Spring 2025 Quarterly Commentary
Economic Perspective
Economic forecasting is not generally considered an “easy”job. It requires strong analytical skills, critical thinking and a solid understanding of economic theories, mathematics and statistics. Reported economic data, while useful, lacks certainty. It is often subjected to numerous revisions. We recently encountered a puzzling example of differing interpretations of data from two Federal Reserve member banks – the Atlanta Fed and the New York Fed. The Atlanta Fed’s GDPNow model recently forecasted negative economic growth (-1.8%) for first quarter of2025 whereas the NY Fed’s Nowcast forecasted strong economic growth (+2.7%)!How is this possible? Aren’t they the experts? We believe much of the difference can be explained by current policy uncertainty around tariffs. Will they be universal or reciprocal? Will they be short-term in nature with hopes of negotiating a trade deal? Or should we begin to factor in long-term price increases and possible stagflation? Is it any wonder economic heads are spinning, and the stock market is experiencing well above-average turbulence!
There have been a couple of positive developments in recent days that we would like to share. First,and most importantly, it seems as though all the negative public sentiment and economic uncertainty is beginning to force the administration’s hand a bit. It recently backed away from universal, across-the-board tariffs and replaced them with targeted(reciprocal) tariffs. In our opinion, this development is favorable (and its impact much more manageable) for both the economy and corporate profits. Additionally, targeting certain countries can lead to long-term mutually beneficial trade agreements. Secondly, using Treasury Secretary Scott Bessent’s own words, “the reprivatization of our domestic economy has begun” (less government-driven & less trade-driven)and it is beginning to attract significant direct investment into America.Recently, over $3 trillion of investment pledges have come from the likes of the United Arab Emirates ($1.4T), Saudi Arabia ($600B), Hyundai ($20B), Apple($500B), Taiwan Semiconductor ($100B) and several others. This is likely to positively offset some of the new administration’s tariff and government efficiency initiatives. With that said, the jury is still out as to the ultimate economic impact. The devil will be in the details, but we are cautiously optimistic as we await more clarity in the coming months.
Market Perspective
The late-February/early-March negative market sentiment and price action more than reversed much of our early-2025 gains. The Standard & Poor’s 500 Index corrected greater than 10% from previous market highs (February 19th) led by many of the Magnificent 7 names. It was the first stock market correction since October 2023. Importantly, the rotation away from the previous leaders led to corresponding strength into several out-of-favor areas of the market –including the value-style stocks, the healthcare sector and dividend payers. Asa result of the above-mentioned market action, the equal-weighted S&P 500Index outperformed the top-heavy, market capitalization-weighted S&P 500Index during the quarter. The last time that occurred was in calendar year 2022when the S&P 500 Equal Weight Index was down less than the S&P 500Composite Index. Interesting how that occurs during periods of market volatility, especially downward volatility!
The market’s current 2025 earnings growth estimates have declined from low double digits to high single digits due to tariff uncertainty. In our opinion,post-correction valuations have moved from ‘stretched’ to ‘more reasonable’. With earnings estimates having been reset and valuation multiples having experienced contraction, we are beginning to see abundant opportunities for our long-term investors. Therefore, with our ‘margin of safety’ much more favorable, if appropriate you could see the equity portfolio activity pick up over the near term.
Looking Ahead
Our team looks at the investment landscape through a top-down (macroeconomic) and bottom-up (fundamental) lens. We also follow Federal Reserve monetary policy very closely as changes in interest rates impact those top-down and bottom-up perspectives. Some investment experts, like economists, use that information to forecast all kinds of things. We do not. Instead, especially in times like these, we focus on a company’s ‘controllables’ – its balance sheet, revenue growth, pricing power, margins, cash flow generation, divided payout and capital allocation flexibility. By keeping it simple and focusing on individual companies and their fundamentals, we choose to avoid the noise affecting our economy and financial markets. It has served our clients well before and we will work diligently to ensure it will do so this time as well.