Review & Outlook
January 12, 2026
It was another strong year for the S&P 500 in 2025, and the index continued to be led primarily by a narrow group of large technology companies expected to benefit from the rollout of artificial intelligence (“AI”). Collectively, these firms invested more than $400 billion in AI infrastructure, driven by the belief that AI would transform nearly every sector of the economy and deliver substantial productivity gains and cost savings across corporate America.
Recently, however, cracks have begun to appear in this narrative. Investors are increasingly questioning whether returns on such massive capital investments will justify the spending, raising concerns that the market may be experiencing another speculative cycle reminiscent of the 19th-century railroad boom or the dot-com bubble of the 1990s. Several large technology companies—notably Oracle and Meta—have already seen their stocks decline as markets penalize what is now viewed as excessive spending. History suggests that companies with the highest capital expenditures often underperform over time, and intense, well-funded competition in AI may ultimately limit returns for its developers, even as the technology delivers meaningful benefits to consumers and workers.
As Quality Growth investors, we believe this environment has created opportunities. In our view, many high-quality companies, those with strong balance sheets, low leverage, and high returns on capital—have been overlooked. These stable and profitable businesses have been priced as though they carry significantly more risk than fundamentals suggest. Based on our internal metrics, the highest-quality stocks are now trading at their smallest premium to the S&P 500 in the past five years. Looking ahead, our investment decisions will be guided by several key themes:
- Slowing labor markets and housing activity are likely to shift public focus away from inflation.
- The economic impact of tariffs is likely to be limited as higher prices face resistance from consumers and the courts.
- Strong Baby Boomer spending and elevated savings rates should help mitigate recession risks.
- Continued capital spending by large technology firms favor the smaller companies that supply the foundation tools and services directly to the AI buildout.
- Leadership changes at the Federal Reserve may result in less predictable interest-rate policy in the year ahead.
Recent portfolio activity reflects these views:
- Selling modestly exceeded buying over the past year as we rebalanced toward underappreciated opportunities.
- Cash levels remain near a multi-year low at approximately 10%, reflecting our optimism.
- The shift from an inverted to a positively sloped yield curve has led us to extend duration and further ladder fixed income portfolios.
- Tight corporate bond spreads and rising leverage among large technology firms warrant more defensive allocations, including increased exposure to government bonds.
Over the past three years, the AI theme captured the market’s attention and overwhelmingly rewarded these few companies compared to other areas of the economy. This has tested our list of companies emphasizing quality and diversification. We believe the next phase of the business cycle is just starting and will turn the market’s focus towards a broader set of companies with durable growth and strong fundamentals. While volatility is likely as market leadership evolves, we remain prepared to capitalize on these dislocations while maintaining our investment discipline as we look for companies with strong growth and profitability.
Warm regards,
Daniel A. Kane, CFA
President
Stephen F. Knapp, CFA
Director of Research
Jeanne C. Goedecke, CFA
Portfolio Manager
