Recent headwinds to Value Equity have reflected multiple expansion within a narrowly led benchmark, while portfolio fundamentals remain strong. We believe this creates a compelling opportunity.

To read the full piece, please use the link below. 

(All MSCI index returns are shown net and in U.S. dollars unless otherwise noted.)

Markets Review

Sources: CAPS CompositeHub^TM, Bloomberg
Past performance is not indicative of future results. Aristotle Global Equity Composite returns are presented gross and net of model fees and include the reinvestment of all income. Gross returns will be reduced by fees and other expenses that may be incurred in the management of the account. Net returns are calculated by subtracting a model fee of 0.50% on an annual basis or 0.04167% on a monthly basis, which includes trading costs and the revinvestment of all income. Please see important disclosures at the end of this document.

Global equity markets rallied to record highs in the second quarter, with the MSCI ACWI Index rising 14.93% during the period. Global fixed income markets also advanced, as the Bloomberg Global Aggregate Bond Index increased 0.87%. From a style perspective, growth stocks outperformed value, with the MSCI ACWI Growth Index exceeding the MSCI ACWI Value Index by 9.21%.

Performance across global equity markets was broadly positive during the period, led by gains in Asia/Pacific ex-Japan and North America, while Latin America and Africa/Middle East lagged. On a sector basis, ten out of the eleven sectors within the MSCI ACWI Index advanced, led by Information Technology, Industrials, and Financials. Alternatively, Energy, Materials, and Utilities were the worst performers.

Geopolitics remained a source of volatility, particularly in the Middle East, where the ongoing conflict between the U.S. and Iran affected energy markets, shipping routes, and investor sentiment. During the quarter, intermittent military strikes and recurring threats to commercial shipping in and around the Strait of Hormuz kept investors focused on the potential for disruptions to global energy supply. Late in the period, a temporary ceasefire and negotiations briefly eased these concerns. However, developments shortly after quarter-end, including renewed hostilities and President Trump’s statement that the ceasefire was over, underscored the fragility of the situation and the potential for renewed volatility in energy markets.

As the two sides worked toward peace, global economies continued to feel the negative impact of the war. Due to the inflationary shock from the conflict, the European Central Bank raised interest rates during the quarter; however, concerns about stagflation increased on news that real GDP growth in the eurozone had contracted versus the previous quarter. Meanwhile, the Bank of England and U.S. Federal Reserve kept rates steady, despite elevated inflation in both countries. In Asia, the Bank of Japan raised rates, and South Korea’s government passed a $17.7 billion emergency supplementary budget to offset rising oil prices.

Despite the fragile global economic backdrop, earnings in Europe and Asia remained robust, supported by continued demand tied to AI infrastructure and strength in select commodity-linked industries. Beneath the surface, market leadership reflected a more risk-on environment globally, with high-beta stocks generally outperforming low-beta stocks. Companies tied to the buildout of AI-related infrastructure, including semiconductors, memory, power equipment, and other data center suppliers, were among the strongest performers, while more defensive and lower-volatility areas generally lagged.

Performance and Attribution Summary

For the second quarter of 2026, Aristotle Capital’s Global Equity Composite posted a total return of 9.07% gross of fees (8.94% net of fees), underperforming the MSCI ACWI Index, which returned 14.93%, and the MSCI World Index, which returned 13.76%. Please refer to the table below for detailed performance.

Source: FactSet
Past performance is not indicative of future results. Sector attribution shows how much of a portfolio’s overall return is directly attributable to stock selection and asset allocation decisions within the portfolio, highlighting which sectors contributed or detracted to the total return. Attribution includes the reinvestment of income. Attribution is presented gross of fees and does not include the deduction of all fees and expenses that a client or investor has paid or would have paid. Please refer to the gross and net composite returns included within to understand the overall impact of fees.

From a sector perspective, the portfolio’s underperformance relative to the MSCI ACWI Index can be attributed to both security selection and allocation effects. Security selection and an underweight in Information Technology, as well as security selection in Consumer Discretionary, detracted the most from the portfolio’s relative performance. Conversely, security selection in Materials and Communication Services and a lack of exposure to Utilities contributed most to relative return.

Regionally, both security selection and allocation effects were responsible for the portfolio’s underperformance relative to the MSCI ACWI Index. Security selection in North America detracted the most from relative performance, while security selection in Asia/Pacific ex-Japan contributed the most.

Contributors and Detractors for 2Q 2026

Relative Contributors	Relative Detractors
Samsung Electronics	TotalEnergies
Microchip Technology	Munich Reinsurance
Qualcomm	Otsuka Holdings
Erste Group Bank	AIA Group
FANUC	Martin Marietta Materials

Relative contributors and detractors are based on attribution total effect and exclude benchmark securities not held in the portfolio.

Munich Re, the world’s largest reinsurance company, was a detractor during the quarter. Although the company reported strong operating results, supported by lower-than-expected catastrophe losses and disciplined underwriting, shares declined as investors focused on continued pricing pressure in portions of the global reinsurance market and weaker investment results driven by capital market volatility. We view these pressures as part of the normal insurance cycle rather than a change in the quality of the franchise. Munich Re provides balance sheet capacity and risk expertise to insurers around the world across property and casualty, life and health, cyber, and other complex risks—areas where scale, data, underwriting judgment, and long-standing client relationships are critical. The company’s diversified business mix, including its growing primary insurance operations through ERGO, can help reduce reliance on any single product line or geography, while its strong capital position provides flexibility to absorb catastrophe losses, support clients when capacity is most valuable, and return capital to shareholders. In addition, management continues to differentiate Munich Re through investments in technology, data, and R&D, which should improve underwriting, claims handling, and efficiency over time. We believe these advantages, together with opportunities for share gains in specialty lines such as cyber and in underpenetrated markets such as Asia, position the company to generate attractive returns across insurance cycles.

Martin Marietta, a leading supplier of construction aggregates and building materials, was a detractor during the quarter. Shares modestly declined as investors remained focused on the pace of recovery in residential and private nonresidential construction activity, despite continued strength in infrastructure, energy, and data center-related demand. While the stock underperformed during the period, it remains a strong performer over the past 12 months. We continue to believe Martin Marietta’s irreplaceable aggregates reserves, disciplined pricing strategy, and strategically located asset base position the company to benefit from long-term infrastructure investment and population growth while generating attractive FREE cash flow over time. In addition, the announced acquisition of Lhoist North America further broadens the company’s portfolio into attractive industrial markets and, if executed successfully, should enhance its long-term earnings power and cash flow generation.

Samsung Electronics, the South Korean technology conglomerate, was the largest contributor. Shares advanced as memory pricing continued to ramp sharply, driven by tight supply and accelerating demand from data centers and AI infrastructure. While Samsung is often viewed through the lens of smartphones and consumer electronics, the company’s earnings power is increasingly tied to memory, particularly DRAM, where Samsung remains one of the global leaders and where we have long identified memory and smartphones as the two core profit drivers. Importantly, the current strength in the share price seems to reflect more than simply higher spot pricing. Samsung is shifting its portfolio toward higher-value products such as HBM4, server DDR5 and enterprise SSDs, while longer-term supply agreements should provide better visibility through the cycle. After trailing peers in earlier generations of high-bandwidth memory, the company has improved its competitive position, supported by renewed investment focus, DRAM line conversion and HBM4 progress. Beyond memory, Samsung continues to benefit from its scale and manufacturing expertise across displays, image sensors, smartphones, consumer electronics, and custom semiconductor manufacturing. We remain mindful of memory cyclicality, Chinese competition, and the capital intensity required to remain at the leading edge. However, Samsung’s improving product mix, disciplined capacity allocation, and broader component opportunities should support higher normalized earnings and FREE cash flow over our investment horizon.

Qualcomm, a leading semiconductor and communications technology company, was among the largest contributors for the quarter. Shares recovered as management indicated that the inventory adjustments and production constraints resulting from higher memory costs were progressing largely as expected and that handset revenues from Chinese customers were expected to reach a bottom. As we noted last quarter, we believed these headwinds to be cyclical rather than structural and did not alter our long-term investment thesis. The company also continued to make progress on its long-term strategy of evolving from a handset-centric company into a broader provider of connected computing technologies. Automotive revenue reached another record high, while Internet of Things (IoT) and newer businesses such as AI-enabled PCs, industrial applications, and data center computing continue to represent a growing portion of the company and remain central to its long-term diversification strategy. We believe Qualcomm’s technologies will continue to benefit as connectivity expands across devices and AI workloads increasingly extend from the cloud to the edge, supporting Qualcomm’s ability to generate strong levels of FREE cash flow in the long run.

Recent Portfolio Activity

During the quarter, we sold our positions in Danaher, Dolby Laboratories, and Tokyo Century and purchased Techtronic Industries and Wal-Mart de Mexico.

We first invested in Danaher, a company focused on biotechnology, life sciences and diagnostics, in the first quarter of 2016, attracted by its disciplined capital allocation, differentiated operating culture, and consistent FREE cash flow generation. The business is distinguished by a portfolio of market-leading franchises and a high mix of recurring consumables revenue tied to a large installed base. Its differentiated operating culture, anchored by the Danaher Business System (DBS), has historically enabled the company to be a highly effective acquirer, consistently integrating new businesses, expanding margins, and driving strong FREE cash flow generation. Over our decade-long holding period, Danaher successfully transformed itself from a diversified industrial company into a more focused healthcare business. This evolution included the spinoffs of Fortive, Envista, and Veralto, as well as the acquisition and integration of key assets such as Pall, Cepheid, and Cytiva. The company also increased the contribution from recurring revenue and workflow-based solutions embedded in customer operations, which contributed to the durability and predictability of the business.

More recently, as Danaher has shifted further into more complex, innovation-driven end markets, the application of DBS appears to be less differentiated than it was in Danaher’s traditional manufacturing-oriented businesses. Success in these new end markets is increasingly driven by scientific innovation, faster product cycles, and more specialized customer requirements. At the same time, increased scale and a more centralized organizational structure appear to be limiting flexibility at the business unit level, reducing the speed and effectiveness with which opportunities can be pursued. While we continue to view Danaher as a high-quality business, we believe much of our original investment thesis has now been realized, with fewer company-specific catalysts ahead. Accordingly, we elected to exit the position and redeploy the proceeds into what we view as more attractive opportunities.

We first invested in Dolby Laboratories, the creator and licensor of audio and imaging technologies, in the first quarter of 2022. We were attracted to Dolby’s asset-light licensing model, trusted brand, strong intellectual property portfolio, and deep relationships with both content creators and device makers. We believed Dolby would benefit from the growing demand for more immersive entertainment experiences, allowing the company to extend its technology into new use cases. During our ownership, Dolby executed well in several respects: increasing adoption across content and devices, expanding into newer end markets such as autos and gaming, adding to its patent portfolio, and maintaining the high-margin, cash-generative financial profile that first attracted us. However, adoption has not translated into the level of earnings growth we initially expected. As a result, while we continue to view Dolby as a high-quality franchise and will monitor its monetization efforts, we believe the remaining catalysts lack the visibility and timing we require, and exited the position.

We first invested in Tokyo Century, the Japan-based provider of leasing and specialty finance solutions, in the third quarter of 2024. The company benefits from a diversified platform across equipment leasing, specialty finance, automobility, and global financing, as well as its strategic relationships with partners such as NTT, Itochu, and CSI Leasing. We also saw attractive catalysts in aviation leasing through Aviation Capital Group, IT leasing through CSI Leasing, and data center-related investments. During our ownership, Tokyo Century continued to benefit from favorable aircraft leasing conditions, including tight aircraft supply, rising lease rates, and improved aircraft values, while its broader leasing franchise remained supported by scale, a strong balance sheet, and diversified revenue streams. However, as we reassessed the Global Equity portfolio, we concluded that a more direct investment in Itochu, which owns roughly 30% of Tokyo Century, together with a new investment in Techtronic, offered a more attractive use of capital. Given this overlap and the clearer catalysts we see in these opportunities, we elected to exit Tokyo Century and redeploy the proceeds.

Techtronic Industries Co. Ltd.

Headquartered in Hong Kong, Techtronic Industries (“TTI”) is a global manufacturer of power tools, outdoor power equipment and related accessories. The company operates primarily through two flagship brands: Milwaukee, which serves professional tradespeople, and Ryobi, which targets the DIY and light professional market (including handymen and maintenance professionals whose needs fall between homeowners and full-time trades). Over the past decade, TTI has transformed itself into one of the leading players in the global power tool industry, driven by sustained innovation and disciplined brand investment.

Milwaukee has been the primary growth engine, expanding from approximately $450 million in sales in the early 2000s to roughly $10 billion today. The brand has gained meaningful share in professional trades through a focus on productivity, safety, and battery-powered innovation. Ryobi remains a leading DIY platform, supported by a long-standing distribution relationship with Home Depot, TTI’s largest retail partner.

TTI continues to benefit from the long-term industry transition from corded, gas-powered, and pneumatic tools toward battery-powered platforms. The company’s strategy of maintaining backward compatibility across battery generations has reinforced customer loyalty and created a durable installed base across both Milwaukee and Ryobi ecosystems.

High-Quality Business 

Some of the quality characteristics we have identified for TTI include:

• Leading positions in professional and DIY power tools through the Milwaukee and Ryobi brands, supported by strong brand equity, deep engagement with professional tradespeople, and a track record of consistent product innovation;
• A powerful battery ecosystem strategy, with over 110 million M18 and 65 million M12 batteries in circulation and backward and forward compatibility across generations, creating switching costs and repeat purchases across hundreds of compatible tools;
• Ongoing investment in research and development, enabling consistent product innovation, market share gains, and expansion into adjacent product categories; and
• Deep retail partnerships, particularly with Home Depot, reinforced by dedicated in-store sales representation and merchandising support

Attractive Valuation 

We believe shares are attractively valued relative to our estimate of intrinsic value. Our analysis reflects the growing contribution of the Milwaukee franchise, which now represents the majority of operating profit, and the benefits of continued mix shift toward professional products, as well as stabilization of underperforming segments. In addition, as recent investment spending normalizes, we expect FREE cash flow to increase to levels that we believe are not fully reflected in the current share price.

Compelling Catalysts

Catalysts we have identified for TTI, which we believe will cause its stock price to appreciate over our three- to five-year investment horizon, include:

• Continued mix shift toward the higher-margin Milwaukee brand, which has grown from 18% of total sales in 2010 to approximately two-thirds today;
• Geographic expansion of the Milwaukee brand outside the United States, where market share remains below North American levels, and introduction of the Ryobi platform into additional markets such as Latin America and Australia;
• Expansion into adjacent professional categories, including personal protective equipment and modular tool storage systems, thereby increasing wallet share within the professional customer base; and
• Improvement in operating profitability through turnaround of underperforming segments and greater cost discipline.

Wal-Mart de Mexico SAB de CV

Founded in 1952 and headquartered in Mexico City, Wal-Mart de Mexico (“Walmex”) is the largest retailer in Mexico and Central America and a key subsidiary of Walmart Inc., which retains a majority ownership stake. Walmex operates more than 3,800 stores across multiple formats—Bodega Aurrerá (discount stores and the company’s fastest-growing format), Walmart Supercenter (big-box retail), Sam’s Club (membership warehouse), Walmart Express (small supermarkets), and other discount outlets—giving it a uniquely diversified presence across the consumer landscape.

This multi-format approach serves a wide spectrum of customers and shopping occasions—from everyday essentials and large family baskets to convenience and premium purchases. Bodega Aurrerá, for example, has become a household name across Mexico and now represents roughly half of the company’s stores, while Sam’s Club caters to membership customers seeking bulk purchases and higher-ticket items. Together, these formats provide Walmex broad market coverage, geographic reach, and strong brand loyalty across urban centers, suburban communities, and regional towns.

In recent years, the company has significantly expanded its omnichannel ecosystem, investing in e-commerce, logistics, and digital services to enhance convenience and deepen customer engagement. E-commerce is ~8% of total sales, supported by strong growth in online grocery and third-party marketplace offerings. Complementary platforms, such as Cashi (digital payments), BAIT (mobile telecom), and Walmart Connect (digital advertising), extend Walmex’s reach into financial and digital services, strengthening customer ties and building new revenue streams.

High-Quality Business 

Some of the quality characteristics we have identified for Walmex include:

• Dominant scale advantages with over 3,000 stores in Mexico, making it the clear market leader in food and general merchandise retail;
• Diversified and resilient revenue base, with a meaningful percentage of sales from grocery—providing recurring traffic and stable cash flow—complemented by general merchandise, fuel, pharmacy, and membership-based services;
• Strong returns on invested capital (~18%), supported by consistent execution and capital discipline; and
• Support from Walmart Inc., which provides access to global best practices, digital tools, and procurement efficiencies.

Attractive Valuation 

We believe Walmex is attractively valued relative to its long-term normalized earnings power. In our view, the market underappreciates the company’s ability to grow revenue through ongoing store expansion and strengthen margins and FREE cash flow generation through efficiency gains, scale benefits and continued growth in higher-margin channels, such as private label and e-commerce.

Compelling Catalysts

Catalysts we have identified for Walmex, which we believe will cause its stock price to appreciate over our three- to five-year investment horizon, include:

• Expansion of private label penetration (from mid-teens to mid-20s), which should improve profitability and customer loyalty;
• Further development of the e-commerce platform, with Walmex aiming to become a one-stop shop by combining online grocery and a third-party marketplace, supported by digital tools adapted from Walmart U.S.;
• Disciplined store expansion, with current plans to add approximately 1,500 new stores across Mexico and Central America over the next five years, extending reach and scale advantages; and
• Leadership continuity, as newly appointed interim CEO Cristian Barrientos, a veteran Walmart executive with more than 25 years of experience, provides operational stability and maintains focus on profitable growth during the leadership transition.

Conclusion

As we look ahead, the global backdrop remains complex. Geopolitical developments, central bank decisions, and changes in investor risk appetite can all influence returns over shorter periods, but these factors are difficult to forecast with consistency. Rather than position the portfolio around macro outcomes, we continue to focus on the businesses we own and the actions management teams are taking to increase value over time.

Our investment process centers on the three pillars of Quality, Valuation, and Catalysts. We seek companies with strong competitive positions, capable management teams, financial resilience, and identifiable opportunities to improve profitability and FREE cash flow. While markets can move quickly from one theme to the next, we believe owning high-quality businesses at attractive valuations remains the best way to create value for clients over the long term.

Markets Review

The U.S. equity market rebounded during the second quarter and reached new all-time highs, with the S&P 500 Index rising 15.20% during the period. Surging demand for artificial intelligence (AI) processing power and expansive capital expenditure plans continued to support AI-related businesses, which drove a substantial portion of benchmark returns and contributed meaningfully to earnings growth. Fixed income markets also advanced, as the Bloomberg U.S. Aggregate Bond Index increased 0.67%.

Sources: CAPS CompositeHubTM, Bloomberg
Past performance is not indicative of future results. Aristotle Atlantic Focus Growth Composite returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross returns will be reduced by fees and other expenses that may be incurred in the management of the account. Net returns are presented net of actual investment advisory fees and after the deduction of all trading expenses. Please see important disclosures at the end of this document.

On a sector basis, ten of the eleven sectors within the Russell 1000 Growth Index posted gains in the second quarter of 2026. The strongest-performing sectors were Information Technology and Industrials. The weakest sectors were Energy and Consumer Staples.

Market leadership remained narrow and increasingly tied to the AI infrastructure buildout. Significant investment in semiconductors, memory and data center infrastructure continued to benefit a concentrated group of companies. While these themes supported benchmark returns, they also contributed to significant dispersion beneath the surface, as many resilient, cash-generative businesses outside the AI infrastructure ecosystem did not participate to the same degree.

Geopolitics remained a key source of market uncertainty during the quarter. Peace negotiations between the U.S. and Iran proved volatile, with the reopening of the Strait of Hormuz, nuclear commitments, asset sanctions and regional economic development as primary points of discussion. An interim understanding between the two countries helped establish a ceasefire framework and restore maritime shipping in the region. However, tensions remained elevated, as both sides accused the other of violations, contributing to renewed U.S. strikes on Iran.

Against this backdrop, oil prices were volatile and continued to put upward pressure on inflation. The Consumer Price Index rose 4.2% for the 12 months ended May, compared with 3.8% for the 12 months ended April. Despite elevated inflation, real GDP growth accelerated, the unemployment rate remained stable at 4.3%, and consumer confidence improved in June from May’s record low. Given these conditions, the Federal Reserve maintained the target range for the federal funds rate as the Committee continued to balance its dual mandate of maximum employment and price stability.

Performance and Attribution Summary

For the second quarter of 2026, Aristotle Atlantic’s Focus Growth Composite posted a total return of 19.01% gross of fees (18.88% net of fees), outperforming the 16.74% total return of the Russell 1000 Growth Index.

Source: FactSet
Past performance is not indicative of future results. Sector attribution shows how much of a portfolio’s overall return is directly attributable to stock selection and asset allocation decisions within the portfolio, highlighting which sectors contributed or detracted to the total return. Attribution includes the reinvestment of income. Attribution is presented gross of fees and does not include the deduction of all fees and expenses that a client or investor has paid or would have paid. Please refer to the gross and net composite returns included within to understand the overall impact of fees. Please see important disclosures at the end of this document.

During the second quarter, the portfolio’s outperformance relative to the Russell 1000 Growth Index was due to security selection, while allocation effects detracted. Security selection in Health Care and Information Technology contributed the most to relative returns. Conversely, security selection in Communication Services and Consumer Staples detracted the most.

Contributors and Detractors for 2Q 2026

Relative contributors and detractors are based on attribution total effect and exclude benchmark securities not held in the portfolio.

Contributors

KLA Corporation

KLA Corporation contributed to performance in the second quarter, benefiting from the AI-driven WFE upcycle and reinforcing its position as the leading process control beneficiary of rising semiconductor manufacturing complexity. The company’s quarterly results highlighted the broad-based strength across process control, specialty process tools and advanced packaging tied to AI logic and high-bandwidth memory (HBM). Management raised its long-term outlook, underpinned by process control market share that has expanded to approximately 58%, over 4x its nearest competitor, as rising chip complexity (GAA, advanced nodes, HBM stacking) continues to lift process control intensity as a share of fab spend. This positioning was further validated in June, as Samsung and SK Hynix’s $515-$518 billion capacity expansion plan to double South Korean DRAM output drove strength in KLA’s shares, reinforcing the read-through from accelerating WFE spend (~$145B in 2026 toward ~$250B by 2028) directly into the company’s process control business.

Guardant Health

Guardant Health contributed to performance in the second quarter following a string of positive developments, as several catalysts played out during the quarter. These developments include FDA approval of an updated version of the Guardant360 liquid biopsy test, American Cancer Society inclusion of the company’s Shield test for colorectal cancer screening, and a report of stronger-than-expected first quarter earnings driven by volume growth and coverage expansion.

Detractors

Netflix

Netflix shares detracted from performance in the second quarter following a series of failed large-scale M&A bids that raised concerns about the company’s organic growth trajectory. The pursuit of both Warner Bros. Discovery and Roku signaled that management may be increasingly reliant on inorganic levers to sustain engagement and revenue growth, weighing on the P/E multiple. Headwinds were compounded by lower subscriber engagement due to a weaker content slate and disappointment that management did not raise full-year 2026 guidance during its first quarter 2026 earnings call in April.

Darling Ingredients

Darling Ingredients detracted from performance in the second quarter as the market digested outsized gains in Darling’s stock during the first quarter of 2026. In the second quarter, Darling announced better-than-expected earnings and raised full-year guidance. Several commodity-based indicators tied to Darling’s earnings drivers, including fat prices, renewable diesel margins and renewable identification numbers (RINs), remained supportive of the company’s earnings outlook for the remainder of 2026 and into 2027.

Recent Portfolio Activity

The table below shows all buys and sells completed during the quarter, followed by a brief rationale.

Buys

Amphenol

Amphenol is one of the world’s largest designers, manufacturers and marketers of electrical, electronic and fiber optic connectors and interconnect systems; antennas; sensors and sensor-based products; and coaxial, high-speed and specialty cable. Based on recent reports of industry analysts, the company estimates that worldwide sales of interconnect and sensor-related products were approximately $250 billion in 2024, reflecting continued growth driven by data communications, electrification, and aerospace and defense demand. The company aligns its businesses into three reportable business segments: (i) Harsh Environment Solutions, (ii) Communications Solutions and (iii) Interconnect and Sensor Systems. The company sells products to customers in a diversified set of end markets.

Our view on Amphenol centers on its diversified exposure across automotive, aerospace, defense, information technology datacom, mobile networks, industrial and other end markets, which provides resilience while positioning the company to benefit from multiple long-term growth themes. The company is a consolidator in a fragmented interconnect market, supported by a global manufacturing footprint, disciplined acquisition strategy and a track record of integrating deals that expand capabilities in fiber optics, defense interconnects, cable solutions, active optics and building connectivity. Its decentralized operating model, cost discipline, strong incremental margins, high returns on invested capital and equity, and robust free cash flow can support profitability and earnings growth. We believe demand from AI data centers and cloud infrastructure is a major growth driver, with Amphenol now spanning the full data center signal path across copper, power, fiber and optics, while broader electrification, factory automation, Industrial Internet of Things adoption, defense modernization and aerospace electronics provide additional multi-year demand tailwinds. Together, these factors can create a resilient, high-quality growth profile supported by disciplined capital allocation and continued opportunities for organic and acquisition-driven expansion. Amphenol trades above its recent historical valuation range after re-rating on the strength of its AI and data center business, as well as strong execution. We view the premium as justified given the company’s long record of trading at a meaningfully higher earnings multiple than the broader market. The main drivers of future valuation will likely be the durability of AI and data center growth, the pace of recovery in industrial demand, and continued value creation from acquisitions.

Coherent

Coherent is a vertically integrated manufacturing company that develops, manufactures and markets lasers, transceivers, and other optical and optoelectronic devices, modules, and systems, as well as engineered materials, for use in the communications, industrial, instrumentation and electronics markets. The company has broad technical expertise and a deep technology stack in areas of importance to its products. This includes materials growth and fabrication of specialty materials, semiconductor lasers and passive optics, including isolators, transceivers, transport equipment, higher-powered lasers for semiconductor capital equipment, display manufacturing, precision manufacturing and scientific research. Many of Coherent’s products include custom integrated software that it develops internally, leveraging the company’s deep domain expertise.

We believe Coherent offers a compelling long-term investment thesis as AI data centers shift from electrical copper connections to optical networking, creating a structural multi-year growth opportunity across scale-out, scale-up and data center interconnect applications. The company benefits from vertical integration across key photonic components, expanding indium phosphide manufacturing capacity, a geographically diversified and U.S.-centered supply chain, and a strategic partnership with NVIDIA that validates its position in co-packaged optics for next-generation data center architectures. In addition, Coherent has a large and expanding addressable market, a high-margin industrial business with recurring service and replacement revenue, and a portfolio streamlining program that reallocates investment toward higher-growth opportunities while using divestiture proceeds to reduce debt and support earnings growth.

Sandisk

We initiated Sandisk as a complementary picks-and-shovels investment opportunity tied to the AI memory bottleneck, with hard disk drives and flash memory now capacity-constrained inputs for AI data center expansion. These components are shifting away from commoditized consumer technology inputs, and we believe Sandisk can benefit from stronger pricing power, multi-year customer agreements, higher earnings and potential valuation multiple expansion.

Sandisk is a global developer and manufacturer of flash memory storage solutions headquartered in Milpitas, California, following its spinoff from Western Digital in February 2025. The company serves enterprise data centers, personal computers, smartphones and consumer devices through products including enterprise solid-state drives, client solid-state drives, embedded mobile storage, and branded removable and retail storage. Sandisk manufactures through its Flash Ventures joint venture with Kioxia, giving it access to advanced three-dimensional flash memory production at low-cost, capital-efficient economics, while retaining vertical integration in controller and firmware intellectual property, supported by a large patent portfolio. The company is increasingly focused on higher-value storage demand tied to AI data center growth.

We see Sandisk offering leveraged exposure to the AI-driven memory bottleneck, as flash memory and enterprise solid-state drives shift from commoditized components to strategically constrained inputs for data center growth. The investment case rests on stronger and more visible demand from hyperscale customers, improved industry supply discipline, multi-year customer agreements that provide floor-protected revenue, and a cleaner standalone structure following the separation from Western Digital. The company also benefits from its long-standing Flash Ventures partnership with Kioxia, which provides a cost and capital advantage, while new data center platform qualifications, high-bandwidth flash optionality and geopolitical support for trusted supply chains can create additional paths for earnings growth and valuation multiple expansion.

We believe Sandisk trades at a valuation that appears reasonable given improving earnings expectations, stronger AI memory demand and rising pricing power. We believe disciplined supply, contracted demand and a debt-free, cash-returning balance sheet should reduce earnings volatility and support a higher valuation over time.

Western Digital

We initiated Western Digital because we view the company as providing picks-and-shovels exposure to the AI memory bottleneck, with hard disk drives and NAND flash memory now serving as capacity-constrained inputs to AI data center buildout. These components are no longer commoditized inputs in consumer technology goods, and we see both Western Digital and Sandisk benefiting from stronger pricing power and multi-year customer agreements, resulting in upward earnings inflection and multiple expansion.

Western Digital is a pure-play developer and manufacturer of hard disk drives and data storage solutions focused on high-capacity storage for cloud and AI infrastructure. Following the February 2025 separation of its flash memory business into the independent company Sandisk, Western Digital has become one of the leading suppliers of nearline hard disk drives used by hyperscale cloud service providers to store large volumes of data economically. The company is vertically integrated across key components such as recording heads and magnetic media, operates a global manufacturing and testing footprint, and supports its product roadmap with advanced recording technologies and a large patent portfolio. With only three remaining global hard disk drive manufacturers and two scaled industry participants, Western Digital operates in a consolidated and supply-disciplined market that benefits from growing demand for AI data storage.

We believe Western Digital represents a compelling investment opportunity as hard disk drive demand shifts from a personal computer-driven cycle to a durable AI and cloud infrastructure growth story. The company benefits from a structurally improved industry with limited competition, disciplined capacity, multi-year customer agreements and rising pricing power as hyperscale customers prioritize secure storage supply for rapidly expanding data needs. This stronger market backdrop can translate into higher margins, improved earnings visibility, significant free cash flow generation and increased shareholder returns through dividends and share repurchases. With limited capital investment requirements, a cleaner balance sheet and sustained demand for economical mass storage, we believe Western Digital is positioned to compound earnings and cash flow over multiple years.

Western Digital Corporation has earned a higher valuation because its business profile has shifted from a cyclical hardware supplier to a more disciplined, cash-generative infrastructure company with stronger demand visibility. Continued growth in data storage needs, improved pricing power, durable margins, modest reinvestment requirements and meaningful shareholder returns support further earnings and cash flow compounding over time.

Sells

HubSpot

We sold HubSpot because its core value proposition—an easy-to-use, all-in-one go-to-market platform—is becoming increasingly replicable by AI-native agents that can autonomously manage prospecting, lead nurturing and pipeline workflows without the need for a dedicated SaaS layer. HubSpot’s SMB-heavy customer base is especially price-sensitive and more exposed to churn as lower-cost AI-native alternatives emerge, creating risk to both net revenue retention and new logo growth. With the stock still valued for durable double-digit growth, we view the risk/reward as skewed to the downside.

Outlook

The equity markets in the second quarter increased mid-teens on the strength in technology and related companies tied into the AI infrastructure spend. Interest rates rose slightly for the quarter, as inflation continues to run above the Federal Reserve’s target level. There was a sizable decline in energy-related equities on the pullback in energy commodity prices. We view equity valuations on forward earnings expectations as reasonable, as the growth in earnings has continued to surprise to the upside. The economic data points to a moderately growing economy with lingering inflation, putting the Federal Reserve on hold with a bias toward a rate increase in the latter half of the year. The conflicts in Iran and Ukraine will continue to drive uncertainty, especially in the energy commodity space. Our focus will likely continue to be at the company level, with an emphasis on seeking to invest in companies with secular tailwinds or strong product-driven cycles. 

Five years ago, one of our portfolio managers (PMs) made an inaugural trip to Iceland. The PM was fascinated by the lundi, Icelandic meaning a puffin species of bird. We wrote about these tough (yet quite cute!) flying creatures in our January 2022 edition of The Essence. Their heartiness and extraordinary lives, mostly out at sea, exemplified a part of Aristotle Capital’s process of studying how businesses “weather” tough conditions. COVID was still impacting most countries – yet Iceland was largely spared – while its duration and consequences were not fully known.

Fast forward to 2026 and this same PM set out to replicate what was a unique journey. This time, however, a more circuitous route was taken. First through London to meet with some portfolio companies, then north to Ireland and Scotland. Then on to the Scottish Highlands and through the Faroe Islands as a last stop before Iceland. These 18 islands (population no more than 54,000 on a crowded day) are a self-governing part of Denmark, sitting between Iceland and Norway in the North Atlantic Ocean. This is where our PM met Dánial Hoydal, Founder and CEO of Faer Isles Distillery.

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