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
This letter is intended for FAM Shareholders and is authorized for distribution only when preceded or accompanied by a prospectus or summary prospectus for the FAM Value Fund, FAM Dividend Focus Fund and FAM Small Cap Fund. Past performance is not indicative of future results. Investment returns may fluctuate: the value of your investment upon redemption may be more or less than the initial amount invested. Please read the prospectus or summary prospectus for more complete details, including investment objectives, risk considerations and expenses, before you invest. FAM Funds are distributed by Fenimore Securities, Inc., Cobleskill, NY 12043, 800-932-3271. Current performance numbers are available at fenimoreasset.com.
This presentation may contain statements based on the current beliefs and expectations of Fenimore’s management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. Any references herein to any of Fenimore’s past or present investments, portfolio characteristics, or performance, have been provided for illustrative purposes only. It should not be assumed that these investments were or will be profitable or that any future investments will be profitable or will equal the performance of these investments. There can be no guarantee that the investment objectives of Fenimore will be achieved. Any investment entails a risk of loss. Unless otherwise noted, information included herein is presented as of the date indicated on the cover page and may change at any time without notice. Fenimore Asset Management Inc. is an SEC registered investment adviser; however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made.
