion-dollars in annual revenue!

Semiconductors and infrastructure should remain the focus for investors. We continue to get data point after data point that this is at the very least a very long cycle. Nvidia reported 106% growth! A $5 trillion dollar company doubled revenue! That type of growth is not supposed to happen for the largest company in the world. They guided to 70% growth for fiscal 2028, well above the 45% analysts expected. The guidance could have been even higher, if memory was not constrained.

The memory stocks are likely to get re-rated. They all trade at low multiples in the low-to-mid single digits. The chip shortage index is right near all-time highs. Both NAND and DRAM prices are at all-time highs and accelerating higher. Most of the memory stocks will at least double earnings in the next year. The re-rating will come as analysts and investors start to price growth in 2028 and 2029. For instance, analysts expect Micron’s earnings to decline by 29% in 2029. Micron announced 16 multi-year contracts that run through 2030. The contracts are take-or-pay with pricing floors. Similarly, SanDisk has signed long-term agreements with eight customers totaling $94bn (~$250bn market cap), representing approximately 50 percent of bits in FY2027 and approximately two-thirds of bits in FY2028. They expect margins to sustain over 80%, up from 34% just two-years ago. Earnings are likely to grow at a high level for a lot longer. These companies will buyback a significant amount of their float. SanDisk announced that they will return 100% of their excess cash flow to shareholders. SK Hynix announced the largest buyback in South Korean history. Micron will announce a plan in December or early next year. The earnings estimates don’t have meaningful contribution from recursive self-improvement, physical AI, or robotics. There is a lot of ways to win with these stocks. As investors start to price in a longer cycle, the multiple will start to re-rate higher. While you wait for that you will get tremendous earnings growth and capital return. Elon Musk’s quote on the SpaceX earnings call sums up the situation in memory very well: “memory capacity is increasing by around 20% per year, but demand has risen by 200%.”

Looking forward, the market will focus on the latest in geopolitics, AI, economic data, and Fed meeting.