Daily Market Brief - Feb 26, 2026

Editor’s Note

• AI is no longer one trade. It is a split screen. In the U.S., capital is clearly rotating from traditional SaaS into what I think of as “Level 2 infrastructure” — power, cooling, networking, and storage. Names like Constellation Energy, Vertiv, and Arista Networks are being treated as core AI enablers, while the “SaaSpocalypse” narrative pressures seat-based software models such as Workday. At the same time, housing-linked weakness in Lowe's and the homebuilders is a reminder that not all parts of the economy are riding the AI wave.
• Japan feels structurally different this time. The strength in TOPIX is being driven by real earnings upgrades and shareholder returns, not just currency moves. Companies like Tokyo Electron and Fujikura are combining AI supply chain exposure with buybacks and governance improvements. To me, this is less about “cheap Japan” and more about a credible ROE expansion cycle that global investors are finally taking seriously.
• Under the surface, concentration and geopolitical risk are rising. The deepening tie between Microsoft and OpenAI, debates around NVIDIA’s margin path, and the ever-present Taiwan question surrounding Taiwan Semiconductor Manufacturing Company all point to a market that is pricing optimism but not necessarily fragility. Add in rapid model progress from Chinese AI players despite chip bans, and it feels like the next phase of this cycle will be defined less by enthusiasm and more by resilience under stress.

The current market landscape reveals significant shifts: the U.S. is experiencing a dichotomy of booming AI infrastructure alongside a 'SaaSpocalypse' and deteriorating housing, while Japan is undergoing a structural transformation driven by strong guidance and shareholder-focused initiatives. Meanwhile, Hong Kong and China are seeing defensive sectors build a base amid AI volatility and efforts to attract tech unicorns.

Market Themes, Sentiment & Debates

United States: The AI Infrastructure Divergence and the "SaaSpocalypse"

The U.S. market is currently defined by a stark bifurcation. On one side, the AI Gold Rush has moved beyond chips into "Level 2" infrastructure. We are seeing aggressive capital rotation into power (CEG, TLN), cooling (VRT), and networking (ANET, CIEN). The conceptual shift is from "SaaS" to "Intelligence Factories," where compute is viewed as a pure profit machine. Conversely, a "SaaSpocalypse" narrative is taking hold; WDAY and PD’s recent struggles highlight a growing fear that AI agents will cannibalize seat-based software models. Furthermore, the housing macro environment is deteriorating. Cautious FY26 guidance from LOW and sector-wide sell-offs in homebuilders (LEN, PHM) suggest that high mortgage rates are finally breaking the back of residential investment demand.

Japan: A Decade-High Guidance Cycle

Sentiment in Japan has shifted from tactical to structural. BofA’s upward revision of the TOPIX to 4,100 is supported by the strongest Q3 guidance upgrades in ten years. The market is rewarding shareholder-friendly moves, such as Fujikura’s 5-for-1 split and Tokyo Electron’s buybacks. We are observing a significant "unwinding of the yen carry trade" that is ironically propelling tech supply chain leaders (TOTO, Nittobo) to all-time highs. Japan is no longer just a "cheap" play; it is an ROE-improvement story.

Hong Kong/China: Infrastructure Defense vs. AI Volatility

The HK market is exhibiting a classic "Stage 2" base-building phase in defensive sectors. While AI large-model names (SenseTime, ZHIPU) are suffering from profit-taking and "price-war" fears, capital is rotating into industrial cyclicals and infrastructure (China Conch Venture). Rumors of the HKEX expanding confidential IPO filings suggest a desperate but necessary attempt to lure Chinese tech unicorns back to the exchange to offset the valuation discount.

Notable Stock Moves, Earnings & Development

Interesting Comments, Facts and Ideas

• The Microsoft-OpenAI Concentration Risk: Internal deep dives suggest 45% of MSFT’s backlog is now tied directly to OpenAI. For a $3T company to have that much exposure to a single, cash-burning entity is an "uncommon risk" that the market is currently ignoring in favor of the Copilot narrative.
• The "Middle Road" Fallacy for NVDA: Analysts are arguing that NVDA’s current valuation assumes a "smooth middle road" of steady growth. Statistically, this is the least likely outcome. We either see a massive acceleration as "Intelligence Factories" scale, or a hard reset as HBM3E costs and TSMC pricing power compress margins.
• Michael Burry’s Accounting Warning: Rumors are circulating regarding Burry’s claims that "Mag 7" firms are using sophisticated accounting tricks—likely aggressive R&D capitalization or creative revenue recognition—to inflate earnings by upwards of 20%. If proven, the valuation floor for tech disappears.
• China’s AI Resilience: Despite the US chip ban, Barclays notes that Chinese AI firms are making "astounding" progress. They are optimizing open-source models so efficiently that the price/performance gap with GPT-4 is closing faster than anticipated.
• The 2027 Taiwan Clock: Intelligence warnings to Tim Cook (AAPL) regarding a 2027 China-Taiwan window are becoming part of the "geopolitical risk premium" debate. The fact that TSM and AAPL remained resilient despite this suggests the market has either priced in "the end of the world" or is simply refusing to discount anything beyond the next two quarters.
• Novo Nordisk (NVO) vs. the Protein Market: The sell-off in GLP-1 leaders over pricing cuts is viewed by some as an overreaction. An interesting counter-thesis: GLP-1s might actually increase demand for protein snacks, as users attempt to mitigate muscle loss, potentially saving a sub-sector of the consumer staples market.
• Japanese Small-Cap Alpha: Shinki Bus (9083.T) is a classic deep-value target. Trading at 0.5x BV with land assets alone exceeding its market cap, it’s a prime candidate for a PE buyout (e.g., KKR) or a REIT sale-and-leaseback.

Happy Alpha Hunt! - Distilla

Disclaimer: This content is generated using AI, synthesizing public data (filings, reports, news) and social media (Reddit, X). It may contain errors, inaccuracies, or hallucinations. Nothing herein constitutes financial advice. This newsletter is for informational purposes only; please consult a qualified professional and conduct your own due diligence before making any investment decisions.