NVIDIA and Palantir are two tremendous technology companies, with enviable competitive advantages. Though we believe these things to be true, we still felt it was time to exit our position in Palantir and to substantially reduce our weight in NVIDIA.

Meta Platforms (META) continues to reach new highs, after reporting earnings that WestEnd's Senior Equity Analyst, Ali Mogharabi, calls an excellent quarter for the company.

The ability to deliver sizable outperformance over the past five years—as WestEnd has done—depended on a manager’s ability to identify the artificial intelligence theme not as another business cycle, but as the foundation of a global economic transformation.

NVIDIA has been an unquestionable leader the AI GPU market, with over 90% market share.

The question for investors is whether this dominance can continue.

Volatility returned to markets at the outset of the third quarter. On one of our regular Zoom calls with clients and in a monthly email newsletter, we cited rising interest rates in Japan and the unwinding of a massive “carry trade” as the impetus for selling pressure. At one point, the CBOE Volatility Index (VIX) reached 65.73, the third highest level behind only the 2008 Global Financial Crisis and the 2020 Covid-19 crash. 

We remained calm.

Stocks powered higher in the first half of the year, with the S&P 500 rising +15% and reaching 32 new all-time highs. But a rising tide did not lift all boats. 

Notably, just five companies—Nvidia, Apple, Google, Amazon, and Meta—contributed 62% of the index’s total return in the first half of the year. Consistent with our key theme of being long innovations in cloud and Artificial Intelligence, we currently own four of these companies and have held shares in all five in 2024 (we sold Google in April). 

The strong equity rally that started last October persisted in Q1 2024. 

Profitable technology companies and growth stocks in general continued to lead the way. Two notable exceptions to the positive Technology trade in the first quarter were Apple and Tesla, which fell -11% and -29%, respectively. In March, the U.S. Department of Justice sued Apple, accusing the company of monopolizing smartphone markets. And Tesla’s woes were largely tied to the quarterly decline in vehicle deliveries, the first time that’s happened since 2020. We have never owned Tesla, and we sold Apple on March 5 following a solidly positive tenure in our Core Strategy. 

Performance across the stock market in the third quarter could be summed up in single sentence: interest rates went up, and stocks went down. In our Q3 letter to clients, we wrote that “rising interest rates created some short-term volatility in equity markets, but our companies held up well, and the quality of earnings we have in the portfolio allowed us to outperform on the downside.” 

Rising interest rates created some short-term volatility in equity markets, but our companies held up well and the quality of earnings we have in the portfolio allowed us to outperform on the downside, in our view.

We’ve now arrived at a time when earnings are expected to accelerate to the upside in the coming months, with continued earnings growth in 2024 as margins rebound after a period of softness.

A central theme of last quarter’s letter was how generative artificial intelligence (AI) could drive the next productivity boom.

The earnings implications over a short span of time is nothing short of astounding. So naturally our next question was, which companies are positioned to profit most in the immediate term from the proliferation of this revolutionary new technology?

To find out, we got on an airplane and went to Silicon Valley.

The failures of Silicon Valley Bank and Signature Bank New York—as well as UBS’s takeover of Credit Suisse—dominated financial news headlines in the first quarter. In our March 21 letter to clients, we framed the risk of financial contagion as very low. Our analysis at the time pegged the US banking system as extremely well-capitalized, with Tier 1 capital ratios at very solid levels and loan-to-deposit ratios at almost their lowest levels in 50+ years. 

We still hold these views.

We will continue to favor companies that tend to traditionally be seen as value stocks, which just means they have strong financial positions, resilient earnings, elevated free cash flow, and above all, are attractively priced. A lot of times, that just means ‘boring.’

We also know that bull markets tend to start when economic conditions reach a low point, and when earnings are weakest but then start to rebound. That’s why we’re also looking out in 2023 for opportunities to reposition for growth and back into a more pro-risk categories, i.e., fulfilling our mission as genuinely active managers.

Stocks opened the third quarter on a strong note, but largely because investors grew too confident that the interest rate cycle was nearing a peak. WestEnd’s portfolio responded strongly to the upside during the rally, which effectively gave us a preview for how our portfolio would respond during a sustained market rebound.

The stock market’s -20% decline in 2022 arguably means a good deal of negative data and news has already been incorporated in current prices. Our goal now is to own companies we believe can generate solid earnings even in challenging economic conditions, and to remain positioned to capture upside before it becomes clear the economy will regain its footing—which we are confident it will.

U.S. and global stocks started the new year on a volatile note. The first half of Q1 was spent pricing-in the impact of rising inflation, rising interest rates, and the economic toll of Russia’s needless war in Ukraine. From January 1 to the invasion on February 24, the S&P 500 index declined -11.3%. The Nasdaq, small-cap stocks, and global stocks all fell further.