April 2026 – Quarterly Letter

The last three months have been a bit chaotic. On February 28th, the United States and Israel went to war with Iran. I think the Israel and U.S. governments believed that the people of Iran would rise and overthrow the theocratic regime. A surprise strike eliminated the previous leader of Iran, and his son took over.

Two months later, the conflict is in a holding pattern. Iran controls the traffic through the Strait of Hormuz, which impacts approximately 20% of the world’s oil shipments. The U.S. navy is blockading the exports of Iran which prevents them from selling oil to their allies. It’s not yet clear whether the moderates or hard-liners are in control of the Iranian government. The moderates are looking to negotiate a deal with President Trump, while the hard-liners think that escalating the war and causing an increase in oil prices will maximize the pressure on the U.S. government.

There are two possibilities for the market. It either matters, or it doesn’t. The market rally over the last month suggests that investors do not expect a significant long-term economic impact.

We’re navigating a generational transformation in AI while handicapping two major wildcards: the war in Iran and the inflationary impact of tariffs. How these forces interact will largely determine the economic outlook for the rest of the year.

Higher oil prices are not slowing down the most important drivers of economic growth. In just the past two months, Anthropic’s projected revenues over the next year have gone from $14 billion to $30 billion.  Anthropic is growing faster than Zoom during the pandemic. To put this pace of growth into context, Anthropic grew four times as much during the first quarter of this year than Google did over three years during its peak expansion. The worry that we are building too many data centers has turned into a worry that we aren’t building enough data centers.

Investment in technology now accounts for 55% of nonresidential capital spending. The most recent quarterly earnings announcements from companies like Amazon, Google and Nvidia suggest that the current investment boom is far from over.

Why is the stock market continuing to make new highs? It’s doing so because corporate earnings are doing the same, as the economy continues to speed along without a recession interrupting its steady growth. For 2026, analysts expect earnings to grow 20%. Since the end of World War II, there have been 17 years in which the S&P 500 earnings grew more than 20%. Fourteen of these years were immediately following a recession, or years in which earnings declined. This will only be the fourth year on record in which the S&P 500 grew more than 20% and followed a year of positive earnings growth.

After stumbling to begin the year, the market rallied 10% in April, completing its best month since 2020. Since the beginning of the year, analysts have raised earnings estimates by more than 7%. Even amid geopolitical conflict, higher energy prices, and tariffs, the earnings power of the largest U.S. companies is historic. The S&P 500’s aggregate profit margin (what’s left after paying all expenses) hit 13.4% last quarter, the highest on record.

S&P 500 forward operating earnings have hit a new record of $346.19 per share. At today’s close of 7200, the S&P 500 is trading at a multiple of 20.8x the next twelve months earnings. Since the beginning of the year, earnings estimates for 2028 have shot up to $381. Applying the current P/E to 2028 earnings implies an S&P price target of 7,924, more than 10% above today’s level. Despite higher energy prices and tariffs, the economy continues to grow at a steady 2% and corporate earnings are keeping pace.

If AI is the winner, then who are the losers? Currently, the biggest productivity boost from AI is happening in the software industry. According to Mark Zuckerberg, what used to take a team of software engineers, now takes a single talented programmer directing AI assistants.  Just this year, Oracle cut between 20,000 and 30,000 roles starting in late March. Amazon eliminated over 30,000 jobs since late 2023. Meta announced a 10% workforce reduction (roughly 8,000 jobs). Microsoft offered a first-ever voluntary retirement buyout to nearly 9,000 eligible U.S. employees in April 2026, specifically exempting AI teams.

The software industry is an important pillar of the stock market.  The emergence of AI has shaken the confidence of investors in the long-term outlook of the industry. Over the last eight months, the value of the industry has dropped by as much as 35%. The concern is that AI has the potential to wipe out the software industry as we know it. High quality companies like Adobe and Intuit are trading near their lowest valuations in thirty years. Microsoft dropping 35% from its peak is a once in a decade event. Software is not a niche industry. Microsoft alone makes up 7% of the S&P 500. The top five software companies represent about 10% of the overall market.

So far, there is little indication that the outlook for software companies has deteriorated. Earnings estimates and corporate guidance are suggesting that the near-term outlook is still favorable. Estimates for Microsoft, Adobe, and ServiceNow are materially higher than they were a year ago. The stock prices reflect a worst-case scenario, but we think the market is wrong. Microsoft, Google and Amazon are collectively investing $1.5 trillion to embed AI into their products and extend their competitive advantages. These companies engineered the PC revolution, the internet revolution, the cloud, and mobile. They’re building AI too. We will continue to bet alongside the companies that have defined every major technology shift of the last forty years.