To Our Investors and Friends,
The S&P 500 had another solid month, up 1.9% in August. For the first time since the market lows in April, the advance was led by many stocks that have been left behind the narrow rally. Small capitalization stocks advanced, and Nvidia, the Artificial Intelligence (AI) darling, fell 2% in the month. The 10-Year Treasury bond dropped a modest fourteen basis points in the month to 4.23%. The 2-Year Treasury note declined 35 bps to end at 3.59%. Oil fell 7.6% in the month to close at $64 a barrel. Popular indexes continued to advance in the month, led by smaller companies. The Russell 2000 Value Index led with an 8.5% gain, the Russell 2000 Growth Index exhibited a 5.9% increase, the Russell 1000 Value Index advanced 3.2%, and the Russell 1000 Growth Index gained 1.1% in the month.
The recovery in the stock market since the April low has been one of the most robust recoveries in market history and has been heavily driven by the “Beta Trade”. Highly volatile stocks including AI semiconductor and hardware companies, speculative technology stocks, and industrial and utility companies deemed AI beneficiaries drove this gain. Most of these stocks were recent additions to multiple AI ETFs (exchange traded funds) launched over the last year. As can be seen in the chart below, macro hedge funds and retail investors alike all piled into this narrow universe of stocks, leading to the greatest returns in pure beta in more than a decade, and the highest valuations these companies have ever experienced.
We believe that this five-month trend may be coming to an end as Wall Street returns to the office this fall and appreciates that much of the investments in AI have resulted in little to no return. In fact, a July 2025 study by MIT’s NANDA group revealed that 95% of AI projects have generated no return. The issue the group highlights is that spending has been focused on front-office initiatives that are too complex for these new technologies to effectively improve now, while ignoring the back-office opportunities that can produce a return immediately. Software companies are the enablers of effective AI investment and are beginning to produce meaningful results for those customers engaging with their new AI offerings.
We believe Wall Street’s narrow focus on AI hardware and Beta should naturally broaden out as more and more examples of AI success stories come to the surface. We think the software stocks that were sold off to make more room for greater holdings in semiconductors and hardware stocks may soon recover. We predict that the focus on AI will begin to migrate to ROI (Return on Investment)-driven AI spending – which likely benefits software companies.
At Kingsland Investments, we have always been focused on finding companies that generate increasingly higher profit levels through thoughtful spending that produced a high ROI. The software companies that we focus on often produce over 100% ROI for their customers, which ultimately brings these customers back for more. AI will be very meaningful to the world economy, but the progress that we make in its utilization won’t be the linear path that Wall Street is assuming. We believe we are entering a period in which the boom/bust semiconductor and hardware companies likely fade in favor of the more predictable software companies that are demonstrating meaningly returns for their clients.
All the best to you,
Arthur K. Weise, CFA