Image Source: Pexels

Stocks had a strong third quarter, following a solid second quarter. In fact, the market hit new all-time highs for both the S&P 500 and the NASDAQ 100, driven mainly by mega-cap technology stocks, especially NVIDIA. However, as we move into the fourth quarter, there are signs that investors may be becoming cautious of the heavy spending by some of these mega-cap companies, as seen in their increasing CapEx numbers. This could potentially cause a negative shift in market sentiment toward these stocks.

As of the end of the third quarter, the Mott Capital Management Thematic Growth Strategy had gained 5.68% year to date, net of fees and inclusive of dividends. Over the same period, the S&P 500 Total Return Index, inclusive of dividends, rose 14.83%.

Mega-cap companies that we own, such as Microsoft, Alphabet and Amazon, have all increased their CapEx spending dramatically over the past couple of years to invest in artificial intelligence. While I’m a believer in the technology and have incorporated it into my daily workflow, I’m concerned that the level of spending and capital commitments could eventually weigh on these businesses’ overall cash flow. I fear the spending could become an ongoing, perhaps never-ending process, given the immense and continually growing demands for computing power and energy to deploy AI tools.

(Click on image to enlarge)

This has been a serious concern of mine since the beginning of 2025. As a result, I’ve continued to trim positions in the portfolio that have become overweight and maintain large CapEx budgets. During the quarter, I reduced the position in Alphabet to a 5% weighting.

(Click on image to enlarge)

This approach has also given me the flexibility to invest in new businesses and rotate into some out-of-favor parts of the market that may one day benefit from AI, but in different ways. As you know, in the second quarter, I added UnitedHealth and Zoetis to the portfolio. This quarter, I increased our Grail position to 5% of our portfolio.

Grail was spun off from Illumina last year, and as part of that spinoff we received fractional shares. I held onto those shares because I wanted to see the data release and evaluate the company’s progress in blood-based cancer detection tests. During this quarter we learned that the test results were positive and could potentially lead to FDA approval. As a result, I increased our position and look forward to watching this company grow in the coming years.

(It’s worth noting that when Illumina acquired Grail in 2021, it paid approximately $8 billion for it. The EU later compelled Illumina to spin off Grail over antitrust concerns. Currently, Grail’s market value is around $3 billion meaning it would need to more than double to match the valuation Illumina paid in 2021. While this change in assigned value is significant, it should not be taken as an indication of inherent weakness in the position, but rather as a reasonable market recognition that Grail will now have to pursue its product development on its own without the benefit of support from its former parent.)

Overall, I’m pleased with how the portfolio has evolved this year, though I don’t believe the work is finished, given that approximately 25% of the portfolio remains in cash. For that reason, I don’t plan to sell any additional positions for the rest of the year unless something unforeseen occurs. However, I would be more than happy to add new positions I’m monitoring should the right opportunities arise.

More By This Author:

Liquidity Pressures Remain Even As Stocks Rebound
The Real Reason Tech Stocks Are Tanking Right Now
Negative Gamma, Weak Momentum, And Liquidity Strain Drive Stocks Lower