August Portfolio Review: Adapting to a Late-Cycle Market
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are not annualized. Performance results, current to the most recent month end may be obtained by
visiting Qraft AI ETFs at www.qraftaietf.com/lqai.
Performance Overview
During the July 7 – August 3 measurement period the prior model portfolio rose 3.4%, roughly 320 bp¹ ahead of the S&P 500. A 32% focus on platform tech, led by Nvidia and Microsoft, drove gains, boosted by AI capex² and reduced tariffs with Japan and the EU. Tesla, Amazon, and retail sales strength helped, but momentum slowed as new tariffs on Canada and India, along with a weak 73k July payroll gain, weighed on markets. The risk-off swing drove a –1.3% hit on 1 August, exposing the portfolio’s sensitivity to macro shocks as higher-beta³ cyclicals gave background. Although the overall showing remained solid, the late stumble underscored rising concentration risk⁴. In response we have since trimmed the technology overweight, diversified internationally and added selective defensives—steps we believe will leave the portfolio better balanced for a late-cycle, trade-fragile market landscape.
Monthly Review
During the July 7–August 3 observation window the United States looked very much like an economy in the late-cycle transition. A volley of new tariffs—30% on EU and Mexican goods, 25% on Japanese and South-Korean imports, 50% on copper—drove the effective tariff rate to a nine-decade high, pushed the dollar higher and briefly knocked the Dow more than 200 points as investors braced for a 0.3% jump in July CPI⁵. When the mid-month data actually arrived, CPI printed 2.7% YoY and retail sales rose 0.6%, but downward revisions to profit-growth estimates (to 5.8%) kept Treasury yields edging up and sentiment edgy. Relief followed when hurried truces with Japan and the EU cut planned levies to 15% in exchange for more than $1T of pledged investment, helping 85% of reporting firms beat earnings estimates and propelling the S&P 500 and Dow to fresh highs. The calm lasted only days: new 25–35% duties on India and Canada, a meager 73k July payroll gain and an unchanged 4.2% unemployment rate dragged the S&P down 1.6% on August 3 and lifted the implied probability of a September Fed cut to almost 90%. Net-net, consumer demand is still carrying growth, but cracks in capital spending and hiring, together with tariff-induced cost pressure, have left equity markets swinging between relief over temporary trade truces and fear that monetary easing may arrive too late.
Looking ahead, I expect the economy to enter August on a glide path of softer real growth (1½ – 2%), sticky headline inflation and a Federal Reserve that is nominally on hold yet tilting toward a fall rate cut. Pipeline PPI⁶ data remain tame, but the July CPI print plus a tariff rate at 90-year highs show that price pressure from trade policy is real. High-frequency indicators—cooling retail sales, weaker cap-ex orders and rising continuing claims—suggest further labor-market deterioration, even as any hint of trade détente can still spark sharp equity rallies. This combination of slowing but positive growth, elevated albeit contained inflation and an increasingly accommodative Fed should keep volatility high, flatten the front end of the curve and, with guarded confidence, favor quality cyclicals and cash-flow generative names over pure defensives.
To reflect that view we pared back pure duration plays—cutting Utilities to 5.2% and REITs to 4.4%—trimmed overall Tech to 29.8%, and redeployed the capital into high-quality cyclicals, financials and tariff-resilient cash-flow generators. New positions in Berkshire Hathaway, Blackstone, Visa and Nu Holdings lifted Financials to 5.5%, aiming to capture businesses that should re-rate if the curve steepens into a Fed cut. Industrials (Howmet, TransDigm) and materials/energy transition names (Linde, Cameco) were added as hedges against ongoing reshoring and infrastructure cap-ex. Consumer exposure rose to 12.5% through Walmart, McDonald’s, and Carvana, whose pricing power and service-sector tilt suit a soft-landing scenario. Core secular growers—Nvidia, Microsoft, Palantir and Tesla—remain top holdings at slightly lower weights to fund the diversification, while modest Energy and commodity stakes (XOM, COP, FSLR) stay in place as insurance against any new tariff-driven cost shocks that could challenge the disinflation narrative.
Portfolio Overview
Top Holdings – NVDA 7%
LQAI trimmed peripheral tech but kept NVIDIA Corporation (NVDA) at a 7% weight—still the fund’s largest position—because the firm’s break-into-history $4 trillion valuation surge, unrivalled AI hardware leadership, deep software stack and consistent high-margin, cash-generative financial profile make it the market’s preferred proxy for the entire AI build-out, attracting continual index and institutional demand that buffers volatility; shipment of export-compliant H20 chips re-opens a potential $15–20 billion annual China revenue stream, underscoring NVIDIA’s regulatory agility, 70% local share and ecosystem reach, while investments in partners such as Enfabrica and Vast Data further entrench its moat; although Beijing’s security review and bipartisan U.S. scrutiny introduce headline risk, both sides appear intent on negotiated compliance rather than outright bans, and LQAI’s reduction of overall IT exposure below 30% mitigates policy shocks without sacrificing core upside; outlook: despite near-term policy noise, NVDA’s dominant competitive position, robust balance sheet, expanding earnings base and sustained demand from hyperscalers and sovereign funds support a favorable medium-term performance expectation.
Top Holdings – MSFT 6.32%
Microsoft has been elevated to the portfolio’s second-largest holding (6.32% from 3.77%) because the market’s enthusiasm for its AI roadmap—evidenced by Copilot’s rollout in Edge, multibillion-dollar data-center expansions, the backing of OpenAI’s GPT-5 timeline, and an AI-infrastructure alliance with Temasek—now decisively outweighs lingering security concerns. High-profile cyber intrusions and related U.S.-UK regulatory scrutiny remain a drag, yet Microsoft’s accelerated hardening measures and the cross-selling of Defender and Entra suggest the issue could evolve into a net positive revenue stream; thus the position stays overweight but not outsized to preserve flexibility. Governance moves such as removing China-based engineers from U.S. military cloud work, endorsing the EU’s voluntary AI code, and partnering with the U.K. on AI safety further strengthen its standing with sticky defense, healthcare, and public-sector clients, promising longer contract cycles and lower churn. Supported by dominant software, cloud, and gaming franchises, healthy cash generation, and ample balance-sheet capacity to fund escalating AI capex², Microsoft’s fundamentals remain strong, and we see revenue and earnings compounding as AI monetization accelerates—giving the stock a positive outlook within LQAI despite periodic security-related volatility.
Top Holdings – PLTR 5.04%
We have raised Palantir Technologies’ weight in LQAI to 5.04%, making it the portfolio’s third-largest holding, because its deepening entrenchment in U.S. defense software, highlighted by a new 10-year Army enterprise contract worth up to $10 billion, offers durable, mission-critical revenue streams that diversify our AI exposure beyond Nvidia and Microsoft while keeping overall tech risk steady. The contract streamlines procurement for the Army and effectively grants Palantir preferred-vendor status, positioning the firm to capture a sizable share of future defense workloads even as the Department of Defense tests rival platforms from Microsoft and OpenAI; we acknowledge that competitive threat by capping PLTR below our two largest tech positions but still see it winning an outsized slice of the federal AI budget thanks to long-standing security clearances and proven field deployments. Political frictions around the $175 billion Golden Dome missile-defense program could slow near-term order flow, so we have paired the PLTR increase with additions to industrial names such as TransDigm and Howmet to hedge timing risk, yet the same uncertainty expands the Pentagon’s supplier roster in ways that favor agile software contractors like Palantir. Fundamentally, the company continues to post double-digit revenue growth, expanding gross margins and positive free cash flow, backed by a debt-light balance sheet and rising backlog, supporting our view that its valuation remains underpinned by improving profitability. Outlook: despite headline volatility, we expect Palantir to leverage its strengthened government foothold and growing commercial traction to deliver steady top-line expansion and margin gains, making the shares a core long-term contributor to LQAI performance.
Notable Changes – WMT (Upgrades) 2.51%
LQAI initiated a 2.51% position in Walmart after previously holding no shares, lifting the stock to just outside the portfolio’s core-tech cluster while trimming overall Staples exposure from 7.54% to 4.34%; the move reflects Walmart’s superior execution in an inflation-pressured 2025 retail backdrop, its 30% e-commerce surge during July’s “Black Friday in Summer,” and management’s goal to push digital revenue to 50% of sales within five years via AI “super agents,” all of which underpin consensus expectations for upper-single-digit EPS growth, accelerating free-cash-flow and a still-modest mid-teens multiple versus slower-growing peers. The company’s decision to cut shelf prices about 2%—even as Amazon raised comparable prices 5% and suppliers warn of 25% tariff-related cost hikes—reinforces its Everyday-Low-Price moat, secures traffic during trade-down cycles, and justifies reallocating capital from other Staples names. Offsetting these positives are tariff risk, margin compression across the sector, an FTC warning over “Made in USA” labels, an 850,000 water bottle recall, and a profit slump plus CEO exit at Walmex, so the stake was capped below 3% to balance digital optionality and robust U.S. cash generation against regulatory and Latin-American execution headwinds. Overall outlook: favorable, with robust fundamentals and expanding digital capabilities expected to drive sustained earnings and cash-flow growth, though headline and overseas risks warrant a measured weight.
Notable Changes – AVGO (Downgrade) 0.39%
LQAI has cut Broadcom’s weight from 3.68% to 0.39%, reallocating capital to higher-conviction AI names such as Microsoft, Palantir and Nvidia, because Broadcom now faces a trifecta of challenges: an EU antitrust appeal that could delay VMware-related synergies and distract management; balance-sheet pressure as net leverage rises and free-cash-flow conversion weakens amid absorption of VMware’s lower-margin subscriptions, putting the dividend-growth narrative at risk; and strategic missteps exemplified by the aborted €1 billion Spanish chip-plant, which strains EU relations just as the firm seeks regulatory goodwill, although the recent Tomahawk Ultra networking processor launch shows technological vigor. Given these unresolved legal, financial and political overhangs, the portfolio views Broadcom’s risk-adjusted return as inferior to peers and maintains only a tactical, opportunistic holding while awaiting clearer legal outcomes, deleveraging progress and smoother execution.
Notable Changes – KVUE (Downgrade) 0.10%
LQAI has cut Kenvue (KVUE) from 1.64% to 0.10% of assets after the abrupt CEO dismissal, activist agitation and an impending strategic review recast the company from a dependable consumer-staples cash-flow story to one riddled with execution risk, prompting a shift of capital toward holdings with clearer near-term catalysts. The forced exit of Thibaut Mongon and interim appointment of Kirk Perry point to deep-rooted operational issues in skin-health and beauty that usually mean a multi-quarter “wait-and-see” period with little scope for multiple expansion. A recent Barclays downgrade underscored growing sell-side skepticism about KVUE’s top-line trajectory relative to peers, implying a thin valuation cushion if guidance disappoints. Outlook until the August earnings release and strategic roadmap provide clarity, LQAI stays sharply underweight KVUE, expecting continued volatility rather than near-term upside.
Footnotes
¹ Basis point, a unit of measure for interest rate or yield changes (1 bp = 0.01%). ² Capital expenditure, the money a company spends on long-term investments such as equipment, facilities, or technology. ³ Describes assets that tend to be more volatile than the overall market(beta greater than 1). ⁴ The risk from investing heavily in a small number of assets, industries, or regions. ⁵ Consumer Price Index, a measure of inflation based on the average change in prices paid by consumers. ⁶ Producer Price Index, a measure of inflation based on the average change in prices received by producers. Some or all of the companies mentioned are held in the fund.
Disclosure
For a list of the top 10 fund holdings, please visit www.qraftaietf.com/lqai. Fund holdings are subject to change.
About Qraft Technologies
Qraft Technologies is a fintech company aiming to drive growth in the asset management industry through its innovations in artificial intelligence (AI) and investing. Qraft offers a variety of AI-powered investment solutions, including a security selection engine, asset allocation engine, robo-advisory solution and an AI order-execution system. From data processing to alpha research and portfolio execution, Qraft has an established track record in developing cutting-edge AI solutions that have been adopted by over 25 financial institutions worldwide. In 2022, Qraft received a US$146 million investment from SoftBank Group, entering into a strategic partnership to accelerate AI in the asset management industry.
About LG AI Research
Launched in December 2020 as the artificial intelligence (AI) research hub of South Korea's LG Group, LG AI Research aims to lead the next epoch of artificial intelligence (AI) to realize a promising future by providing optimal research environments and leveraging state-of-the-art AI technologies. And LG AI Research developed its large-scale AI, EXAONE, a 300 billion parametric multimodal AI model, in 2021. EXAONE, which stands for “Expert AI for Everyone,” is a multi-modal large-scale AI model that stands out from its peers due to its ability to process both language and visual data. With one of the world’s largest learning data capacities, LG AI Research aims to engineer better business decisions through its state-of-the-art artificial intelligence technologies and its continuous effort on fundamental AI research. For more information, visit https://www.lgresearch.ai/.