2025 4Q Letter to Investors: What History Says About the Future
We look at the significant recent contribution to equity returns coming from valuation expansion in a historical context and what it might mean for forward returns.
How Profitable Are Big Tech Companies Really?
December 31, 2025: We examine the significant rise in the capital expenditures of the hyperscalers (MSFT, AMZN, META, GOOGL and ORCL) and other large technology companies, and the growing chasm developing between accounting profits and cash profits.
2025 3Q Letter to Investors: Execution Supersedes Intention
The S&P 500 in our view is expensive, at levels that have proven perilous in the past, and is also concentrated beyond historical precedents. For those who have stayed with the broad market, is it time to move to Value? The reality is that the Russell 1000 Value is only marginally cheaper and also has concentration issues and a legacy of slower underlying fundamental growth.
These Go to Eleven
September 11, 2025: We examine U.S. equity multiples across various measures which are currently near the record levels that were last seen 25 years ago during the tech bubble. To achieve historic average returns going forward, we would need to see fundamental growth accelerate well beyond prior peaks. This suggests that growth needs to “Go to Eleven”, to borrow from the 1984 movie This is Spinal Tap, in order for investors to have a chance at achieving average historic equity returns.
2025 2Q Letter to Investors: Return Pillars & Valuation Risk
Since May 2017, the S&P 500 has achieved a 14.3% annualized total return, with a significant portion (4.6 percentage points) stemming from valuation expansion, particularly among the largest stocks. The remaining return came from dividends and free cash flow growth. Distillate’s U.S. FSV strategy, which has nearly matched the S&P 500’s performance over this period, did not benefit from this valuation expansion. Instead, its net-of-fee returns were driven by superior underlying free cash flow growth, primarily due to systematically rebalancing into less expensive stocks.
Big Trends Favor Small Stocks
June 11, 2025: Over the long term, smaller stocks have significantly outperformed the largest ones, but have done so with significant cyclicality. Only 15 years ago, larger stocks had underperformed sharply and were strongly favored on valuation before subsequently outperforming substantially. Conditions are reversed today with underperformance of smaller stocks approaching levels in relative performance, valuation, and duration that have given way to powerful reversals and reversions to the mean in the past.
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