Fourth Quarter 2025.
Market Review
Performance Driver Review 
Market Perspectives
Public financial markets are the ultimate scoreboard. Every trading day, a huge number of market participants direct their capital at companies they believe are doing a good job and pull their capital away from those they feel are falling short. The stocks of companies that have more capital directed towards them than away from them end up winners. At the end of every trading day, there are winners and losers, and an investor’s portfolio is either up or down (okay, sometimes that investor is flat on the day, but you get the picture). Being a winner at the end of any given day isn’t really all that hard – even the bad players (companies) have their fair share of winning days. However, as the timeline grows longer, winning becomes more difficult. Companies must win more frequently and by a larger margin to sustain their dominance over these longer periods. Sustained dominance, in turn, allows the winning company’s value to grow, ultimately manifesting in the company becoming a larger portion of the market as a whole.
As a barometer for the companies that have sustained dominance during the last cycle, investors can look to the top ten largest stocks in the S&P 500: Apple, Nvidia, Microsoft, Amazon, Alphabet, Meta, Tesla, Broadcom, Berkshire Hathway and JPMorgan. The question that is more important to investors, though, is not who has sustained dominance, but who will sustain dominance. Only the latter provides any edge in making money.
So how hard is it to stay in the top ten? Hard. Historically, less than half of the top ten companies on any given day will still be there ten years later. By twenty years, it’s less than a third. By thirty years, there might be one left. It is easy to assume that what is big today will aways be big, despite history telling investors otherwise… Companies tend to be great at only one thing (the best companies may be good at a handful), but sooner or later that thing becomes obsolete or backburnered and something new steals that capital. As capital chases the new company, the new company begins to win, continued winning takes them to the top and the cycle continues. Today, the new thing is AI, and every investor out there is wondering just how long that dominance can sustain.
AI: Things that go POP, and This Time It’s Different
WoodTrust prides itself on making it through three years of AI hubbub without using the word “bubble” – but given how commonplace “AI bubble” has become in today’s financial language, the firm can take solace in using it conversationally.
A few WoodTrust Portfolio Managers have recently taken keen interest in the memos of famed bond investor Howard Marks as his topics and considerations often overlap with those of WoodTrust’s own Investment Committee. For the remainder of this piece, we borrow several tidbits from his most recent memo “Is It a Bubble?”1 to discuss bubbles generally, AI uniqueness and whether any of it really matters.
Bubbles. WoodTrust Market Perspectives have discussed market concentration ad nauseam over the last couple years, so readers may be wondering if high market concentrations are synonymous with bubbles. These two words are certainly not interchangeable, and all sorts of bubbles have been created and popped without major stock market concentration (the sub-prime residential mortgage-backed securities bubble that created the GFC as a recent example). However, a concentrated market can be evidence of a bubble.
So, if today’s high market concentration is, in fact, evidence of a bubble, are bubbles bad? Investors have certainly seen evidence of bad bubbles, or at least the bad part of them: wealth destruction. However, Marks asserts the wealth destruction associated with a bubble popping does not necessarily define whether a bubble was good or bad, or, at least, worthwhile. Instead, a bubble’s merits should be evaluated based on its necessity to further societal and economic progress. Bubbles that occur simply out of greed are the bad bubbles known as “mean-reversion” bubbles (think the portfolio insurance fad2 or the sub-prime mortgage movement). Bubbles that occur as a byproduct of technological progress are the good bubbles known as “inflection” bubbles (think railroads and the internet). These inflection bubbles often must occur for the new technology to make it through its nascent stage to eventually yield fruit (progress). The mania surrounding the formation of an inflection bubble draws all sorts of cheap capital to the new technology, turbocharging its growth. Unfortunately, despite the nobility of an inflection bubble, it has just as much potential to destroy an individual’s wealth as its greed-fueled counterpart.
AI Uniqueness. While AI has a few inflection bubble ingredients, many smart people have found reasonable evidence that “this time could be different.” Their assertion is that there is, in fact, no bubble to burst because the extraordinary enthusiasm is backed by strong fundamentals. Support for this conclusion generally focuses on the robust demand; the significant user base (one billion and counting); major players with revenues, profits and cash flows; the absence of an IPO craze; and generally reasonable valuations.
In Conclusion
At WoodTrust, we recognize logical arguments on both sides of the bubble battle, but we understand the existence of a bubble (or lack thereof) has no implication for how we think about investing our clients’ capital. Our investment philosophy is founded on a risk-first mindset that results in diversified portfolios. The only concentration we are ever willing to have is concentration in high-quality companies. Our diversification has kept up reasonably well in this AI-driven market, and it is built to alleviate pressure in market downturns. This strategy is a bubble-avoider by principle, and we pursue it with relentless persistence. As always, we thank you for your trust and look forward to our meetings with you in the near future.
1https://www.oaktreecapital.com/insights/memo/is-it-a-bubble
2https://www.federalreserve.gov/pubs/feds/2007/200713/
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