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A time to reflect: what really matters?
A new year is upon us. It’s a time to reflect, maybe on the past, perhaps on the future, on accomplishments or mistakes. The common thread in most reflections is that they land not on the trivial, but on the moments that matter.
But identifying ‘what matters’ isn’t always easy. For example, by the end of 2006, coming up to 20 years ago now, CNN’s ‘Year in Review’ New Year’s Eve video montage would have surely been dominated by that year’s many geopolitical conflicts – from the Iraq War to North Korea’s first nuclear test. Zidane’s World Cup headbutt would also clearly be featured, as would our collective obsession with the demotion of Pluto as a planet. We’re only half joking. The public’s reaction was so strong that The American Dialect Society chose the verb ‘to be plutoed’ as its 2006 Word of the Year (‘to demote or devalue something’). For those keeping score, ‘plutoed’ received 47 votes. ‘YouTube’, which was launched a year earlier, received just 12.
Which mattered more?
In the grand scheme of moments that matter, nothing against Zidane – and as much as we’d rather not have Pluto be plutoed yet again – we’d highlight another event from 2006 that trumps both as far as impact on the future goes: it’s when Amazon quietly revealed storage and compute as metered web services – S3 and EC2. The cloud was born, and the very infrastructure on top of which the world’s media, information, commerce, and social activity runs was about to change.
Indeed, each year brings a fresh list of events, mostly geopolitical, alongside inconsequential things that seem to dominate the narrative. Yet many of the groundbreaking ones somehow slip through the cracks. 2025 was no different. Nor will 2026 be. So, let’s reflect. What really matters today for long-term growth investors?
What matters? Your returns
2025 has been a volatile year for the US stock market.
Trade uncertainty in the first half, followed by concerns over potential irrational exuberance surrounding AI in the second, drove the turbulence.
While the portfolio delivered good absolute returns, it suffered in October and November when sentiment towards some AI-related companies caused a sell-off in correlated names.
Large benchmark constituents held up well, and as a result, we lagged the S&P 500 and Russell Growth indices for 2025.
On a more positive note, the end of 2025 capped a strong three-year period of recovery.
Fundamental growth and profitability drove returns well ahead of the S&P 500 and broadly in line with growth indices, with a much wider base of contributors than today’s concentrated benchmarks.
What matters? Fundamentals
Fundamentals matter. Always.
In the spirit of reflecting, let’s return to 2022, before the portfolio’s recovery began. If you asked a room full of growth investors what caused that year’s violent downdraft, the popular response would be ‘the rate cycle’.
That’s fair, its impact on the valuations of long-duration growth stocks was abundantly (and violently!) clear.
Another factor doesn’t get nearly enough airtime: fundamentals.
Nearly four years removed, and amid an otherworldly AI spending boom, it’s easy to forget the post-COVID air pocket in demand that hurt fundamentals for everything from ecommerce to online advertising to cloud computing.
Growth was slowing. Estimates were falling. In the final nine months of 2022, earnings per share (EPS) estimates for the S&P 500 for calendar year 2023 fell by 10 per cent. Conditions were rocky.
The market’s behaviour reflected that split. During the 2022 sell-off, Russell 3000 Growth companies whose 2023 EPS forecasts rose returned -14 per cent in aggregate, while those with falling estimates fell -35 per cent on average. The index reached a maximum drawdown of -33 per cent.
The point is simple: strong fundamentals were a strong antidote to rate-driven valuation compression.
This ties back neatly to ‘what matters’. As violent as the rate cycle’s valuation compression was, we saw it as a temporary, albeit painful, reset.
As long-term investors, we were more focused on weakening fundamentals. Were they temporary, too?
At a deeper level, what was the state of the underlying engines that had driven such powerful growth opportunities for the previous 10 to 15 years? Were they depleted? Had they run their course?
Our reflections proved valuable. We concluded that some growth engines of the prior decade were tapped out (cheap capital, lax regulation), but others were intact (cloud, ecommerce), and still others were just revving up (AI). That helped us move on from companies whose engines had run their course, while patiently riding out, or even doubling down on, those that were battered but whose headwinds seemed more transient.
In 2023, as headwinds abated, fundamentals for many businesses tied to durable secular shifts rebounded with gusto.
Fast forward to today, and the fundamental picture remains excellent.
Companies in the portfolio grew revenue at an average of nearly 20 per cent in 2025, with a similar pace expected for 2026.
Meanwhile, operating leverage continues to shine through. Average earnings before interest and tax (EBIT) margins are expected to move from 7 per cent to 11 per cent. And estimate revisions remain solidly upwards.
Fundamentals are impressive. But even more exciting is what’s driving them, the engines of growth.
What matters? The Engines
The numbers above represent a snapshot. They tell us nothing of the future.
Our conviction that opportunities will remain strong rests on structural shifts we’ve been investing behind for years: the internet, the cloud, and the digitisation of virtually every system we engage with.
At first glance, that can sound like old news. But the key point has little to do with when these infrastructures first emerged.
The real magic comes with the characteristics of being digital in the first place, and what it means for the future. We summarised this in our 2022 Engines of Growth paper and find it more relevant than ever:
'While the ‘Digital Transformation’ theme already seems well-trodden by growth investors, its potency and duration are still underappreciated.
The phrase itself encourages one to picture a clean migration from Point A (analogue) to Point B (digital), and to assume that once Point B is reached, the transformation is complete.
That framing misses something crucial.
The magic of Point B is that it is not an end state. Rather, it is just a beginning.
The digital world is a world with new, infinitely scalable tools – software, data, and compute capacity – that can be put to use in infinitely scalable ways.'
AI is a useful illustration. It may have seemed to ‘appear out of nowhere’ in 2023, but the road to AI was paved by a cocktail of digital ingredients: data, compute, software, lower costs, and dense, connected networks.
Picking the timing of ChatGPT’s breakout was hard, but the direction of travel, given these preconditions, was far closer to inevitable.
Looking ahead, if these structural drivers (compute, cloud, software and data) continue to compound, we believe the opportunity set for our portfolio will remain broad and deep.
What matters? AI
It’s dominating the headlines, but does AI, and the ‘bubble or no bubble’ narrative, matter?
Yes, AI matters, but how much the current ‘bubble’ narrative matters is less clear.
The whole market seems to have a lot riding on the AI capital expenditure (Capex) supercycle.
The better questions are: for whom, for how long, and with what long-term implications?
For context, consider the internet bubble and the fates of two high-flyers that felt the brunt of its bursting in 2000: Amazon and Cisco. Both experienced drawdowns greater than 90 per cent during the crash.
Today, Amazon is up nearly 50x from its pre-burst peak. Meanwhile, Cisco only achieved a new high 25 years later, in December 2025.
One helpful lens for us is to think about not just who is benefiting from AI, but how they are benefiting, and for how long.
We distinguish between (1) capex beneficiaries on the front line of the current spending cycle (akin to Cisco circa 1999) and (2) ‘AI deployers’ that use these technologies to become stronger operationally or structurally (akin to Amazon in 1999).
Both are represented in the portfolio, but the durability of the advantage can be very different.
Where the capex cycle goes from here is uncertain. But for the deployers, even if spending came to a screeching halt tomorrow, AI as a tool is already loose in the wild. Companies like these can keep improving, and many in the portfolio already are:
- Lemonade: the digital-first, AI-powered, modern insurance company is managing to grow premiums at more than 30 per cent a year with only single-digit expense growth, which they directly attribute to AI-driven operational efficiency.
- Shopify: online commerce platform Shopify is also growing more than 30 per cent year-over-year. It has done this while maintaining flat headcount for two straight years, thanks to AI.
- Guardant: an AI-driven, blood-based cancer diagnostics leader, has seen demand for its flagship Guardant360 test accelerate for four consecutive quarters, thanks largely to its AI-powered platform.
We can go on. But the point is that there is an awful lot to be excited about relative to AI that sits outside of the ‘bubble or no bubble’ capex debate.
What matters? Uncertainty meets portfolio construction
We continue to live in a highly uncertain world. There will be events that inject uncertainty into markets, tariffs, bubble concerns, and geopolitical tensions.
Over the last 18 months, we’ve written and spoken about the enhancements we’ve made with portfolio construction and volatility in mind: ensuring a minimum level of financial maturity, and a suitable balance across growth exposures and sources of demand.
Given the inherent uncertainty in markets, portfolio construction matters more than ever. We can’t control when, or for how long, the market turns ‘risk off’. We’re confident the adjustments we’ve made over the past two years will lead to a more resilient and robust portfolio than 2022, reducing the chance of a repeat of that period’s extreme volatility.
2025’s ‘risk off’ periods, such as ‘Liberation Day’ in April, and again in October and November, tested our guardrails.
Downdrafts are inevitable, but the delivered tracking error has trended down since its peak in mid-2022 and has held relatively stable at the upper end of our expectations. We still think it is probably too high for the long run, and we are focused on this. But we continue to make progress.
For example, this quarter we invested in strong ideas for our enduring growth bucket, such as the new position in Medline, the medical supply manufacturer and distributor, and we reinitiated a holding in Alphabet. We also added to names such as skilled nursing home provider Ensign Group, while taking some profits from some of our most volatile transformational growth holdings.
We will still be volatile relative to US equity benchmarks. The portfolio is more concentrated and more tilted towards higher growth and longer-duration companies than the S&P 500 and Russell Growth indices. But it is worth noting that these benchmarks are more volatile themselves now than prior to 2020, given their high levels of concentration.
We will continue to focus on overall portfolio shape, keeping volatility in line with expectations while investing in the most exceptional growth companies the US has to offer.
Conclusion
Reflection can stir up a wide range of emotions. In some moments, it leaves you refreshed, in others, regretful or nostalgic. At its best, it inspires aspiration. For us, this reflection sparks something even stronger: genuine excitement.
Entering 2026, we are excited about the shape of the portfolio: the businesses that make it up and their fundamental health, the underlying structural drivers of their growth, and the fitness of the portfolio and its construction in a world filled with uncertainty.
We can’t predict the ‘events’ that will dominate headlines next year. But, we can continue to focus on what matters: fundamentals, durable engines of growth, and a portfolio built to ride out the inevitable volatility.
US Equity Growth
Annual past performance to 31 December each year (%)
|
|
2021 |
2022 |
2023 |
2024 |
2025 |
|
US Growth Composite (gross) |
-3.5 | -55.3 |
47.3 |
31.3 | 10.5 |
|
US Growth Composite (net) |
-4.0 | -55.5 | 46.6 | 30.6 | 9.9 |
|
S&P 500 Index |
28.7 | -18.1 | 26.3 | 25.0 | 17.9 |
Annualised returns to 30 September 2025 (%)
|
|
1 year |
5 years |
10 years |
|
US Growth Composite (gross) |
10.5 | -1.6 | 16.0 |
|
US Growth Composite (net) |
9.9 | -2.1 | 15.5 |
|
S&P 500 Index |
17.9 | 14.4 | 14.8 |
Source: Revolution, S&P. US dollars. Returns have been calculated by reducing the gross return by the highest annual management fee for the composite. 1 year figures are not annualised.
Past performance is not a guide to future returns.
Legal notice: The S&P 500 Index is a product of S&P Dow Jones Indices LLC, a division of S&P Global, or its affiliates (“SPDJI”). Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC, a division of S&P Global (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.
Risk factors
The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
This communication was produced and approved in January 2026 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.
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All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk. Past performance is not a guide to future returns.
This communication contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, but is classified as advertising under Art 68 of the Financial Services Act (‘FinSA’) and Baillie Gifford and its staff may have dealt in the investments concerned.
All information is sourced from Baillie Gifford & Co and is current unless otherwise stated.
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