Please remind me what DeepSeek was all about. Wasn’t it supposed to upend the proverbial apple cart and cause the hyperscalers to take a hatchet to their forward capital spending programs? That was January 2025, while the far-right side of the bar graph below displays the capital spending in billions of US$ of the hyperscalers for the recently reported quarter. AI-driven capital spending has returned with a vengeance as Meta, Microsoft, Amazon, and Alphabet spent $155B during the first half of 2025. According to Britain’s The Guardian newspaper, this sum is greater than what the U.S. government has spent on education, training, employment and social services fiscal year-to-date.
By the last trading day of Q2, the S&P 500 had clawed back the almost $10T it lost between its pre-tariff high on February 19th and its April 8th tariff-inspired low, plus $500B on top of this recouped loss, closing the first six months of 2025 with its fifth new closing high of the year (and 15th since the U.S. election). The M7 accounted for 44% of this bottom-to-top recovery and as the M7 group is the ‘poster child’ for both large cap and growth factors, the graph below explains their outperformance during the Q2 recovery in equities. Starting on the left, from January 2024, the right side of this 18-month indexed graph makes it pretty clear that large cap growth was the only place to be of late, prior to the ‘junk rally’ that joined the party in early June, with the ‘high beta’ and ‘most shorted’ factors outperforming the M7 during that time.
President Trump’s backpedalling on China in early May enabled investors to adopt the view that a general 10% tariff (and possibly some regionals) could be as bad as it gets. In fact, markets have become so sanguine to Trump’s tweets that we’re now all familiar with the latest acronym, the “TACO” trade, which presumably is something that bugs the U.S. President and emboldens traders to boost risk exposure any time another “text bomb” catalyzes a dip in markets.
A frustrating month for our funds, as once the first few days of April made us rudely aware of the potential for President Trump to drop ‘information bombs’ at any time, combined with our belief that China holds the ‘Trump cards’ in any trade war, we opted to maintain low net exposures. Sure, we tactically adjusted exposure up and down during the month, but we did not opt to aggressively trade equities based on technical ranges in an attempt to win back our drawdown. Instead, we stuck to our accepted and successful disciplined methodology for managing client capital in an attempt to minimize volatility while striving to generate a competitive net return. The year is far from over.