Fear, fundamentals and fortitude

As with any investment, your capital is at risk.

There are moments in investing when the market becomes so focused on the next few quarters that it stops distinguishing clearly between businesses. We think this is one of those moments.

Recent performance in our US Growth portfolios has been disappointing, and it would be wrong to pretend otherwise. A more defensive backdrop, conflict and geopolitics have all played a part. But the larger force has been the market’s growing conviction that ‘AI kills software’.

What began as a concern about selected parts of software has broadened into a much blunter sell-off across digital, data and technology businesses. Companies with very different economics, competitive positions and routes to value creation are increasingly being treated as though they face the same risk.

We think that interpretation is too simplistic.

Against this backdrop of uncertainty and evolving narratives, the market is rewarding what feels orderly, predictable or safe – just look at the diverging returns of energy and software sectors since September: 

The closure of the Strait of Hormuz raises energy prices, and energy stocks are the first-order beneficiaries in terms of revenues and profits. The 'AI kills software' narrative suggests software and related companies will experience an equal and opposite decline in their fundamentals. 

Despite the recent share price weakness, we do not see a broad deterioration in underlying business quality. In many cases, we see the opposite:

• Across the portfolio, average 2026 revenue growth is about 20 percent.
• Average 2026 sales estimates have risen by roughly 3 percent over the past six months.
• Profitability is improving too, with average earnings before interest and tax (EBIT) margins now about 11 percent, up from below 9 percent last year.

In other words, the operating picture is holding up far better than the market narrative would suggest.

That distinction matters. Much of what we have experienced has been valuation compression rather than fundamental deterioration.

Indeed, on both a forward price-to-sales and forward price-to-earnings basis, our US Growth portfolio now looks as inexpensive relative to the S&P 500 as it has at any point since before 2015 (see charts below). Since June 2025, the S&P 500’s price-to-sales multiple has re-rated upwards, while our holdings have de-rated on average:

Beneath that average, the moves have been even more striking: 20 companies in the portfolio have de-rated by more than 25 percent over the past nine months. Yet the median revenue growth for those businesses in the fourth quarter of 2025 was 28 percent and estimate revisions have been more positive than negative. That is not what broad fundamental impairment usually looks like. It looks more like a market that has become indiscriminate. 

Why is this happening?

The simple answer is that the market is trying to digest a genuine technological shift, but it is doing so in a too-simplistic way.

We do not dispute that AI will change software. It will. But change does not automatically mean value destruction. More often, value shifts.

One way we think about this is through systems. When one bottleneck is removed, another tends to emerge elsewhere. That can make the underlying infrastructure, control points and workflow rails of a system more valuable, not less. Many of the companies we own are not just ‘software’ in some generic sense. They sit at critical points in real workflows: enabling transactions, enforcing trust, managing logistics, controlling access, capturing proprietary data and helping decisions move reliably from intent to outcome. In an AI-enabled world, those positions may become more valuable, not less.

This is why we think the market’s current mood is too blunt.

DoorDash, for example, has seen strong execution overshadowed by concerns about near-term investment and delayed profitability in newer verticals. Duolingo has been caught in the crossfire of fears around AI translation, even as management is making what we see as a rational trade-off to support user growth and engagement. CoStar has been marked down as investors have grown impatient for profits, despite the continued strength of its core franchise and its willingness to reinvest from a position of strength. These are not identical businesses. They should not be analysed through a single lens. Yet that is increasingly how the market has behaved.

There is another inconsistency in the current narrative. On the one hand, investors worry that AI capital expenditure has gone too far. On the other hand, they worry that AI is so powerful it will wipe out established software franchises. Both cannot be true in the same way at the same time. If AI proves economically trivial, it is unlikely to destroy durable incumbents. If it proves transformative, then value should accrue not only to the companies building the infrastructure, but also to those deploying AI effectively across real customer workflows.

That is why our excitement today is sharply at odds with the prevailing market narrative. We are not excited because recent returns have been pleasant. They have not. We are excited because the gap between price and business reality appears unusually wide.

Similarly, consumer staples and other physical assets that the market believes won’t be disrupted by AI have rerated. That dynamic has driven a rotation in the US stock market:

The IT sector now trades at a lower forward PE than consumer staples. The most dynamic, fastest-growing part of the American economy, priced more cheaply than sugar water. NVIDIA, growing sales by over 60 percent a year, trades on the same earnings multiple as Pepsi, growing in the low single digits.

And here's the punchline: strong performance in our US Growth portfolios has followed previous premium lows.

From the 2017 low, absolute performance was +42 percent over one year, and +65 percent over two years (+11 percent and +25 percent relative to the S&P 500, respectively).

From the 2022 low, absolute performance was +47 percent over one year and +91 percent over two years (+10 percent and +22 percent relative to the S&P 500, respectively).

Fortitude

Periods like this are uncomfortable. They test your patience and fortitude. But they can also be the moments when long-term returns are seeded. When strong businesses de-rate sharply without a corresponding weakening in their fundamentals or prospects, our instinct is not to retreat mechanically. It is to lean in thoughtfully, selectively and with humility.

For long-term investors, this kind of dislocation is not usually something to fear.

It is where we can potentially add the most value.

US Equity Growth

Annual past performance to 31 March each year (%)

Annualised returns to 31 March 2026 (%)

Source: Revolution, S&P. US dollars. Net 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 March 2026 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

Potential for Profit and Loss 

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. 

The images used in this communication are for illustrative purposes only.

188109 10060821