Dear Fellow Investor,
Since Fenimore’s establishment in 1974, investors have navigated ongoing stock market, economic, and geopolitical uncertainty. Through it all, Fenimore’s North Star has been our investment process focused on investing in what we believe are durable, quality companies. In our experience, this approach gives investors the highest probability of achieving their financial goals. This unwavering philosophy allows us to stay the course during shifting market sentiment or when quality investments are out of favor. We believe that our long-term horizon and disciplined methodology give us an advantage, especially during dynamic times.
CURRENT MARKET CONSIDERATIONS
There are many forces that can influence stock prices. Today, geopolitical conflict and the price of oil remain important considerations while artificial intelligence (AI) continues to command significant investor attention. Among the issues we are weighing, two stand out: the broadening impact of AI-related capital spending and the rising cost of money.
AI IS STILL ON TOP
AI-related investment has grown to an extraordinary scale and continues to expand rapidly. Moody’s estimates that capital spending by six major U.S. hyperscalers could reach approximately $785 billion in 2026 and $1 trillion in 2027.1 Those are enormous sums of capital being deployed in a remarkably short time period.
While the boom’s early stages elevated primarily technology and semiconductor companies, the data center spending surge is now lifting up an increasingly broad spectrum of businesses. This includes cooling, engineering and construction, electrical equipment, aggregates, fire and life-safety systems, product testing, industrial distribution, facility services, and more. In fact, most industries are being impacted.
For Fenimore, that broadening creates another area for fundamental research: businesses benefiting meaningfully from AI infrastructure spending that are not considered AI companies. It also gives us another variable to assess — how much of the growth, profitability, and cash flow being generated is durable and how much reflects the current capital-spending swell.
THE RISING COST OF MONEY
Due to various factors, including events in the Middle East, inflation has remained above the Federal Reserve’s (“Fed”) long-term 2% target. Consequently, the Fed recently raised the federal funds target range by 0.25 percentage points to 3.75%–4.00%, its first increase since 2023.2 Longer-term government borrowing costs have also risen sharply worldwide. Higher interest rates are not inherently good or bad, nor do they automatically imply an economic slowdown. They do, however, change the math.
When investors can earn more from an essentially risk-free investment like U.S. Treasuries, everything else has a higher hurdle to clear. For example, a business acquisition, new factory, real estate development, or stock must offer a sufficiently attractive prospective return to compensate for the additional risk.
Higher rates also benefit savers who can earn considerably more on cash, CDs, and bonds than they can when interest rates are near zero. Companies may also be more discriminating about where they put money.
The same principle applies to stocks. When the risk-free rate is very low, investors may pay extraordinary prices for earnings expected far into the future. However, when money has a meaningful cost, then current earnings, free cash flow, balance-sheet strength, and returns on reinvested capital become more important.
AN ENVIRONMENT WE UNDERSTAND
Today’s shifting environment reinforces the importance of Fenimore’s steadfast investment philosophy. Our work involves assessing the relationship between a company’s quality, the cash it generates, management’s opportunities to reinvest that cash, and its stock price. A higher cost of money does not change this discipline — it simply raises the return threshold an investment must clear.
Simultaneously, the AI buildout is creating a wider and more varied opportunity set. Some businesses are benefiting from infrastructure spending in ways that may not yet be fully appreciated while others with little AI connection have been overlooked as investor attention and capital have concentrated elsewhere.
RESEARCH ON THE ROAD
Our team is conducting diligent, firsthand research nationwide. During our meetings with leadership, we reconfirm that FAM Funds’ holdings meet our quality standards. We believe that this in-depth research and our decades of experience give us the knowledge to make sound decisions.
Overall, our holdings continue to generate strong earnings growth, and we believe stock prices ultimately reflect the progress of the underlying businesses. Our North Star, therefore, is not to predict the next headline but to identify quality companies capable of compounding value over many years while investing in them at sensible prices. This long-term, disciplined approach has served investors well through many market cycles, and we expect it to remain just as relevant in the years ahead.
LET’S CONNECT
We invite you to meet with us in our Cobleskill or Albany office. You can also reach our team at 800-932-3271 or info@fenimoreasset.com. Thank you for your trust and partnership.
Sincerely,
Your Fenimore Research Team
Andrew F. Boord
Bryan L. Engler, CFA®
Shikha Garg
Kevin D. Gioia, CFA®
Antonio C. Goodwyn, CFA®
Paul C. Hogan, CFA®
Robert L. Peters
William W. Preston, CFA®
Marc D. Roberts, CFA®
Drew P. Wilson, CFA®
1 moodys.com as of 7/31/26
2 federalreserve.gov as of 9/16/26