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The market never fails to remind us that the path to building wealth is rarely smooth. It rewards the patient and disciplined investor who stays invested through the ups and downs.
This year was no different.
Following a sharp selloff in April, equity markets gradually climbed the “wall of worry” to reach new all-time highs despite ongoing trade disputes, U.S.-China tensions, government shutdowns, and global conflicts. Investor expectations of lower interest rates drove the recovery as central banks signaled a more dovish stance. Strong optimism tied to AI-related developments from large-cap technology leaders or the so-called Magnificent 7 stocks—Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia and Tesla—also fueled bullish market sentiment in 2025.
Every day, we navigate an uncertain world. That holds true both in life and in investing. Today’s wall of worry centers on the hype and skepticism surrounding generative AI. Headlines warn of irrational exuberance and draw parallels to the internet bubble of the late 1990s and early 2000s. If we take a step back, we see that current technology valuations—especially among AI leaders—remain well below the frothy levels of the dot-com era. At that time, the largest internet stocks traded at sky-high multiples exceeding 100 times earnings. Cisco traded near 130 times next 12-month earnings at the peak in March of 2000.
Today’s leading AI companies don’t appear to be trading at extreme valuations (see chart below). These businesses demonstrate earnings characteristics and business quality that may support a valuation premium relative to the broader market.
Legitimate questions remain about the durability and timing of the current AI investment cycle. Five of the largest hyperscalers—Amazon, Alphabet, Meta, Microsoft, and Oracle—are deploying capital aggressively into AI infrastructure, from graphic processing chips to large-scale data center buildouts, potentially ahead of revenue and demand opportunities. However, the hyperscalers disagree with that view. Microsoft, for example, said that they’re building AI capacity to meet contracts they’ve already made, which is evidenced by the growing backlogs and other clear signs of demand.
Still, concerns remain over whether these high capital expenditures will deliver sufficient returns on invested capital (ROIC) in the medium to long term. The market wants clearer evidence of payoffs from these investments. Capital spending at the hyperscalers is going through the roof (see chart below). There’s no doubt about that. Once upon a time, the hyperscalers historically operated asset-light models with low capital intensity and high ROIC, but recent AI-driven investments have significantly increased capital spending. This shift, evident over the past three years, raises valid concerns about declining ROIC due to higher depreciation costs, debt financing costs, and potential overcapacity.
All in all, equity valuations and investment cycles are always worth watching.
Managing Market Narratives in Volatile Markets
The AI spending spree played no small part in the November tech selloff. The narrative quickly shifted from AI enthusiasm to fears of an AI-linked tech bubble, and with it, prices adjusted accordingly. Remember that markets often move not because of fundamentals changing overnight, but because investors collectively change their minds about what matters most in the moment. But as Warren Buffett once said, the market is there to serve you, not instruct you.
We found no reason to sell our technology holdings last month. The business fundamentals, growth prospects, and competitive advantages remained intact. The market’s reaction didn’t alter the underlying value of the businesses.
Narratives are very powerful, but they go up in smoke when fundamentals prevail again, both on the upside and downside.
Earlier this year, the market had all but counted Google out as a real player in the AI race (see chart below). I had read bearish articles from Bloomberg, CNBC, and other reputable sources that declared Google had fallen behind in generative AI innovation. Many warned about the potential collapse of Google’s search business. CNBC guests advised investors to sell the stock. Fast forward to today, and the same crowd celebrates Google as an AI darling after successful product launches and breakthroughs in Google’s Gemini generative models. Bloomberg now calls Google “the sleeping giant… now fully awake” in the global AI market.
This reversal is a textbook case of why investors should avoid tying their convictions to popular narratives and instead focus on the fundamentals. In June, I discussed Google’s AI initiatives, which have collectively increased search query volume and user activity. While the search business has experienced some share losses, the commercial or transactional search categories, including retail, local services, travel, and financial services—the segments that drive the majority of Google’s search revenue—show no signs of deterioration. Search volumes for commercial queries have in fact increased since Google launched AI Overviews in 2024.
As I wrote at the time, “Google’s internal data shows AI Mode queries average twice the length of conventional searches, a pattern that could generate additional user engagement opportunities and potentially more monetizable clicks for Google’s advertising platform. We believe this should help alleviate investor concerns about AI’s potential negative impact on Google’s primary revenue source.”
Google is one of the few hyperscalers that control the full AI stack. Google’s vertically integrated approach in leveraging its own datacenters, in-house TPUs, integrated software, and frontier models (i.e. Gemini) positions the company to compete for market share and customer growth within AI and cloud platforms.
What will tomorrow’s wall of worry bring?
Mastering Your Emotions
Let’s talk market corrections. They tend to provoke the same behavioral response from investors to negative story lines—a rush for the exits. Many will smash the sell button first and then seek reasons to justify their decision later. This impulse is both common and costly. Market corrections are not unusual. They are a normal and recurring feature of the market. We’ve seen them come and go countless times over the years.
The question then is not if markets will fall, but how you respond when they do. Stepping aside feels safe, but when do you get back in? At a lower price? A higher one? The honest answer is that no one knows (see chart below). You cannot predict the direction of the market. As Peter Lynch wisely said: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
Trying to time the market is a fool’s game that can systematically destroy wealth over time. Historically, remaining invested has often compared favorably to attempts at short-term market timing, though results vary based on individual circumstances and market conditions. Patience is the ultimate edge. Discipline, not prediction, is the defining trait of successful investing. The market will always find ways to test our conviction. Every selloff serves as a lesson that wealth is built by those who stay the course, not by the clever market timer.
So, when do we sell?
We sell a business from the portfolio under a few conditions.
We execute portfolio exits only when a rational case exists for doing so. We sell when we identify an opportunity more compelling than what we currently own—one offering higher expected returns. We also sell when a business underperforms or when its fundamentals deteriorate such that it no longer meets our quality standards. Companies commonly lose their competitive advantage, especially if they fail to innovate and adapt to changing markets. Finally, at times, market enthusiasm can bid up a company’s price well beyond its intrinsic worth. When valuations stretch beyond reason, our discipline forces us to act. We sell when the market offers a price well above what the business is truly worth.
Finding Quality and Value
Finding a truly exceptional business among thousands of global companies is no small task. Discovering one that also sells at a reasonable or bargain price makes the challenge even greater. We focus daily on turning over as many rocks until we uncover that rare combination of quality and value. We seek to own competitively advantaged businesses that not only generate strong profits and cash flows but also reinvest them skillfully at high rates of return.
Our portfolio consists of businesses across various industries and sectors, as well as exposures to disruptive and long-term secular growth trends. To name a few: Amazon (digital retail and cloud computing), Netflix (digital media and entertainment), Brookfield (alternative assets), Mastercard (digital payments), L’Oréal (premium beauty), Tesla (electrification and autonomous vehicles), Robinhood (online brokerage), Danaher (life sciences and diagnostics), WSP Global (engineering and consulting), and Hermès (luxury goods).†
Owning a high-quality business makes it far easier to stay patient when markets turn volatile. If the underlying fundamentals of the business remain intact, you have little reason to part ways with the stock during a short-term market correction. Over the long-term, shifting market narratives don’t dictate the true value of any business, but by the profits it produces and the cash it generates year after year. That’s why we focus so intently on understanding how a business earns its money and how management chooses to redeploy those earnings.
Final Remarks
Market narratives don’t drive our decision making. Our conviction rests on understanding the underlying economics of the business and maintaining discipline in how we evaluate value and quality.
We remain optimistic about the long-term outlook for the companies in our portfolio. We believe that earnings growth is the key driver of share prices over time and are confident in the growth potential of our holdings. Periods of market weakness present opportunities for us to add to positions at attractive valuations.
Wishing you a Merry Christmas and Happy New Year!
Christopher De Sousa, CIM®
Portfolio Manager
519-707-0049
marnoa.ca
This commentary is provided for informational purposes only and reflects the author’s views as of the date of publication. Statements regarding market conditions, company fundamentals, or future outcomes are forward-looking and subject to change without notice. There is no guarantee that any investment strategy or expectation discussed will be successful. References to specific securities are for illustrative purposes only and do not constitute a recommendation to buy or sell any security.