| ANNUALIZED SINCE INCEPTION | QUARTERLY | YTD |
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Douglass Winthrop's Q1 2026 letter addresses market volatility amid Middle East conflict and AI investment reassessment. Despite the S&P 500 declining 4% and Nasdaq falling 6%, the manager views this as a natural recalibration following strong 2024-2025 performance. The letter extensively analyzes artificial intelligence through the Hype Cycle framework, suggesting markets are moving from inflated expectations toward measured adoption. Key holdings Microsoft and Amazon, despite 33% and 20% declines respectively, maintain exceptional fundamentals with Microsoft generating 40%+ operating margins and Amazon's AWS contributing over half of operating income. The manager emphasizes these companies' massive AI infrastructure investments as positioning for long-term competitive advantage rather than near-term earnings pressure. Aon, despite less direct AI exposure, also presents opportunity following a 20% decline. The outlook remains constructive on quality businesses with strong moats, viewing current volatility as temporary reassessment rather than fundamental deterioration. The manager encourages clients to maintain appropriate liquidity while positioning for eventual normalization.
High-quality businesses with strong competitive moats and durable growth prospects are experiencing temporary share price pressure due to market reassessment of AI investment timing and geopolitical uncertainty, creating attractive opportunities for long-term investors.
The manager expects themes that were in place prior to the Middle East conflict to reassert themselves once immediate uncertainty subsides, particularly continued AI adoption and higher inflation/interest rates. While acknowledging conditions could deteriorate further near-term, the manager views recent declines in quality companies as opportunities rather than fundamental deterioration.
| Date | Letter | Tickers | Keywords | Pitches | Quick Takes |
|---|---|---|---|---|---|
| Apr 6 2026 | 2026 Q1 | AMZN, AON, MSFT | AI, Cloud, inflation, large cap, Quality, rates, technology |
MSFT AMZN AON |
Douglass Winthrop sees Q1 2026 market volatility as creating opportunities in quality technology companies. Despite 20-33% declines in holdings like Microsoft, Amazon, and Aon, the manager emphasizes their strong fundamentals and views current weakness as timing reassessment rather than deteriorating prospects. The firm maintains conviction in AI adoption and high-quality businesses with durable competitive advantages. |
| Jan 5 2026 | 2025 Q4 | AMZN, BRK-A, COST, FAST, GOOGL, MA, MSFT, NVDA, ORCL, UBER | AI, inflation, Quality, technology, Trade Policy, value | - | Douglass Winthrop warns that AI valuations mirror historical innovation bubbles where technology succeeded but early investors lost money. They avoid overvalued AI pure-plays like Nvidia, preferring established companies embedding AI into workflows. Despite extended market valuations and policy risks, they see opportunities in undervalued quality stocks like Amazon and Berkshire Hathaway with strong competitive moats. |
| QUARTER | THEMES | TAGS |
|---|---|---|
| 2026 Q1 |
AIThe letter extensively discusses artificial intelligence through the lens of the Hype Cycle framework, noting that AI appears to be moving from inflated expectations toward more measured adoption. The manager views recent market volatility in AI-heavy companies like Microsoft and Amazon as a reassessment of timing rather than deterioration in long-term value, creating potential opportunities. |
Technology Innovation Infrastructure Investment Adoption |
CloudCloud infrastructure is highlighted as a key growth driver, particularly through Microsoft Azure's 25%+ year-over-year growth and Amazon Web Services' dominant market position. The manager emphasizes AWS as a primary toll road for AI deployment, generating 30-35% operating margins despite representing a minority of Amazon's total revenue. |
Infrastructure Growth Margins Deployment Services | |
Data CentersMassive data center investments are discussed as a key theme, with Microsoft and Amazon committing tens of billions annually to AI-related infrastructure. Microsoft's capital expenditures are expected to exceed $100 billion this year, while Amazon's are projected even higher, driven by continued AWS and AI infrastructure expansion. |
Infrastructure Investment Capacity AI Expansion | |
| 2025 Q4 |
Small CapsSmall-cap equities ended 2025 on a positive but volatile note with mixed market conditions throughout Q4. The manager expects the outlook for small-cap equities entering 2026 to be increasingly constructive, particularly within value-oriented segments, driven by Federal Reserve monetary easing and improving earnings momentum. |
Small Cap Value Russell 2000 |
RatesThe Federal Reserve's shift toward monetary easing represents an important inflection point for smaller companies, which tend to be more sensitive to changes in interest rates and credit conditions. Lower borrowing costs should support refinancing activity, capital investment, and margin recovery. |
Federal Reserve Interest Rates Monetary Policy | |
EarningsConsensus expectations point to a meaningful acceleration in small-cap earnings in 2026, with growth projected in the low-to-mid teens and exceeding that of large-cap companies. This anticipated rebound reflects easier year-over-year comparisons, improving operating leverage, and broadening demand across cyclical sectors. |
Earnings Growth Operating Leverage Cyclical | |
ValueSmall-cap stocks trade at approximately 16x forward earnings, compared with more than 21x for large-cap equities, leaving small caps valued at roughly a 30% discount on a relative basis. Within small caps, value-oriented stocks remain attractively positioned as growth stocks continue to trade at a meaningful premium. |
Valuation Forward P/E Discount | |
EnergyStrong stock selection and favorable allocation within Energy made the sector the second-largest contributor to relative performance. Helmerich & Payne led gains, benefiting from improving drilling activity, disciplined capital allocation, and strong operational execution. |
Drilling Oil Services Capital Allocation | |
UtilitiesStrong stock selection and favorable allocation made Utilities the largest contributor to relative performance for the quarter. Portland General Electric led gains, supported by regulatory clarity, steady rate base growth, and defensive characteristics that were rewarded as market volatility increased. |
Regulated Utilities Rate Base Defensive |
| Date | Pitch Type | Author | Ticker | Company | Industry | Sub Industry | Bull / Bear | Exchange | Keywords | Action |
|---|---|---|---|---|---|---|---|---|---|---|
| Apr 6, 2026 | Fund Letters | Douglass Winthrop | MSFT | Microsoft Corporation | Software - Infrastructure | Systems Software | Bull | NASDAQ | Artificial Intelligence, Azure, Cloud computing, data centers, Enterprise software, operating leverage, SaaS, technology infrastructure | Login |
| Apr 6, 2026 | Fund Letters | Douglass Winthrop | AMZN | Amazon.com Inc | Internet Retail | Internet & Direct Marketing Retail | Bull | NASDAQ | Artificial Intelligence, AWS, Cloud computing, data centers, e-commerce, infrastructure, market leadership, operating leverage | Login |
| Apr 6, 2026 | Fund Letters | Douglass Winthrop | AON | Aon plc | Insurance Brokers | Insurance Brokers | Bull | New York Stock Exchange | Cyber security, enterprise clients, financial services, insurance brokerage, professional services, recurring revenue, regulatory compliance, risk management | Login |
| TICKER | COMMENTARY |
|---|---|
| MSFT | Microsoft's capital expenditures are expected to exceed $100 billion this year, while Amazon's are projected to be even higher, driven largely by continued expansion of AWS and AI-related infrastructure. These investments have raised questions about near-term returns, contributing to share price declines of approximately 33% and 20%, respectively, from their 52-week highs. At the same time, the underlying businesses remain exceptionally strong. Microsoft continues to generate operating margins above 40% and returns on invested capital in the high-20s% range, supported by durable growth in Azure and its broader enterprise software ecosystem. Azure revenue has continued to grow at a rate in excess of 25% year-over-year, reflecting both cloud adoption and early AI-related demand. |
| AMZN | Microsoft's capital expenditures are expected to exceed $100 billion this year, while Amazon's are projected to be even higher, driven largely by continued expansion of AWS and AI-related infrastructure. These investments have raised questions about near-term returns, contributing to share price declines of approximately 33% and 20%, respectively, from their 52-week highs. Amazon's core business is well-moated from scale and a management culture focused on continuous efficiency improvement, consistent with its aspiration to be 'Earth's most customer-centric company.' Amazon Web Services (AWS) remains the leading cloud infrastructure provider and a primary toll road for AI deployment. AWS generates operating margins of approximately 30–35% and contributes over half of Amazon's consolidated operating income, despite representing a minority of total revenue. |
| AON | Aon plc has also experienced share price pressure despite a business model that is less directly tied to the capital intensity of artificial intelligence. Aon continues to generate operating margins near 30% and returns on invested capital in the mid-20% range, supported by a highly recurring revenue base and long-standing client relationships. Aon's core business involves helping large enterprise clients understand and manage highly complex risks, whether related to insurance, cyber threats, evolving regulations, or an increasingly intricate global environment. This work relies heavily on expertise and judgment. While artificial intelligence may enhance aspects of its capabilities, it is unlikely to displace the central role the firm plays for its clients, as is suggested by its near 20% sell-off from its peak last February. |
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