Q3 2026 Investment Letter

Q3 2026 Letter - A Quieter Quarter

U.S. stock markets ground higher during the third quarter, although it was a much quieter tape than the second quarter. The Federal Reserve raised interest rates for the first time since 2023, inflation reaccelerated with the latest CPI reading at 3.7%, and oil climbed back toward $100 a barrel as the conflict in the Middle East disrupted the Strait of Hormuz. Despite all of that, corporate earnings remained strong and the market finished the quarter near record highs. Beneath the surface, however, breadth was poor. The advance belonged to a handful of large companies while the average stock, small caps, and bonds all lost ground. We continue to believe selectivity matters more than usual in this environment.

Quarterly Performance

Seaside Private Capital (SPC) finished the third quarter up 2.19%, essentially in line with the S&P 500 total return of 2.30% and slightly ahead of the index on a price basis at 2.03%. Year to date we are up 10.46% versus 12.73% for the S&P 500 total return, so we are lagging on the year and there is no sense sugarcoating that. The damage was done in the second quarter, when the market ripped higher while we were adding to our enterprise software holdings as they sold off hard on AI disruption fears. The third quarter was a partial recovery. Gains across our software holdings and Global Payments were largely offset by UnitedHealth, which gave back part of its strong first-half run, and by our equal-weight index position as market leadership narrowed again.

The longer-term picture remains intact. Since inception on 12/31/22 the Fund is up 148.66% versus 109.84% for the S&P 500 total return, or 27.49% annualized for the Fund versus 21.85% for the S&P 500 TR. We are measured on that record, not on any single quarter.

A Quieter Quarter

After a transformative 2025, in which we completely revamped the portfolio around long-term compounders, this was a deliberately quiet quarter. There was no selling during the quarter. Our only purchase was increasing our position in ServiceNow, which now stands at 14% of the portfolio. At quarter end we held six equity positions plus a 1% cash position, so we are essentially fully invested.

Our current holdings at quarter end were: UnitedHealth Group (NYSE: UNH) 19%, Global Payments (NYSE: GPN) 19%, Invesco S&P 500 Equal Weight ETF (NYSEARCA: RSP) 19%, Adobe Inc. (NASDAQ: ADBE) 17%, ServiceNow (NYSE: NOW) 14%, Salesforce Inc. (NYSE: CRM) 12%, and Fidelity Government Cash Reserves (NASDAQ: FISXX) 1%.

Q3 Market Update

The S&P 500 closed the quarter at 7,651.54, up 2.03% on a price basis and 11.78% year to date, finishing less than 2% below its August 13 record close. That headline number hides a difficult quarter for most investors. The Dow declined 2.70% during the quarter, the Russell 2000 fell roughly 7.5%, and the U.S. Aggregate bond index lost about 3.5%. Energy was the strongest sector as crude rose roughly 30% during the quarter.

The main story was rates. On September 16 the FED hiked the federal funds rate by 25 basis points to 3.75% - 4.00%, its first increase since July 2023, and its projections pointed to at least one more hike before year end. Inflation drove the decision. Headline CPI rose to 3.7% year over year in September, up from 3.4% in August, with gasoline accounting for more than half of the monthly increase. Core inflation, at 2.6%, was much better behaved. This looks to us like an energy shock working its way through the headline data rather than broad-based overheating, but the FED cannot ignore it, and neither can we. The 10-year Treasury yield surged from roughly 4.4% to 5.29% during the quarter, above 5% for the first time in roughly two decades. That is real competition for equities.

The labor market, meanwhile, is cooling without cracking. Unemployment has held in a tight 4.1% - 4.3% range since March, although September payrolls came in at only 29,000 jobs. Hiring has stalled; layoffs, so far, have not started.

What kept the market afloat was earnings. Second quarter earnings came in well above expectations and S&P 500 profits are up nearly 30% over the past year. Earnings, not expanding multiples, did the work this quarter. In fact, valuations have come down meaningfully as profits outran prices, which is the healthiest way for a bull market to digest high starting valuations. With the midterm elections on November 3 now directly ahead of us, we expect plenty of headline volatility.

Portfolio Update for Q3

UnitedHealth Group (NYSE: UNH) - 19%. UnitedHealth reported second quarter results on July 16 that were a clean beat. Adjusted EPS was $6.38 versus $4.08 a year earlier, revenue was $112.0 billion, operating earnings rose 55% to roughly $8.0 billion, and the medical care ratio improved to 86.7%. Management raised full-year adjusted EPS guidance for the second time this year, to $19.50 - $20.00. The stock hit its high for the year in July and then gave back ground through August and September, finishing the quarter down. The issue is the shape of the year: guidance leaves only about $5.89 - $6.39 of earnings for the entire second half, less than the second quarter earned on its own, and much of the second quarter strength came from $860 million of favorable prior-period reserve development, which will not repeat on schedule. Membership is also shrinking on purpose. Management is pricing for margin rather than defending share, with Medicare Advantage membership expected to decline by over 1 million members this year and Medicaid margins still negative. We think that is the right trade. We would rather own a smaller, properly priced UnitedHealth than a larger, mispriced one. This was the same mispricing problem that hurt earnings in 2025, and it gets repriced again at the start of next year.

Since the close of the quarter, UnitedHealth reported third quarter results on October 13, and they were encouraging. Adjusted EPS was $4.69 versus roughly $4.14 expected, the medical care ratio was 88.4%, Optum Health operating earnings swung to $735 million from just $41 million a year ago, and management raised guidance for the third time this year, to at least $20.50. The turnaround under Stephen Hemsley continues to track ahead of where we expected it to be.

Global Payments (NYSE: GPN) - 19%. The second quarter was Global Payments' first full quarter operating as a pure-play commerce solutions provider, having completed the acquisition of Worldpay and the divestiture of Issuer Solutions. Adjusted net revenue was $3.16 billion, up 4% on a normalized basis, adjusted EPS rose 12% to $3.46, and normalized operating margin expanded 70 basis points to 42.0%. Management did trim the full-year outlook to reflect a roughly 100 basis point headwind from the Middle East conflict on its travel portfolio, and now expects normalized revenue growth of approximately 4% - 5% and adjusted EPS of $13.60 - $13.80. The margin expansion target of roughly 150 basis points was maintained, as was the plan to return more than $2 billion to shareholders in 2026; $1.2 billion was already returned in the first half, including $550 million of buybacks in the second quarter alone.

At the quarter-end price of roughly $82, the stock trades at approximately 6 times the midpoint of this year's adjusted EPS guidance. For a business growing earnings at a low double-digit rate, expanding margins, and buying back stock at this pace, we think that is far too cheap. The honest risks are execution and leverage. The Worldpay integration has to work, and the balance sheet now carries roughly $17 billion of net debt. That is the debate on this stock, and we are comfortable being on our side of it.

Invesco S&P 500 Equal Weight ETF (NYSEARCA: RSP) - 19%. As we have discussed before, in the absence of enough attractively priced individual companies we will allocate capital to a market index, and we deliberately do it on an equal-weight basis. The ten largest companies now make up roughly 39% of the cap-weighted S&P 500. We do not want that much of the Fund riding on a handful of AI names. RSP cost us during the third quarter, declining roughly 2% while the cap-weighted index gained 2.03%, as leadership flipped back to the mega-caps in mid-September after the average stock had led for most of 2026. We accept that trade. RSP did its job earlier this year when breadth was better, and over a full cycle we believe the diversification it provides is worth the quarters where it lags a narrowing market.

Adobe Inc. (NASDAQ: ADBE) - 17%. Adobe reported record fiscal third quarter revenue of $6.76 billion, up 13% year over year, with non-GAAP EPS of $6.13, up 15%. Total ending ARR was $27.50 billion, and AI-first ending ARR exceeded $650 million, growing more than 150% year over year. The company also passed one billion monthly active users across its businesses. Management raised full-year guidance to revenue of $26.58 - $26.63 billion and EPS of $24.45 - $24.50. The stock still sold off after the report because fourth quarter revenue guidance of $6.8 - $6.85 billion came in a hair below expectations and net new ARR declined as Adobe pushes its freemium strategy, trading near-term ARR for a much larger base of users to convert over time.

Two other developments during the quarter are worth noting. On September 3 Adobe announced that Shantanu Narayen, who has led the company for nearly two decades, will move to Executive Chair, with Anil Chakravarthy becoming CEO effective December 1. Chakravarthy is an internal appointment who has run the digital experience business, and we view an orderly, inside succession as a positive rather than a disruption. Adobe also completed its acquisition of Topaz Labs during the quarter, adding AI image and video enhancement tools to the creative stack.

The bear case on Adobe is that AI tools, including increasingly capable free clones of its creative software, will erode the moat. We take that threat seriously, but at the quarter-end price Adobe traded at roughly 10 times forward earnings, against a five-year average multiple in the mid-30s, while still growing revenue at 13% with a 44% operating margin and a $25 billion buyback authorization. The market is pricing in a great deal of disruption that has not yet shown up in the numbers.

ServiceNow (NYSE: NOW) - 14%. The fundamentals and the stock have been telling two completely different stories. Second quarter results, reported July 22, were a beat-and-raise across the board: subscription revenue of $3.88 billion, up 24.5% year over year and 150 basis points above the high end of guidance, total revenue of $3.99 billion, current RPO growth of 21.5% in constant currency, and a renewal rate that held at 98%. AI annual contract value crossed $1 billion, with net new AI ACV up more than 40% sequentially, and management raised full-year subscription revenue guidance to roughly $15.77 billion. The stock fell after the report anyway, on a third quarter subscription guide that landed just under $4 billion and on near-term margin pressure from rising AI usage and the Armis integration. The shares ended the quarter still down on the year and well below their 52-week high, even though the underlying growth never broke.

Since quarter end, Servicenow has boucned back nicely and we are up ~60% on our position. We still believe the company is highly undervalued. ServiceNow reports third quarter results on October 28, and that print will be an important check on both organic growth and AI monetization as consumption pricing is pushed toward 2027.

Salesforce Inc. (NYSE: CRM) - 12%. Salesforce was our strongest performer during the quarter. Fiscal second quarter results, reported August 26, showed revenue of $11.35 billion, up 11% year over year, cRPO of $33.5 billion, up 14% in constant currency, and the strongest net new annual order value growth in four years with attrition near record lows. Agentforce ARR topped $1.5 billion, up more than 240% year over year, and combined Agentforce and Data 360 ARR reached nearly $3.9 billion. Customers consumed 3.2 billion Agentic Work Units during the quarter, up 97% sequentially. That is real usage, not pilot activity. Management raised full-year fiscal 2027 revenue guidance to $46.10 - $46.40 billion.

One number in the release deserves an asterisk, and we will give it one. Headline non-GAAP EPS of $5.90 included roughly $2.53 per share of gains on Salesforce's strategic investments, principally its stake in Anthropic. The underlying run rate is closer to the $3.42 - $3.44 the company guided to for the third quarter. The quarter was good enough without the investment gain, and investors should underwrite the business on the operating numbers. Late in the quarter Salesforce also won the HMRC contract in the UK, a deal reported at up to £2.4 billion including VAT over 10 years covering more than 39 million citizens, and signed a definitive agreement to acquire Listen Labs, an AI customer research company. The pace of acquisitions, Fin and Loops among them, is something we are watching. Salesforce spent years earning a reputation for improved capital discipline, and we do not want to see the old, deal-hungry Salesforce return. For now, the core case is intact: AI is expanding what customers will pay Salesforce for, rather than replacing it, and the "end of software" narrative that punished this stock earlier in the year has not come true.

Fidelity Government Cash Reserves (NASDAQ: FISXX) - 1%. Our cash position is minimal. After spending 2025 holding as much as a third of the portfolio in cash, we are now essentially fully invested in positions we understand at prices we found attractive. That cuts both ways. If the volatility we expect around the midterms and the next FED meeting creates dislocations, we will have to fund new purchases from existing holdings rather than from cash on hand.

Concluding Remarks

This was not a quarter for big decisions, and we think that is fine. The portfolio we rebuilt in 2025 is the portfolio we want to own: a concentrated group of high quality compounders bought at prices well below where they have traded historically, a large equal-weight index position to keep our mega-cap concentration in check, and very little cash. Our holdings are, in aggregate, far cheaper than the index. Global Payments trades at roughly 6 times adjusted earnings, Adobe at roughly 10 times forward earnings, and Salesforce and ServiceNow have both de-rated sharply this year despite double-digit and mid-20s growth, respectively.

The risks from here are clear enough. Rates are rising, not falling, and a 5.29% 10-year Treasury competes with equities in a way it has not in decades. An energy-driven inflation problem can get worse before it gets better, and hiring has slowed to a crawl. Against that, earnings are growing strongly, our companies are generating large amounts of cash, buying back stock, and in most cases raising guidance. We remain focused on our 3-5 year horizon for each position and will let the businesses, not the headlines, tell us when a thesis has changed.

Earnings season for the portfolio is now upon us, with UnitedHealth already reported, ServiceNow on October 28, Global Payments on November 5, and Salesforce and Adobe in December. We will report back after the fourth quarter.

Sincerely,

Daniel Fas

Founder & CIO at Seaside Private Capital