In the 1st quarter, the S&P 500 returned -4.3%, the Aggregate Bond Index returned 2.6%, and assets under Upholdings’ discretion returned -5.0%.
Guessing Game
Lately, the S&P 500 has fallen in part because investors believe it will continue to fall. Stock prices move because of one of two things: a change in underlying earnings, or a change in the multiple used to value those earnings. Frequent changes to both is why prices are so volatile. Earnings usually grow, but frequent changes in sentiment make prices impossible to predict:
*Changes are annual year over year except for 2025 year-to-date
Changes in US tariff policies have dominated headlines. The US imports $4 trillion of goods and services annually and exports $3 trillion. Both are large numbers, but still just a fraction of $107 trillion annual output of the world’s economy. Businesses, especially smaller and more nimble ones, are adapting and growing in spite of these macroeconomic changes. While we think the most expensive companies in the S&P 500 should be avoided, we continue to find smaller US companies that are ripe for equity investment.
Actual Intelligence
A company is like a brain: many small actions and data points flowing between nodes, making decisions in real time. Before the internet, companies housed these systems in local, dusty server rooms. Then in 2006, Amazon launched Amazon Web Services (AWS), thus making storage and computing untethered to a company’s physical location.
Today, cloud systems are primarily offered by Amazon, Microsoft, and Google. Spending on these services exceeded $240 billion in 2024 with annual growth of more than 20%. But it takes more than storage and computing to run these systems: companies need real-time observability, anomaly detection, and visibility across multiple digital environments.
This is where Datadog comes in: the intersection of cloud adoption and operational intelligence. As companies move more infrastructure to the cloud, they need to monitor performance, detect failures, and optimize user experiences. Datadog’s tools are all built around these needs. And the company is regarded as the best in their field by both customers and competitors.
DataDog’s stock price was down 29% in the 1st quarter. The overarching fear is that companies are done investing in cloud systems and are shifting their budgets to new implementations of artificial intelligence. Based on our research, the concern that cloud spending is being permanently reallocated to AI is wrong. AI applications require even more complex infrastructure—making observability more essential, not less. Conversations with current Datadog users suggest AI will amplify, not replace, the need for their tools. Datadog’s stock:
*Changes are annual year over year except for 2025 year-to-date
While the market’s sentiment of DataDog may swing year to year, we expect their underlying earnings growth to continue at an abnormally rapid pace.
Social Impact
Donating to existing higher education institutions has the unintended effect of shrinking access to education. This quarter, we again supported Khan Academy.
Robert
Disclaimer
This letter is for educational purposes only. It is not a recommendation to invest in any particular security or strategy, since anything mentioned herein may be unsuitable for some investors. Speak with your financial adviser before investing. Upholdings cannot guarantee investment results. All investing involves risk, including the complete loss of invested principal.