2025 2nd quarter investment bulletin
EXECUTIVE SUMMARY
Economic uncertainty in Q1-2025, followed by tariff-driven global trade policy has markets in retreat.
The severity and duration of tariffs and US global trade policy will dictate near/long term effects on corporate earnings.
The unstoppable rise of the Magnificent 7 stocks has turned as those companies lead the sell-off.
Interest rates on bonds declined, leading to price gains.
Volatility presents an opportunity for patient, long-term investors.
Tariffs, Trade and Earnings
The recent tariffs imposed by President Trump have sent shockwaves through markets, stirring fears of economic instability on a global scale. More extensive and severe than initially anticipated, the markets are repricing the prospects of growth and a prolonged decline in earnings.
It is estimated that 40% of corporate earnings in S&P 500 companies derive from global trade. Levies on China have exposed vulnerabilities for those companies particularly dependent on global manufacturing like Apple and Nvidia amongst others.
In addition to stifling growth, the tariffs are also stoking fears of affecting supply chains, increasing consumer pricing and inflation.
The market reaction this week was swiftly negative as you can see from the chart below.
Decline of The Magnificent 7
The incredible rise of growth stocks in the Nasdaq and specifically the Magnificent 7 helped to drive the market higher for more than two years. However, as discussed in our Q1-2025 Investment Bulletin, that push higher also introduced significant over-valuation in those stocks relative to their earnings. The headwinds of tariffs and declining global trade have investors re-casting expectations for growth and the Mag 7 stocks are leading the market in decline.
The chart below shows the 1st quarter performance of the Magnificent 7 (red), the S&P 500 (orange) and then the 493 stocks outside of the Magnificent 7 (green).
Fixed Income Adds Stability
While the S&P 500 has garnered most of the headlines, the bearish sentiment of investors has increased the demand for stable assets driving interest rates down and bond prices up. As evidenced in the chart below, fixed income has been a stabalizing force for portfolios and a lone bright spot of perfromance.
Current Positioning, Outlook & Opportunity
For our loyal readers of the Compass Investment Bulletin, the chart below should look farmiliar. We reference it frequently as one of our go-to measurements of stock price valuation. It depicts the S&P 500 (light blue line) plotted against reported corporate earnings (dark blue). As you can see the S&P has fallen and is becoming more aligned with earnings. As the lines converge, the market is becoming more fairly valued. The key going forward will be tracking the impact to earnings as the tariffs take hold.
After the run-up in markets during 2023 and 2024, our portfolio rebalancing in Q4-2024 generally reduced stock exposure for most clients based on our concerns over valuation. Conversly, as we see the sell-off in the stock market deepen, we are taking a longer-term view and opportunistically buying into the markets in small increments. Based on recent events we have re-forecasted our potential entry points and will be patient as more tangible economic data becomes available.