Market overview

In third quarter 2026, the equity markets demonstrated notable resilience in the face of structural headwinds, continued geopolitical concerns, and monetary policy tightening, with the S&P 500 Index up +2.3%. Year-over-year earnings growth for the S&P 500 stands at ~32% which, relative to a normalized rate over a longer-term horizon, suggests the market is overvalued by 15% to 20%. It is our belief that stock prices follow this trajectory of growth, and while earnings strength has driven recent broad-based stock price appreciation, this top-line headline has masked a heavily bifurcated market, with market breadth remaining poor and leadership concentrated in just a handful of sectors.

While AI-related disintermediation risks are real, the resulting stock price reaction to them is sometimes largely sentiment driven; the materiality of the declines is in part due to a changing market structure where nonfundamental investors are today’s price setters, controlling 65% to 75% of normal daily trading volume.

Against this backdrop, energy - which continues to benefit from regional conflicts and elevated oil prices - was the best performing sector, up +17.2%. Information technology was up +7.3% and continues to exhibit forward momentum in the face of AI-related capital expenditures; given its weight in the S&P 500, the sector contributed a significant amount to the index total return. Healthcare, commonly viewed as a defensive play, was up +6.5% and was likely viewed as a safety sector against broader macroeconomic risks.

The remaining seven sectors were in negative territory, with utilities and industrials - perceived to be the most impacted by rising long-term bond yields - the worst performing at -12.4% and -9.7% respectively.

Portfolio commentary

The financial results of our portfolio companies were strong, with our recipe for economic value creation - reported returns on invested capital plus implied free cash flow per share growth - attractive on both an absolute and relative basis. Compared to the extreme uncertainty that accompanies the price other market participants are willing to pay for our portfolio companies and those we choose not to own, we feel more in control of the fundamental performance and superior valuation of our portfolio companies.

To that end, our portfolio companies have executed well and have produced solid growth and fundamental economic performance while maintaining appropriately conservative capital structures. These achievements are evident at the aggregate portfolio level, where we have observed attractive growth in revenue, cash flow, and earnings; superior profit margins; returns on capital; and healthy balance sheets. In our view, momentum and high beta continue to drive market performance at the expense of growth, quality, and positive fundamental factors. After making opportunistic adjustments, we remain focused on finding new investments and rebalancing existing portfolio companies in the context of a market environment we view as challenged. For the quarter, the Strategy’s two largest detractors to total return were KLA Corp. (KLAC) and Applied Materials (AMAT) respectively.

KLA (share price -35.3%) was the largest performance detractor, reducing the Strategy’s total return by ~207 basis points (bps)¹ during the quarter. Shares declined amid growing concerns that export restrictions and escalating geopolitical tensions could dampen demand from China, a critical market for semiconductor equipment spending. Investor sentiment was further pressured by fears that accelerating AI-related investment may pull forward demand, raising questions about the durability of the current wafer fabrication equipment cycle. While these concerns weighed on valuation, the pressure appears more cyclical and policy-driven than structural, as KLA remains a mission-critical supplier of process control and yield management solutions that are essential to increasing semiconductor complexity across both AI and non-AI end markets.

Applied Materials (share price -29.2%) detracted ~135 bps from the Strategy’s total return during the quarter. Shares declined as investors reassessed the outlook for semiconductor capital spending following heightened trade restrictions, uncertainty around China-related revenue exposure, and concerns that customers may moderate investment after an extended period of robust AI infrastructure spending. The weakness reflected broader apprehension surrounding the pace and sustainability of wafer fabrication equipment demand rather than any company-specific execution issues. While near-term visibility remains subject to geopolitical and cyclical fluctuations, the pressure appears temporary rather than structural, as Applied Materials continues to benefit from long-term semiconductor content growth and increasingly complex manufacturing processes that require greater process intensity across leading-edge and mature-node technologies.

These two positions had a large combined average active weight of almost 6% over the quarter-to-date period, and this had a disproportionate negative impact to the Strategy’s total return. We do not see this selloff as idiosyncratic, as fundamentals remain compelling. Rather, we consider overall softness in the semi-cap space related to AI pacing concerns and general calls for guardrails to be implemented as headwinds. Furthermore, stretched valuations and continued elevated expectations led to profit taking.

For the quarter, the Strategy’s two largest contributors to total return were Microsoft (MSFT) and Apple (AAPL) respectively.

Microsoft (share price +37.8%) was the largest contributor during the quarter, adding ~223 bps to the Strategy’s total return. Share price performance reflected continued strength in Azure cloud growth, which benefited from robust demand for AI workloads and accelerating adoption of the company’s generative AI offerings. Investors responded favorably to evidence that Microsoft’s substantial investments in AI infrastructure were translating into increased revenue growth and customer demand across both cloud and productivity platforms. With its unique position spanning cloud infrastructure, enterprise software, and AI applications, Microsoft remains well positioned to benefit from the growing adoption of AI across the global economy.

Apple (share price +15.2%) contributed ~91 basis points to the Strategy’s total return. Share price performance during the period reflected resilient demand across the company’s installed base, growing investor confidence in Apple’s AI strategy, and the successful launch of its latest iPhone lineup. The stock also benefited from the continued expansion of the higher-margin services segment, which provides recurring revenue streams and strengthens customer engagement within the ecosystem. With more than 2 billion active devices worldwide and a highly loyal customer base, Apple remains well positioned to benefit from long-term growth in premium consumer technology, digital services, and ecosystem-driven spending.

Today’s market environment warrants caution in our view, and our portfolio construction process has evolved given changing market dynamics. In an environment that remains highly selective, the Strategy’s underperformance was exacerbated by our underweight to software. We didn’t fully participate in the valuation reversal and rotation into the space, where market leaders are showing signs of being able to integrate and monetize AI. We are hyper-focused on managing the risk around AI-exposure and are continuing to diversify while maintaining a level of commitment with some of our long-standing investment disciplines.