Welcome to the Machine

Anyone else find this earnings season exhausting? This is not referencing anything specific as much as there are so many market narratives to track all at once: the generational infrastructure and energy build-out to make way for AI, behavioral changes related to international trade being rewired, and the on-and-off again tariffs and their potential impact on consumers and businesses.

Maybe I’m just feeling this way because half of our portfolio reported in the last week, which means participating in earnings calls, analyzing balance sheets, and reading analyst reports. We’re going to unpack some of that in our recap of the week, but I wanted to share a summary of what we’re seeing:

• Our AI, defense, and aerospace themes remain of the highest conviction after these results.

• There does seem to be some element of fatigue where even strong results and increasing future guidance aren’t enough to rally shares further.

• Companies remain unsure about tariff-related impacts on pricing and demand. In spite of this, most of the companies we cover had upbeat management—including a positive line of questioning from analysts.

4 Trillion Club

Microsoft, a core portfolio holding since my first day at Nesbitt, reported quarterly results and provided forward guidance that exceeded analyst estimates (AI conviction). Shares jumped as much as 8% after-hours before finishing the day at +3.95% (a little fatigue). CEO Satya Nadella stated during the earnings call, “I have never been more confident in Microsoft’s opportunity” (upbeat sentiment).

Where do we begin when it comes to covering their gargantuan quarter and fiscal year? Last week, we highlighted Google Cloud’s impressive performance when it posted 30% growth. Not to be outdone, Microsoft’s Azure grew 39% and surpassed $75 billion for the year—and the company is still forecasting growth above 30% next year. What is perhaps most impressive was the 24% growth in Office and productivity-related revenue, which comes at a much higher margin. These are staggering growth numbers because this is a company with earnings of more than $100 billion and a market cap now at $4 trillion (yes, they are part of that exclusive club now). Clearly, the laws of physics don’t apply here as size has no impact on the trajectory of a company.

Everyone Else

The week’s events did not stop at Microsoft. As mentioned earlier, the portfolio had a lot of companies reporting:

Rolls-Royce: Purchased for the portfolio during the December–January period, results and guidance came in above expectations and shares rose 6.8% yesterday, bringing year-to-date return to 98%. All three of their operating segments performed exceptionally: aerospace, defense, and energy systems.

Howmet Aerospace: Like Rolls-Royce, aerospace and defense segments are absolutely crushing it. Shares, however, underperformed yesterday at -6.4%. After rallying 70% on the year and currently possessing a 50x earnings multiple, this is some of that fatigue we referred to earlier. It’s a small holding, which we see as a long-term winner and would likely be buyers if shares underperform further. Unrelated to investing but I was thrilled to discover a Howmet Aerospace facility 5 minutes from my home—I will post updates if I can get a sit-down with management and get a tour of the facility.

Amazon: Shares are down 7% in the pre-market as investors digest a mixed quarter that saw the company exceed most targets. However, AWS’s 17.5% growth was overshadowed by Microsoft’s and Google’s stronger cloud performance the day and week before. Amazon is also more exposed to retail, and while the company has done an exceptional job navigating this terrain, there exists some uncertainty moving forward. As of now, the company confirmed that it is seeing either diminishing price or higher prices related to tariffs; as we’ve noted, this is because products are now under increased scrutiny in the face of all the new tariff movement and potential demand destruction—something to monitor.

First Solar: Their first quarter of reporting post the passage of the budget bill (which was weighing heavily on the shares prior). Bookings dropped amidst the uncertainty, losing 0.7 GW in its pipeline—but then immediately added 2.1 GW of new projects in the month of July alone. As investors, this is perhaps one of my favorite developments to read: the company’s capacity through 2028 is booked, giving earnings visibility and giving the company incentive to use their healthy financial position to expand further. With shares having been down close to 40% throughout the year, it is a welcome relief to see them trading positive for the year. This is one of our holdings with the highest return potential.

Prysmian: A more recent portfolio holding—and the world’s largest cable maker—also reported strong quarterly results which propelled shares higher and are now registering a year-to-date gain of 25%. The Italian-based company is seen as a beneficiary of the US’s 50% tariffs on copper, and the company—also the world’s largest single corporate buyer of copper—recently acquired Texas-based Encore Wire for $4.2B.

This is just a summary of some of our portfolio holdings that reported this week. As we’ve recently rebalanced the portfolio, I would not expect any significant changes to our holdings for the time being. We still have another week of earnings to digest before beginning to deliberate on how we want to be invested into the fall.

This week’s recap has not touched on last night’s new tariff announcement; it is currently having a mild negative impact on equities, but it is too early for us to provide coverage on this. We do not know what will stick by the end of next week. We have our reservations, however, and will likely need to address these developments again soon. This may also prompt us to respond to any significant market movements; don’t worry—Leon and I already took our summer vacation; we’re ready for whatever happens next.

Healthy Distraction

Last week, Netflix released the long-anticipated sequel to 1996’s Happy Gilmore. As I’ve often lamented, good comedies have been hard to come by for the last decade. Chalk it up to various factors: studios’ risk appetites diminishing, heightened social sensitivity, and perhaps even the difficulty of finding new things to laugh at.

Having watched the movie, the day after its release, it made me forget about the last 10 years of comedy. Did every joke land? Of course not. Yet, the movie brought me back to a simpler time when I was being entertained—not being lectured to. There were at least three instances where I had to pause the movie because I was laughing too much.

I hope that we build on this. Not everybody needs to find this style of humor amusing. However, the financial success and cult status of the films of the past confirm that there are large audiences of people who want to laugh. If you’re going to watch the movie, remember—it’s no longer 1996, it will feel like a movie of 2025. That being said, it’s a comedy; it’s ok to get off the high horse and laugh a little.

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