In a relatively flat market, Ithaka's portfolio bested the R1000G, beating the index by 570bps (6.7% to 1.0%, gross of fees). Read more here.
In a relatively flat market, Ithaka's portfolio bested the R1000G, beating the index by 570bps (6.7% to 1.0%, gross of fees).
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Market Review and Outlook
During the third quarter, equity markets largely consolidated their strong second-quarter gains amidst broad cross-currents. A noticeable market rotation away from the AI complex toward the broader market left our primary benchmark, the Russell 1000 Growth Index, largely range-bound. Performance across major indices reflected this “tug-of-war” between unyielding corporate earnings and macroeconomic friction. For the quarter, the tech-heavy Nasdaq Composite gained 2.5%, the S&P 500 rose 2.0%, and the value-tilted Dow Jones Industrial Average fell 2.7%. Within large caps, the Russell 1000 Value Index outperformed, advancing 2.3% compared to a modest 0.9% gain for the Russell 1000 Growth Index. Underneath the surface, corporate fundamentals remained resilient: aggregate S&P 500 earnings growth accelerated 400 basis points quarter-over-quarter to roughly 25%, driven primarily by the Technology and Communication Services sectors.
Despite durable top-line fundamental growth, the AI complex experienced sharp volatility in early July, catalyzed by the forced liquidation of the ~$45 billion hedge fund Situational Awareness. The fund’s CIO, Leopold Aschenbrenner, had generated extraordinary trailing returns via heavily leveraged, concentrated positions across the AI ecosystem. When underlying equities experienced a modest pullback, margin pressures triggered an uncoiling of these positions and a cascading liquidation of the fund’s public equity holdings. This unwind reverberated across the broader semiconductor and software trade, starkly illustrating both the concentration risk and the mechanical interconnectedness between leveraged AI exposure and overall index liquidity. Compounding sector-specific volatility was an increasingly complex macro environment. Escalating tensions and erratic negotiations between the U.S. and Iran regarding transit through the Strait of Hormuz drove severe energy price swings. Crude oil troughed near $68/bbl in early July before surging to a year-to-date high near $105/bbl in mid-September. This spike directly bled into headline inflation, lifting September CPI by 30 basis points month-over-month to 3.7%. At the same time, persistent sovereign debt issuance, highlighted by an FY26 federal deficit approaching $2 trillion, led fixed-income investors to demand higher term premiums. The 10-year Treasury yield climbed rapidly from ~4.4% in July to 5.25%, marking its highest level in over two decades. In response to runaway bond yields and renewed price pressures, the Federal Reserve abruptly halted the easing cycle it initiated in September 2024. In mid-September, the FOMC raised the Federal Funds rate by 25 basis points to a target range of 3.75%–4.00%, signaling a re-commitment to stamping out sticky inflation.
Looking ahead to year-end and into 2027, the three most important forces applying pressure to equity markets are: the durability of hyperscaler capex, a structurally higher cost of capital, and the post-midterm legislative landscape. Within technology, the generative AI narrative is shifting from buildout capacity to return on investment. Scrutiny is mounting as hyperscaler capital expenditures surge while cash flow thins, as three of the top five infrastructure spenders have tipped into negative free cash flow, with the remaining two operating on narrow margins. Because this spending finances the entire AI ecosystem (see chart above), any capex rationalization would carry swift implications for broad tech leadership and valuations. Macroeconomically, the pivot back to monetary tightening and a 10-year Treasury yield above 5% fundamentally alters the market framework. A higher risk-free rate expands discount rates across long-duration growth assets, constraining valuation multiples. In this higher-hurdle regime, resilient balance sheets, real pricing power, and organic cash flow generation will dictate performance over speculative momentum. Politically, the approaching 2026 midterms present a potential stabilizing catalyst. With consensus pointing toward Democrats taking control of both chambers of Congress, markets will likely welcome the return of a divided government. Gridlock creates legislative friction against the administration's broader agenda, diminishing tail-risk policy outcomes and offering corporate planners a more predictable operating backdrop. Amidst this evolving macro, micro, and political backdrop, our investment discipline remains steadfast. We continue to focus on long-term wealth creation by maintaining concentrated positions in businesses with a high probability of compounding economic value. Our core criteria remain unchanged: we seek to own companies led by prudent management teams, supported by durable secular tailwinds, and built upon advantaged business models with superior unit economics in large expanding markets.
PERFORMANCE (%) 3Q26 1 YR 3 YR 5 YR ITD1 Ithaka US Growth Strategy (Gross) 6.7 3.6 21.3 8.5 17.1 Ithaka US Growth Strategy (net) 6.6 3.0 20.6 7.8 16.5 Russell 1000 Growth ("R1000G") 0.9 7.5 24.3 13.7 17.3 S&P 500 TR Index 2.3 15.7 22.9 13.8 14.9
1 ITD = inception-to-date, annualized. Inception date is 1/1/2009.
In a relatively flat market, Ithaka's portfolio bested the R1000G, beating the index by 570bps (6.7% to 1.0%, gross of fees). Stock selection contributed 580bps to relative performance, with a 10bp negative impact from sector allocation. The portfolio demonstrated relatively strong breadth and depth with 17 of the 30 stocks held for the entire quarter, representing 56% of the names and 65% of the total weighting, outperforming the benchmark.
At the sector level, Ithaka generated positive relative returns in four of the six sectors where we maintain active exposure: Technology (410bps), Consumer Discretionary (130bps), Financial Services (70bps) and Producer Durables (10bps). Outperformance in Technology was due to appreciation in our cybersecurity, traditional SaaS, and Mag 7 names. This strength was attributed to cracks in the narrative that AI was set to replace all software, with the market warming up to the idea that leading software companies could actually be beneficiaries of an AI enabled world. Consumer Discretionary was our second best performing sector, with two of our e-commerce companies driving all of the strength following stellar earnings releases in the quarter. Financial Services saw broad-based participation in the quarter, with all three of our names outperforming the benchmark by a healthy margin. Our outperformance in Producer Durables was entirely driven by sector allocation, with our 300bp underweight to the sector offsetting weak stock selection. Our largest pool of underperformance was in the Materials & Processing Sector, where our sole holding saw multiple contraction following a robust run up in the beginning part of the year. Ithaka's second source of underperformance was in Health Care, where one of our two holdings underperformed the index by a slight margin. On the allocation side, our 10bps of underperformance was due to our relative overweight to Consumer Discretionary and Materials and our relative underweight in Technology and Energy.
Averytin News Financial update.