Key Takeaways
J. Stern & Co. LLP, a fund managing approximately $1.32 billion in assets, is navigating the current market landscape with a clear, long-term investment philosophy centered on quality and sustainable competitive advantages. Their strategy, as outlined in recent commentaries, emphasizes companies with strong growth opportunities, high recurring revenues, experienced management, and robust cash generation. This approach has naturally led them to a significant allocation in technology giants, but with a discerning eye that extends beyond the immediate hype.
The firm has been a long-term investor in companies like Amazon and Alphabet since the inception of their World Stars Global Equity strategy in 2012, adding Nvidia and ASML more recently in 2022 and 2023 respectively. This selective engagement with the "Magnificent Seven" reflects a belief that while these companies have driven market performance, true value lies in fundamental strength and long-term compounding potential. Their strong performance, often ranking in the first decile of fund peers, underscores the efficacy of this patient, quality-driven approach.
However, J. Stern & Co. also recognizes the need for market broadening beyond a narrow focus on a few tech leaders. They actively seek opportunities in other high-quality sectors like consumer, healthcare, and industrials, which they believe are trading at attractive valuations. This dual strategy – leaning into proven tech leaders while diversifying into overlooked quality – aims to capture growth from multiple structural trends, not just the AI narrative.
Their investment commentary highlights that while AI and increasing computing capacity are crucial drivers, so too are increased healthcare spending, the renewal of global infrastructure, and addressing challenges like energy transition and water supplies. This holistic view suggests a portfolio designed to thrive across a spectrum of long-term global opportunities, positioning them for resilience even as market dynamics shift.
The sheer scale of capital expenditure (capex) by major tech players is fundamentally reshaping the market, creating an unprecedented demand surge for AI infrastructure, with Nvidia at the epicenter. Amazon, Alphabet, Microsoft, and Meta are collectively projected to spend between $650 billion and $700 billion on AI investments in 2026, a staggering increase of 67% to 74% from 2025 expenditures. This massive outlay is primarily directed towards AI chips, servers, and data center buildouts, creating a powerful tailwind for companies like Nvidia.
Nvidia, with its dominant market share exceeding 80% in AI accelerators, is uniquely positioned to capture a substantial portion of this spending. Analysts like Futurum Group CEO Daniel Newman estimate that Nvidia could see 40% to 50% of the Magnificent Seven's committed AI capex flow its way. This isn't just about GPUs; Nvidia's full-stack strategy, encompassing CPUs, networking solutions, and its industry-standard CUDA software, creates a formidable ecosystem that makes it difficult for competitors to dislodge.
Consider the recent announcements: Amazon plans to invest $200 billion in capex in 2026, while Alphabet projects $175 billion to $185 billion. Microsoft's fiscal 2026 capex is on pace for $145 billion, and Meta expects to spend $115 billion to $135 billion. These figures consistently exceed Wall Street's initial estimates, indicating a persistent underestimation of AI spending intensity. For instance, AI hyperscaler capex soared 64% in 2025 against a 22% consensus forecast.
This aggressive investment by hyperscalers directly translates into revenue and profit for Nvidia. The company's networking revenue alone increased by 162% in the most recent quarter, demonstrating the breadth of its impact beyond just core chips. J. Stern & Co.'s early investment in Nvidia since 2022 appears prescient, recognizing the foundational role the company plays in the global AI buildout, making it an "unstoppable stock" in the current environment.
Amazon and Alphabet, two of J. Stern & Co.'s long-held tech positions, are deploying distinct yet complementary strategies in the AI race, each with significant investor implications. Both companies are major players in cloud computing, with Amazon Web Services (AWS) and Google Cloud driving substantial revenue and acting as critical platforms for AI development and deployment. Their aggressive capital expenditure plans are largely focused on expanding this AI and cloud infrastructure.
Amazon, currently trading at $208.56 with a market cap of $2.24 trillion, is making a high-stakes bet on AI sovereignty. The company announced a $50 billion investment to expand its AI and supercomputing capabilities for US government agencies, adding nearly 1.3 gigawatts of new data center capacity. This move, alongside a $38 billion cloud computing deal with OpenAI for AWS data centers and Nvidia chips, and its own custom Trainium AI chips, positions Amazon as a comprehensive AI infrastructure provider. AWS revenue growth accelerated to 20% last quarter, and the company is capacity-constrained, necessitating its massive capex.
Alphabet, with a market cap of $3.76 trillion and trading at $310.90, is leveraging its Tensor Processing Units (TPUs) as a top alternative to Nvidia's GPUs. These seventh-generation chips power much of Alphabet's internal AI workloads, providing a structural cost advantage. The company's commitment from Anthropic to buy $21 billion worth of TPUs underscores their growing reputation. Alphabet's stock significantly outpaced Amazon's in 2025, climbing nearly 60% as investor perceptions shifted regarding its AI leadership, particularly with advancements in its Gemini models.
Both companies are trading at attractive valuations, with forward price-to-earnings (P/E) ratios below 30 times, despite their robust growth prospects. While Amazon's recent performance has been "lackluster" compared to Alphabet, its accelerating AWS growth and traction with Trainium chips could shift investor perceptions in 2026, much like Alphabet experienced in 2025. J. Stern & Co.'s continued investment in both reflects a belief in their long-term potential to monetize these substantial AI investments, even as the market scrutinizes the immediate returns.
Beyond the headline-grabbing tech giants, J. Stern & Co.'s portfolio reveals a strategic, substantial bet on RTX Corporation, the aerospace and defense powerhouse. Trading at $198.46 with a market cap of $266.39 billion, RTX represents a crucial diversification play that aligns with J. Stern's broader thesis of market broadening and investing in long-term structural growth drivers beyond pure information technology. This investment underscores a recognition of the burgeoning defense autonomy sector, where AI and advanced computing are becoming increasingly critical.
The defense industry is undergoing a significant transformation, with governments worldwide pouring capital into autonomous and unmanned systems. The US Congress, for instance, passed an $839 billion defense spending bill for fiscal 2026, directing $9.8 billion specifically towards these advanced systems. The Department of Defense's total IT budget reached $66 billion, with every service branch increasing its AI allocation. This surge in spending directly benefits companies like RTX, which are at the forefront of developing and integrating these technologies.
RTX, with its three segments – Collins Aerospace, Pratt & Whitney, and Raytheon – is deeply embedded in providing systems and services for commercial, military, and government customers. Its involvement in areas like advanced sensors, precision weapons, and next-generation propulsion systems positions it to capitalize on the shift towards smarter, faster, and more autonomous defense capabilities. The company's relatively low Beta of 0.42 also suggests a more stable, less volatile investment compared to high-growth tech stocks, offering a ballast to J. Stern's portfolio.
J. Stern & Co. explicitly states their intent to invest in a broad set of companies that fulfill their quality criteria and can compound over long periods. While technology companies have been top performers, they also highlight industrial companies like Eaton and healthcare firms like Thermo Fisher as significant compounders. RTX, as a leader in the industrial/aerospace & defense sector, fits this mold, benefiting from the "renewal of the public and private asset base" and the need to address global security challenges. This strategic allocation demonstrates J. Stern's commitment to a diversified, long-term approach that captures growth from multiple, interconnected global trends.
While J. Stern & Co.'s strategy of investing in quality tech and diversified industrials appears robust, several key risks and investor considerations warrant attention. The most prominent concern revolves around the sheer scale of capital expenditure by Big Tech. While this spending fuels Nvidia's growth, the "unspoken contract" with investors – that mega-cap tech would fund speculative AI buildouts from cash flow, not debt – is being challenged. Hyperscalers are increasingly using credit markets, shifting risk onto bondholders and potentially impacting their "fortress balance sheet" status.
The primary question for Amazon and Alphabet is the monetization timeline and clarity of these massive AI investments. Investors have expressed misgivings, with Amazon stock falling over 8% and Alphabet shares dropping 3% following their capex announcements. The market is eager to see how and when these multi-billion-dollar outlays translate into tangible revenue growth and improved profitability, especially as some analysts fear a speculative buildout at risk from tech obsolescence or a bond market glut.
Another risk lies in market concentration. Despite J. Stern's stated goal of broadening, their significant positions in Nvidia, Alphabet, and Amazon still tie a substantial portion of their portfolio to the performance of a few dominant tech players. While these companies are high-quality, any sector-specific headwinds, regulatory pressures, or shifts in the competitive landscape could disproportionately impact returns. The "Magnificent Seven" narrative, while powerful, also carries the inherent risk of a narrow market focus.
Furthermore, the broader economic environment remains a factor. While J. Stern believes underlying economies are resilient and interest rates have reached sustainable levels, any unexpected slowdown or policy shifts could introduce volatility. The firm acknowledges that "macro is what we put up with," implying that even a quality-focused, long-term strategy is not immune to broader market forces. Investors must weigh the potential for sustained growth against these macro and company-specific execution risks.
J. Stern & Co.'s investment strategy, while heavily invested in the current AI narrative through Nvidia, Alphabet, and Amazon, is fundamentally rooted in a broader, long-term vision that extends beyond immediate technological hype. Their consistent focus on quality companies with sustainable competitive advantages, strong cash generation, and experienced management teams positions them to navigate evolving market cycles. This isn't just about chasing the latest trend; it's about identifying foundational businesses that can compound value over decades.
The firm explicitly states that while AI and increased computing capacity are important drivers, they are not the sole focus. They see equally compelling "great opportunities for growth and value creation" in areas like increased healthcare spending for an aging population, the renewal of global public and private infrastructure, and solutions for global warming, energy transition, and water supplies. Their strategic allocation to companies like RTX, and their stated positions in healthcare and industrial firms, underscores this diversified approach to structural growth.
J. Stern & Co. believes that the market is broadening from its narrow focus on the "Magnificent Seven," with investors becoming more selective as "the reality of company fundamentals has prevailed over sentiment and hype." Their portfolio is constructed to benefit from this broadening, holding high-quality companies in various sectors that they believe are currently undervalued relative to their long-term potential. This patient, bottom-up approach, focusing on companies that benefit from multiple long-term structural tailwinds, is designed for resilience.
Ultimately, J. Stern & Co. is positioning for a future where innovation and growth are distributed across a wider array of industries. Their blend of dominant AI enablers with robust, essential businesses in other sectors reflects a conviction that true long-term returns come from a diversified portfolio of quality assets, capable of thriving through various economic and technological shifts.
J. Stern & Co.'s calculated bets on AI leaders and strategic diversification into defense and other quality sectors offer a compelling blueprint for long-term investors. While the AI capex boom presents both immense opportunities and potential risks, the firm's disciplined focus on fundamental quality and structural growth drivers aims to deliver sustained returns. Investors should consider how such a balanced, long-term perspective can anchor a portfolio amidst rapid technological change and evolving market dynamics.
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