AI Resilience Amid a More Hawkish Fed

Markets struggled in July amid increased skepticism regarding massive capex spending in the AI and hyperscaler space. This skepticism—which is misplaced, in our opinion—weighed heavily on our AI-related investments, such as semiconductors (XSD) and South Korean equities (EWY). While South Korean equities and semiconductors still boast astronomical year-to-date returns of 72% and 65%, respectively, both fell at least 28% heading into the final days of July, while the S&P 500 shed about 2.3%. However, the AI-related trade has rebounded sharply since then on the heels of strong earnings reports from Amazon (AMZN) and Microsoft (MSFT). The two largest hyperscalers both showed tremendous growth in their cloud business segments, easing concerns that capex plans have become excessive. As of August 12, 2026, South Korea has rallied 22% off its July 29 lows, semiconductors grabbed back 20%, and the S&P 500 has added 5.9%, pushing it into positive territory for the quarter.

Outside of the always-volatile AI trade, markets were left to digest an increasingly hawkish Federal Reserve. At the July meeting, policymakers kept rates steady between 3.50%–3.75%, but three members dissented in favor of a hike, citing persistent above-target inflation. Oil prices were also up sharply as the war in Iran nears its 6th month, though they remain well off the highest levels of the conflict. Meanwhile, the labor market showed modest signs of slowing in July: the economy shed 23,000 nonfarm jobs versus expectations of adding 80,000, and average hourly earnings grew at a slower pace than expected. While the unemployment rate fell to 4.1% from 4.2%, that drop was largely driven by a decrease in the labor force participation rate.

Labor data has undoubtedly softened, but we are not overly concerned about the slowing. In our view, the primary risk is that the Fed makes a policy mistake by being too aggressive with rate hikes to combat inflation. The softer labor data begs for a more balanced approach rather than an all-out fight to quell inflation—and the markets seem to agree, as equities actually rallied following the disappointing labor report. Inflation data will continue to be critical moving forward. While we would prefer to see no further rate hikes (which currently seems unlikely), we do believe the broader economy is strong enough to absorb a modestly more hawkish stance from the Fed. Fundamentals remain solid, primarily due to the knock-on effects of the AI boom. This is not the dot-com era; the buildout of data centers is actively creating jobs and supporting industries not typically associated with technology. As of now, we view July as a run-of-the-mill pullback and remain optimistic heading into the end of the year.