Review & Outlook
October 8, 2026
As we have written many times in the past, our firm’s charter over the long term is seeking and investing in financially strong companies with a demonstrated ability to grow earnings and cash flows while remaining attentive to the price we pay. This is the foundation of our Quality Growth stock approach.
Since the end of the Federal Reserve’s zero bound interest rate policy in 2021 and the launch of ChatGPT in November 2022, enthusiasm for Artificial Intelligence (“AI”) technology has helped a relatively small and narrow group of companies account for much of the stock market’s (S&P 500 Market Cap Index) gains over this period. This has overshadowed many other established companies with strong financial results and when taken together, has created a challenging cycle to navigate managing a diversified stock portfolio. As the table below shows, disparate index returns during the current 5-year cycle have been material.
Period Ending 9/30/2026
| Index | 3rd QTR | YTD | 1 YR | 3 YR | 5 YR |
|---|---|---|---|---|---|
| Annualized S&P 500 MARKET CAP (TR*) | 2.30 % | 12.75% | 15.74% | 22.87% | 13.78% |
| Annualized S&P 500 EQUAL WEIGHTED (TR*) | -1.87% | 10.03% | 11.56% | 15.71% | 8.77% |
| Dow Jones Industrial Average (TR*) | -2.34% | 7.19% | 11.50% | 16.99% | 10.57% |
| Carderock Capital Stock Portfolio** | -2.19% | 7.54% | 10.24% | 14.13% | 6.88% |
* Total Return
** Average return across all Carderock Capital accounts. Individual returns will differ.
We believe AI has the potential to improve productivity and create meaningful opportunities across the economy as proven by our firsthand experience in conducting market research and analysis, as well as boosting our own internal productivity by using it. But we also see its limits. From an investment perspective, however, we must consider its promise alongside the cost of development. The pace and scale at which AI is moving can only guarantee market chaos and dislocation that could cause unintended and negative consequences. From our perspective, the lynchpin of this cycle is very clear; financial benefits and higher productivity must be shared widely by investors, developers, and users. If not, the downside risk to the markets can be perilous. It is always tempting to drift towards “what’s working in the market,” but we know from stock market history, transformational cycles never produce the outcomes (winners and losers) that today’s narrative is claiming. Technological progress alone does not establish what an economy, business, or its stock is worth. Ultimately, profits and utility do.
Factors Driving Our Decision Making
- Technology firms are collateralizing debt to sell to pensions and insurance companies, using tools not dissimilar to the mortgage crisis of 2007-2008.
- The overshoot in inflation and hike in yields likely will not be resolved until the AI buildout slows down.
- Incumbents in AI development (Microsoft, Google, Amazon) are better positioned financially than upstart competitors to offer a full suite of models to end users using AI to enhance productivity.
- Open-source AI models will likely undercut OpenAI and Anthropic’s ability to increase prices for workflows where lower intelligence is “good enough.”
- Collectively, our Quality Growth issues have grown earnings 17% over the past year and 18% over five years, exceeding their stock price performance by a considerable margin.
To be very clear, for the past five years it has been an extremely bifurcated and narrow market: “AI related stocks” and “everything else.” Until the economy experiences lower inflation, declining interest rates, and fiscal responsibility, the “everything else” will most likely come up short.
So, what can go right? It turns out that many things can, and as sanguine as markets are on AI’s development, we are equally optimistic about companies whose fundamentals will not be overwritten by mere lines of code. In the end, we will remain flexible enough to recognize legitimate threats from AI, while not letting the market purely guide our decisions. Diversification across industries and sectors remains our focus.
As always, we welcome your questions and appreciate the confidence you have in Carderock Capital.
Warmest Regards,
Daniel A. Kane, CFA
President
Stephen F. Knapp, CFA
Director of Research
Jeanne C. Goedecke, CFA
Portfolio Manager
