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Market Review and Outlook
The broader U.S. equity markets concluded the first quarter in negative territory, with a deep divergence between sectors and investment styles. The Dow Jones Industrial Average led the major indices, falling ~3.6% in the quarter, followed by the S&P 500 falling 4.6% and the more growthy Nasdaq falling 7.1%. In the large cap space, the Russell 1000 Growth Index fell ~9.8%. This significantly lagged the value side of the index, which gained 1.6% for the quarter as investors adopted a more defensive posture. The defensive bent was due to a combination of geopolitical shocks and a shift in monetary policy expectations.
On the geopolitical front, the military conflict in Iran sent West Texas Intermediate crude oil prices soaring, from ~$65/bbl in March to over $100/bbl by quarter end. This reignited inflation fears and disrupted the disinflation narrative of the past few months, which can be clearly seen in short-term inflation expectations rising to 3.4%, up 40bps m/m. This shock caused the Federal Reserve to maintain a cautious stance, opting to keep interest rates steady at 3.50%-3.75% and signaling that hopes for multiple rate cuts in 2026 were premature. Offsetting these headwinds were AI infrastructure spending and a resilient labor market, which when combined with still robust consumer spending produced 4th quarter earnings growth of ~14% for the S&P 500, the fifth consecutive quarter of double-digit growth. Despite broad earnings growth, the overarching theme of the market continues to be AI “hot” vs everything else, “not.” (see the below chart on VC funding growth).
AI Companies Raised $242 Billion of Venture Capital in Q1 2026
Global funding to AI by quarter
Source: Crunchbase
As we look to the rest of the year, the most important secular theme impacting markets will continue to be AI diffusion, infrastructure limits, and the ability for the large model providers to raise incremental investment capital. Sitting here today, market participants have a limited scope of data to support broad-based, profitable diffusion. Management teams are pointing to positive ROIs, but returns have not yet become meaningful enough to substantially accelerate revenue or earnings growth at large corporations. Despite this, the five largest hyperscalers are plowing ahead with gargantuan investments, with the 2026 AI specific capex budget clocking in at ~$500B. As these massive projections settle, the focus is turning to a critical question: can the AI supply chain actually satisfy this level of growth?
Beyond the AI trade, investors are beginning to factor in the 2026 midterm elections and the upcoming shift in Federal Reserve leadership. Following his recent nomination, Kevin Warsh is expected to begin his term as Fed Chair this May, pending Senate confirmation. Add the above to the ongoing military conflict in Iran and it seems likely that market volatility will continue to test investors’ nerves until we get some clarity on the myriad concerns enumerated above. Amidst this evolving macro, micro, and political backdrop, our investment discipline remains steadfast. We continue to focus on long-term wealth creation by maintaining concentrated positions in businesses with a high probability of compounding economic value. Our core criteria remain unchanged: we seek companies led by prudent management teams, supported by durable secular tailwinds, and built upon advantaged business models with superior unit economics in large expanding markets.
1Q26 Performance
In a decisively negative market, Ithaka’s portfolio lagged the R1000G during the quarter, trailing the index by 570bps (-15.5% to -9.8%, gross of fees). Stock selection detracted 540 bps to relative performance, with a 30bp negative impact from sector allocation. The portfolio demonstrated weak breadth and depth with only 10 of the 31 stocks held for the entire quarter, representing 30% of the names and 36% of the total weighting, outperforming the benchmark.
At the sector level, Ithaka generated positive relative returns in two of the six sectors where we maintain active exposure: Materials and Processing and Consumer Discretionary. Outperformance in materials was due to our sole holding posting a strong fundamental quarter and benefitting from excitement surrounding the AI infrastructure trade. Our outperformance in the Consumer segment was due to one holding that lost a bid to complete a large merger, with the market sending shares aggressively higher on the news. Our largest area of underperformance was Technology where the underperformance was pervasive, with only 5 of the 17 positions held for the entire quarter outperforming the benchmark. The largest contributors to weak returns in Technology were software names, where there continues to be fear that these stocks stand to be the most hurt by AI eating the world. Financials was the second-largest source of underperformance, where our two holdings that operate next-generation financial platforms, which offer customers the ability to purchase stocks, bonds, and cryptocurrencies, faced pressure due to the risk-off environment. Within Health Care, three of our four period-end holdings underperformed the benchmark. The weakness was concentrated in our MedTech holdings, where the sector has fallen out of favor thus compressing valuations. Finally, in Producer Durables, our underperformance reflected multiple compression in our sole holding notwithstanding the company continuing to deliver strong fundamental momentum.
Contributors and Detractors
Top Contributors
Howmet
Howmet is a leading global provider of advanced engineered solutions, specializing in the precision manufacturing of mission-critical components for the aerospace, defense, and commercial transportation sectors. Its diverse portfolio includes high-performance turbine airfoils for jet engines, advanced fastening systems, and complex structural parts crafted from proprietary titanium and nickel-based superalloys. The company generates revenue through long-term contracts for original equipment sales to major manufacturers like Boeing (BA) and Airbus, supplemented by a lucrative, high-margin aftermarket business for engine spares (~20% of revenues). Howmet’s stock climbed in the first quarter following a strong February earnings report that beat Street expectations on both the top and bottom line, with management also providing upbeat full-year guidance. The beat was primarily driven by surging demand in the commercial aerospace and gas turbine markets, with analysts also applauding the strategic $1.8 billion acquisition of Consolidated Aerospace Manufacturing, a leading global designer of precision fasteners, fluid fittings, and other highly complex, highly engineered products for the aerospace and defense market.
Netflix
Netflix is the global leader in subscription-based streaming, delivering a vast library of films, television series, documentaries, and mobile games to over 325 million members across more than 190 countries. The company generates revenue primarily through tiered monthly subscription fees, offering both ad-supported and premium ad-free plans, while increasingly diversifying its income through advertising sales, content licensing, and live events. Its competitive moat is anchored by its massive global scale, proprietary data-driven algorithms that maximize user retention, and a multibillion-dollar annual investment in Netflix Originals that often capture the zeitgeist, leading to viral marketing and exclusive brand loyalty. Netflix’s stock rose in the quarter following management bowing out of the proposed $83B merger with Warner Bros. Discovery (WBD). As a result, Netflix plans to use the funds raised in anticipation of the merger, as well as the $2.8B breakup fee paid by Paramount (PARA), to buy back company stock and further invest in organic content assets.
Veeva Systems
Since its inception, Veeva Systems has grown to become the leading SaaS provider of cloud solutions for the global life sciences industry. Veeva’s industry-specific cloud solutions provide data, software, and services to address a broad range of needs, including multi-channel customer relationship management, content management, master data management, and customer data management. Veeva’s products help its customers bring products to market faster while maintaining compliance with government regulations. Veeva’s outperformance in the quarter was due to positive stock price performance prior to Ithaka exiting the position in mid-January, which was prior to the market experiencing negative returns in the back half of the quarter.
Top Detractors
Microsoft
Microsoft builds best-in-class platforms and provides services that help drive small business productivity, large business competitiveness, and public-sector efficiency. Microsoft’s products include operating systems, cross-device productivity applications, server applications, software development tools, video games, and business-solution applications. The company also designs, manufactures, and sells devices, including PCs, tablets, and gaming/entertainment consoles that all integrate with Azure, its cloud computing service. The stock’s underperformance in the quarter was due to investor anxiety regarding the massive capital expenditures required for AI infrastructure and uncertainty over the near-term return on investment for these projects. Additionally, the decline was fueled by a broader market rotation out of high-valuation tech stocks as analysts re-rated software-as-a-service (SaaS) companies amid fears of slowing enterprise spending and AI disruption.
ServiceNow
Founded in 2004, ServiceNow has become the leading provider of cloud-based software solutions that define, structure, manage and automate workflow services for global enterprises. ServiceNow pioneered the use of the cloud to deliver IT service management (ITSM) applications. These applications allow users to manage incidents and to plan new IT projects, provision clouds, manage application performance and build applications themselves. The company has since expanded beyond the ITSM market to provide workflow solutions for IT operations management, customer support, human resources, security operations and other enterprise departments where previously a patchwork of semi-automated processes have typically been used with varying degrees of success. ServiceNow’s stock sold off in the first quarter as investors priced in fears the software application layer at large could be disintermediated by AI native products. This fear drove meaningful multiple compression that materialized despite strong fundamental growth delivered by the company.
Robinhood
Robinhood is a next-generation financial platform redefining access to investing for everyday consumers. Built around a frictionless, commission-free mobile experience, the company empowers retail investors to trade stocks, ETFs, options, and cryptocurrencies, which were markets historically gated by access and complexity. Robinhood’s intuitive design and fractional share model have made it the preferred entry point for a new generation of investors, with over 80% of its users under the age of 35. The platform has evolved beyond its original trading roots into a diversified financial ecosystem, generating growing revenue streams from net interest income and subscription products like Robinhood Gold, which now serves more than 3 million members. Robinhood’s weak stock price performance in the quarter was due to a relentless sell-off in the cryptocurrency market that severely impacted its transaction-based revenue, leading to a Q4 revenue miss. Additionally, investors were concerned by slowing retail trading volumes as the seasonal boost from its new prediction markets faded after the NFL season.
Transactions
During the quarter we initiated one new position, Vertiv (VRT) and eliminated two positions, Veeva Systems (VEEV) and Visa (V). Our trailing 12-month turnover increased to 24.4% while our trailing 3-year average annual turnover increased to 17.4%. ¹
Company Profile
Intuitive Surgical (ISRG) was founded in 1995 on the then radical belief that computer-enhanced technology could revolutionize surgery by making it less invasive and more precise. The technology originated from research at SRI International in the late 1980s, originally funded by the NIH and DARPA for potential use in remote battlefield surgery. Intuitive’s founders repurposed this for civilian hospitals and ambulatory surgery centers, developing the da Vinci Surgical System to enhance surgeon control and improve patient outcomes through reduced tissue trauma and faster recoveries. This foundational mission to overcome human limitations remains the core of the business today.
Over the past 25 years, Intuitive has been the primary beneficiary of a powerful Secular Driver: the global shift from open surgery to minimally invasive procedures. By providing surgeons with “wristed” dexterity and 3D visualization, capabilities far superior to traditional 2D laparoscopy, the company has systematically converted complex procedures into minimally invasive ones. While its early foundational success was in prostatectomies and hysterectomies, the company has aggressively expanded into general surgery and beyond. Today, the company’s total addressable market consists of approximately 20 million annual soft-tissue procedures. With only 3.2 million procedures performed by Intuitive in 2025, a vast runway for growth remains.
The strength of the investment lies in a business model that generates high-margin, recurring revenue through a “razor and razor blade” approach. Beyond the initial $2 million investment for a da Vinci surgical system, hospitals incur recurring costs for specialized instruments. These tools can cost up to $3,500 per procedure and must be replaced after just 10 to 20 uses. This creates a formidable competitive advantage. The hardware placement establishes high financial and intellectual switching costs, while the instrument business provides high-velocity feedback loops with practitioners. This moat is further fortified by $8 billion in historical R&D investment, with $5 billion spent in just the last five years, creating a barrier to entry that is increasingly difficult for competitors to overcome.
Ultimately, the success of a business depends on a company management team that can translate innovation into value. Intuitive’s leadership is defined by remarkable stability; with only four CEOs in its history, the firm avoids the “revolving door” culture seen in many public market companies. Current CEO David Rosa, who has held the CEO title for less than a year, was the ninth employee hired at Intuitive and has spent his 29-year tenure climbing the ranks through various pivotal business lines. This disciplined leadership has produced exceptional financial metrics, including mid-teens procedure growth for over a decade and consistent EPS expansion. We believe Intuitive will continue to execute this same playbook: methodically allocating capital to deepen its moat while capturing an ever-growing share of the global surgical market.
References
- ITD = inception-to-date, annualized. Inception date is 1/1/2009.
- Turnover Rate indicates the frequency of changes to the portfolio, and is calculated as the greater of the buys or the sells during the period as a percentage of the assets under management at the time of each transaction. The calculation eliminates the effect of client-directed cash flows. Average Annual Turnover is calculated based on a trailing three year period.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
