Cybersecurity Surges as AI Threats Drive Market Rotation

**SPEAKER_1** (0:00)
That's how we're looking on this Wednesday afternoon, and what is this, a seasonally weaker time of the year. So let's talk about some of that, bring Marlee back into the conversation and turn our attention to the Nasdaq 100 with Mark Marex, Senior Director and Head of Index Research, Americas, Nasdaq Global Indexes. Mark, thank you so much for your time today. So as I mentioned, we do now, I guess, enter a seasonally weaker time of the year, and I suppose the NDX is no exception to that given historical trends. What do you think September brings?

**Mark Marex** (0:32)
Oh, I wish I had a crystal ball this year.
What can I say? It's been a very, very topsy-turvy year to date. When you think about what happened in the first quarter, of course, geopolitics dominated a lot of the action, especially towards the end of that quarter. Then you have that incredible, incredible rebound in the second quarter, led by semis, right? And we ended up just under 20% year-to-date for the first half. And we've taken a step back, no two ways about it, the last couple of months, right? And that's despite the fact that we've seen just incredibly, incredibly strong earnings at the index level and for a lot of the major constituents underneath. And so the way I look at it, kind of, is when earnings are the news driver, as they were in late July and early August, and those results are coming in, the index seems to really outperform during those times. And when earnings take a back seat, and a lot of the different macro worries resurface, whether you're talking about geopolitics, whether you're talking about interest rates, inflation or something else, the market tends to take a step back. So September does tend to be a pretty volatile month. We have one more big constituent reporting earnings this week in Broadcom, but then we get pretty quiet until mid-October. And so I wouldn't be surprised if history repeats itself, but I also would look to trade through a lot of whatever short-term noise comes up, because the earnings trend for the Nasdaq 100 right now just looks unstoppable.

**SPEAKER_3** (2:12)
And Mark, how are you looking at the rotation that we're seeing underneath the Nasdaq? I mean, we saw semis dominate in the second quarter. Now, we're in bear market where we saw SaaS on software under so much pressure in that same time. Now, we're seeing software in favor, especially the cybersecurity names surging here. How are you looking at that rotation?

**Mark Marex** (2:33)
Yeah. I mean, look, I kind of look at it as more evidence of the market overall.
The people and the forces that are moving the market in aggregate, being very, very uncertain about the macro environment, especially about how AI is going to drive the winners and the losers of the next few years.
Software, no doubt about it, has had a nice recovery recently. I do think to some extent that is tied to cybersecurity sort of breaking. That pain trade that was going on since about October of last year. Cyber was the first to bottom in early April. If you remember, there was a release from Anthropic, a Cloud Methos model, that created a lot of short-term panic. And then all of a sudden people kind of realized that if models are getting this powerful, that they're able to, in some cases, autonomously execute super sophisticated cyber attacks, it just means everybody needs to spend more on cyber and especially AI-enabled software even more than they thought previously. And so a couple different cyber indexes that we have, they're all around 50% of a gain since that early April bottom. And you've seen recently, right, the market kind of rotate away from semis despite the fact that Nvidia had maybe one of the most compelling, powerful earnings reports recently. That name is trading somewhere around 40% discount to its trailing five and 10-year forward PE. And so I think the market is still digesting a lot of what we're seeing in terms of this acceleration of model capabilities as well as use case proliferation, and still trying to work out who exactly within the value chain is going to benefit the most. I think if you take a very optimistic view of it, it means that a lot of places of the market are going to benefit from it, especially in the tech sector, especially throughout the Nasdaq 100 They just can't all go up at the same time.
Someone is going to be trading down while another sector or subsector is going to be trading up for however many weeks or months it takes before the next rotation comes into play. And we see that at the thematic level, we see that at the subsector level. We even see it within the Mag 7 itself, within the biggest names. You had Google leading for a really, really long time starting late last year when they released Gemini 3 And they've taken a step back despite the fact that they reported over 80% growth in Google Cloud Revenue this most recent quarter. What's happened instead? The Batana leadership has passed over to their competitors Microsoft and Amazon, which are still bigger and growing well and benefiting from the AI trade, but not growing at the rate of 80% plus year over year. So there's just a lot, a lot of uncertainty, I think, given the speed of the evolution of the tech itself, as well as all the different financing dynamics behind it. And you're going to see, I think, that continuing churn. You know, below the headline index movements, there's been a lot of churn all year long.