Software's 28-Point Lead Over Chips in Q3 Fueled by AI Sentiment Shift, Earnings and a Hedge Fund's Short Squeeze

A 17% rise against an 11% fall puts 28 percentage points between the iShares software and semiconductor ETFs ^[1]. The gap opened while the major averages managed only modest gains ^[3]. Salesforce beat even its own sector's fund by 29 points ^[2]. Its Claudeforce tool, built on Anthropic's Claude, lets customers pull Salesforce data and draft emails or update records ^[5].

At least three kinds of buyer sat behind those prices, and only one of them had changed its mind about AI (or, the more useful distinction, only one was buying because it had no choice). Quartz reported that Situational Awareness, a leveraged hedge fund run by Leopold Aschenbrenner, had held large short positions against software companies on the view that their models could not stay competitive as AI improved ^[10]. Bank of America, Goldman Sachs and JPMorgan Chase then issued margin calls that forced a distressed sale of the fund's holdings. According to Quartz, those shorts turned into a tailwind for the stocks the fund had targeted ^[11]. A fund closing a short has to buy, whatever it thinks of Claudeforce. Salesforce was a second buyer, repurchasing its own stock at the depressed price ^[6]. The third is the one Cramer credits: investors who came to see AI as an opportunity for the company instead of an existential threat ^[4]. Neither report sizes the fund's short book or the buyback, so the 46% cannot be divided among the three.

The chip side has its own explanation. Chip stocks retreated after a strong first half ^[20], and Cramer called Corning's fall of nearly 40% profit-taking ^[12]. Caterpillar, whose engines he sees as a growing source of data-centre power, fell 24% ^[13]. "Ultimately, I think we'll remember the third quarter as the moment when software bounced back and some amazing data center plays succumbed to profit taking," Cramer said ^[14]. Profit-taking in one group and short-covering in another would print the same two ETF returns as a straight rotation from chips into software.

The next quarter can go one of three ways. If earnings show AI tools adding revenue at Salesforce, Workday (up 55%) and Veeva (up 60%) ^[7], the sentiment account carries most of the gain and the squeeze was incidental. If covering did most of the lifting, the fund's book has been liquidated and that buyer will not return. Rates sit across both outcomes. The Fed raised its benchmark by a quarter point in September ^[15]. "My big fear right now is the impact of higher interest rates on the stock market," Cramer said, adding that earnings season would show how far borrowing costs are weighing on companies ^[16].

I think the forced covering explains more of the software gain than the sentiment account allows, because it is the only purchase in either report that was compulsory. Software holding its third-quarter gains through an earnings season, with no fund left to cover, would prove that wrong.

Salesforce's own buying is now dearer. At the quarter-end price, a dollar buys about 32% fewer shares than it did at the quarter-start price ^[3]. Cramer said the stock can still go higher ^[18], and after Microsoft's 37% quarter ^[9] he said "Microsoft's rally is just beginning" ^[19]. Cramer's Charitable Trust, the portfolio run by CNBC's Investing Club, owns Salesforce, Microsoft and CrowdStrike ^[17].