Fiduciary Management Q4 2025 Investment Strategy Outlook

Market Overview - The equity market experienced significant gains in 2025, with the Russell 2000, S&P 500, MSCI EAFE, and MSCI World increasing by 12.81%, 17.88%, 20.60%/31.22%, and 21.09% respectively, driven by a speculative "junk" rally and enthusiasm for AI-related companies [2] - Wall Street strategists are forecasting over 10% returns for the S&P 500 in 2026, which would mark four consecutive years of double-digit returns, a rare occurrence in market history [2] Investment Trends - FMI's portfolios have generated solid double-digit annual returns over the past three years but have not kept pace with broader indices due to a current market preference for low-quality investments [3] - High-quality businesses have underperformed low-quality ones sharply in the U.S. in 2025, despite long-term outperformance trends [4] - The small-cap sector has seen a significant outperformance of low-quality companies, with active managers struggling to keep pace during this "junk" rally [5] International Market Insights - The MSCI EAFE Quality Index has underperformed the MSCI EAFE by approximately 10% in both local and USD terms, indicating a global trend of low-quality stocks outperforming [6] - In Europe, the top-performing sectors in 2025 included Defense (+89.9%), Rate Sensitive Financials (+72.1%), and EU Miners (+55.5%), which are generally considered low-quality investments [6] AI Impact on Markets - AI-related stocks in the S&P 500 represent 45% of the index's market cap and have accounted for 78% of S&P 500 returns since the launch of ChatGPT in November 2022 [12] - The tech sector's capital spending has contributed 40%-45% of U.S. GDP growth in 2025, a significant increase from less than 5% in the same period of 2023 [15] - Major tech companies are expected to spend over $500 billion on capital expenditures in 2025, with a projected capex-to-revenue ratio of 29% in 2026 [21] Company-Specific Insights - Hayward Holdings Inc. is positioned well in the pool equipment market, with strong pricing power and a resilient business model, despite current weak demand [27] - Accenture Plc is adapting to the AI landscape, with expectations that AI adoption will drive demand for its consulting services, despite facing headwinds in IT spending [28] - Smiths Group PLC is transitioning to a more focused portfolio, with improvements in growth and profitability, supported by a strong balance sheet [29]