A Confluence of Influences

Mark Twain famously said that a cat doesn’t sit on the same hot stove twice. Investors, however, do not have the same discipline as it relates to utilizing excessive leverage. Activity in the South Korean equity market plus a high-profile, AI-focused investment firm drove price action this week and likely for much of July, so understanding their parameters is important.

For context, AI-related and other technology companies have demonstrated considerable volatility since late June. The Philadelphia Semiconductor Index (SOX) fell 29% from June 22 through July 29, and the semiconductor-heavy South Korean Kospi index fell 38% in local currency terms during that same timeframe.

South Korean retail investors, seeing massive gains in companies like Samsung Electronics and SK Hynix, increased levered bets on exchange-traded funds (ETFs) tied to individual companies. Before regulators stepped in with increased margin requirements, 16 single-stock leveraged and inverse ETFs totaled 17.6 trillion won (roughly $12 billion), with some estimates that leveraged ETF activity represented almost 3% of the entire Korean free-float market capitalization.¹ While recent steps to rein in leverage may have tempered market declines, the levered culture remains worth watching.

In addition to the Korean leverage story, AI-centric hedge fund Situational Awareness, managed by Leopold Aschenbrenner, sold part of its public holdings to Citadel, another large hedge fund. Reports suggest that Situational Awareness was up to 400% levered, and given its concentrated focus within the technology sector, the hedge fund faced acute difficulties as broad technology sold off.² Following the Citadel transaction, higher-beta equity prices bounced on Thursday, suggesting some near-term salve. While  Schadenfreude doesn’t exist on these pages, excessively levered outcomes rarely end well, a lesson markets happily deliver in cruel ways, emphasizing the importance of a well-thought-out and responsible plan. 

The U.S. Federal Reserve, Bank of England and Bank of Japan’s respective monetary policy committees all concluded meetings this week. Each bank decided to leave interest rates unchanged, but their communications could not have been more different. Fed Chair Warsh has opted for a decidedly taciturn approach with markets, including post-meeting communications that are 50% smaller in word count than prior statements, a point he emphasized again Wednesday: “We've been somewhat spare on our words when we pulled back from forward guidance.”³

Forward guidance, or providing market participants with previews of future meetings, has been a standard central bank policy for years. Providing at least a working hypothesis around intentions helps markets gauge policy, but Warsh has indicated that is the opposite of what he is looking for. Instead, Warsh wants markets to draw their own conclusions about incoming economic data. Warsh noted that in the 42 days since the Fed’s last press conference, market-set interest rate increases were amongst the most significant in twenty years.⁴ Warsh noted that “market participants are learning to play the ball and not the referee.”⁵

The Bank of England did not share the Fed’s forward guidance opacity. While they also had three dissenting votes seeking a rate increase, Bank of England Governor Andrew Bailey implored reporters attending a post-meeting press conference, “please do not leave this room thinking the Bank of England is edging towards a hike, because frankly, there’s nothing in what I said, and I think any of us have said, along those lines.”⁶ Similarly, the Bank of Japan, while citing a data-dependent forward path, offered explicit guidance that it remains on a tightening path. In its post-meeting outlook, the Bank of Japan noted that “the Bank will continue to raise the policy interest rate and adjust the degree of monetary accommodation, in response to developments in economic activity and prices as well as financial conditions.”⁷

Markets will be left to adjust to the new Fed communication style, but it appears other central banks are not following the same playbook. 

As we have shared, evaluating technology companies’ AI strategy has evolved from the binary question, “Do you have an AI strategy?” to “Do you have a credible peer-relative AI strategy?” to the current question, “What are your returns on invested capital for your AI spend?” Based on recent earnings reactions, we would add the AI capital expenditure’s free cash flow influence to investors’ interrogation list. Investors are well aware of strong demand for AI ecosystem components, but they know that demand will be impermanent, and accordingly, investor capital is also finite.

Meta is illustrative of a company balancing growth with spending. Two quarters ago, Meta handily beat analysts’ earnings estimates, yet the stock fell 10% as the company raised its AI-related capital expenditures to a range between $125 billion and $145 billion. In its latest quarter, the company narrowed that range to $130 to $145 billion, but a drop in free cash flow due to other expenses led to an earnings miss and another sharp stock drop.¹⁰

However, CEO Mark Zuckerberg noted in the post-earnings conference call that the company had several opportunities to sell excess computing capacity at a premium to their cost. “A common trade-off that we need to make is around how much do you monetize something today versus develop future assets.”¹¹ Meta has multiple AI-related ambitions, so foregoing sales led to lower potential earnings, and investors sent a clear message on that decision.

As noted last week, Alphabet finds itself in a similar position. In the company’s first quarter earnings report, they had a strong earnings and revenue beat, but they raised their capital expenditure guidance for the year and saw significant free cash flow compression. This quarter, the company raised spending guidance again and their free cash flow turned negative, and again their stock faced pressure from investors.

Microsoft and Amazon’s earnings reports were more favorably received, and part of the answer lies in their ability to monetize opportunities while still investing for future growth. Both companies demonstrated meaningful cloud revenue growth, with Microsoft’s Azure cloud service revenue jumping 43% and overall Azure revenue reaching $100 billion.¹² Amazon’s Web Services (AWS) business grew 37% year-over-year, its largest growth rate since 2021.¹³

Back to the investor AI evaluation framework above, Microsoft guided investors to lower capital expenditure growth than some had feared for 2027 while still projecting strong Azure growth.¹⁴ Amazon emphasized its AI-specific growth, noting they “exceeded a $25 billion annual revenue run rate for AWS’s AI business, growing triple-digit percentages year-over-year, (and) exceeded a $25 billion annual revenue run rate for (its) chips business, growing triple-digit percentages year-over-year.”¹⁵

What jumped out to us, however, is something that has not been well covered in the press. Microsoft CEO Satya Nadella posted on social media site X details of a return on invested capital (ROIC) “intelligence app” that he built, highlighting that hyperscalers invested $357 billion in cash-based capital expenditures while sustaining an average 29.7% ROIC.¹⁶ Irrespective of the math’s veracity, this level of detail and scorekeeping speaks to a company receiving the market’s message.

¹ Macrostream. “South Korea's Leverage ETFs Spiral Out of Control: $45B Surge, SK Hynix Fund Overtakes US Tech Giants.” July 3, 2026. https://www.macrostream.ai/articles/6a47e3a43c80f748cb62c941. Accessed 31 July 2026. 

² Son, Hugh. “How Leopold Aschenbrenner built a $45 billion AI hedge fund — and lost most of it in days.” CNBC. July 31, 2026. https://www.cnbc.com/2026/07/31/leopold-aschenbrenner-situational-awareness-fund-fire-sale.html. Accessed 31 July 2026.

³ United States Federal Reserve. “Transcript of Chairman Warsh’s Press Conference.” Federal Reserve Media Center. July 29, 2026. https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20260729.pdf. Accessed 30 July 2026.

⁴ United States Federal Reserve. “Transcript of Chairman Warsh’s Press Conference.” Federal Reserve Media Center. July 29, 2026. https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20260729.pdf. Accessed 30 July 2026.

⁵ Ibid

⁶ Rees, Tom. “Bailey Plays Down Rate Hikes After Bank of England Holds.” July 30, 2026. Bloomberg. Accessed on Terminal 30 July 2026.

⁷ Bank of Japan. “Outlook for Economic Activity and Prices.” The Bank’s View. July 31, 2026. https://www.boj.or.jp/en/mopo/outlook/gor2607a.pdf. Accessed 31 July 2026.

⁸ Northern Trust Wealth Management Research, Bloomberg. Data analyzed on terminal July 31, 2026.

⁹ Ibid

¹⁰Meta Investor Relations. “Meta Reports First Quarter 2026 Results.” April 29, 2026. https://investor.atmeta.com/investor-news/press-release-details/2026/Meta-Reports-First-Quarter-2026-Results/default.aspx. Accessed 31 July 2026.

¹¹Meta Investor Relations. “Meta Reports Second Quarter 2026 Results.” July 29, 2026. https://investor.atmeta.com/investor-news/press-release-details/2026/Meta-Reports-Second-Quarter-2026-Results/default.aspx. Accessed 31 July 2026.

¹² Microsoft Investor Relations. “Earnings Release FY26 Q4.” Press Release and Webcast. July 29, 2026. https://www.microsoft.com/en-us/investor/earnings/fy-2026-q4/press-release-webcast. Accessed 31 July 2026.

¹³ Amazon Investor Relations. “Amazon.com Announces Second Quarter Results.” Amazon News Release Details. July 30, 2026. https://ir.aboutamazon.com/news-release/news-release-details/2026/Amazon-com-Announces-Second-Quarter-Results/. Accessed 31 July 2026.

¹⁴ Microsoft Investor Relations. “Earnings Release FY26 Q4.” Press Release and Webcast. July 29, 2026. https://www.microsoft.com/en-us/investor/earnings/fy-2026-q4/press-release-webcast. Accessed 31 July 2026.

¹⁵ Amazon Investor Relations. “Amazon.com Announces Second Quarter Results.” Amazon News Release Details. July 30, 2026. https://ir.aboutamazon.com/news-release/news-release-details/2026/Amazon-com-Announces-Second-Quarter-Results/. Accessed 31 July 2026.

¹⁶ Nadella, S [@satyanadella]. (2026, July 30). Some more detail on the ROIC Intelligence App I built yesterday and mentioned on today’s earnings call.” https://x.com/satyanadella/status/2082640036949008570. X. Accessed 30 July 2026.