September has been a tough market for everyone except momentum investors. Only semiconductor stocks are doing well. In the rest of the market, many sectors are trading at multi-year low valuations. Below are a few sector ETFs and their September performance.
Semiconductor stocks are doing well due to the AI trade.
The Equal Weight S&P 500 dropped much more than the S&P 500 index, driven by broad-based weakness.
Consumer discretionary has dropped ~7%
There are many more examples. The financials, real estate, materials, utilities, and consumer staples sectors have dropped by (-7%), (-7%), (-7%), (-6%), and (-5%), respectively. The key reasons for the same are:
Rising bond yields: The 10Y and 30Y US government bonds are now at the highest yields in the last ~15-20 years. Government debt and the deficit are out of control, and the war isn't helping either.
Meta launched the Muse agent: Since then, the market has been selling anything an AI agent can disrupt. Software, data providers, subscription businesses, and marketplaces are being sold. This is putting significant pressure on valuations.
The only sectors doing well are semis and AI hardware. AMD rose ~30% in the month and crossed $1 trillion in market cap. The market is selling out of even the larger megacap names like Amazon and Google and piling into Semis. The pain in most sectors is high.
But this ‘sell everything except Semis’ trade cannot continue forever. No world exists where only the semis sector benefits from AI and the rest of the economy doesn’t.
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The opportunity: buying high-quality compounders
By ‘quality compounders,’ I mean companies like S&P Global, Moody’s, Amex, Netflix and many others. These were, and still are, neglected by the market as it chases AI.
They recovered decently from their troughs in July-August but gave back much of that recovery in September. For example, SPGI fell ~9% and Netflix ~14% in September.
These companies have strong free cash flow, which matters in a higher-for-longer interest rate environment. The key is to separate companies that will legitimately be affected by AI from those that are being mechanically derated (as the market chases AI).
Rebound Portfolio Performance
The Rebound portfolio is now beating the market (S&P 500) by ~2.3% since inception in Aug’2025. Below is a snapshot of our portfolio from RC’s Schwab account.
The sharp contraction in alpha compared to last month, when we outperformed the S&P 500 by ~7%, was due to the factors discussed earlier in the article. Mainly, the momentum trade in AI, rising bond yields, and fears regarding AI/Agentic disruption.
We are quite satisfied with our returns in the last year (the RC portfolio was started on 25th August 2025), given how polarized the markets have been, with AI/Semi momentum names doing the best, to the detriment of other sectors.
This is a strong performance given our preference for value picks.
Portfolio Holdings Update
Our long-term target for the RC portfolio is a ~15% CAGR.
At that rate, the portfolio doubles roughly every five years. We think this is achievable without taking on unnecessary risk.
Our focus is on compounding wealth. We treat the S&P 500’s return as the benchmark to beat, but we don’t expect to beat it in every environment, especially in quarters when momentum and trends drive the market.
Over the past month, we reviewed every holding in the portfolio and updated the underlying models to check that each thesis is on track. The results support our view: for value investors looking beyond AI, this is a dream market. 12 of our 19 holdings now carry a buy rating.
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