The movie “F1” starring Brad Pitt recently hit movie theaters. In the movie, Brad Pitt plays a former Formula 1 – or F1 – driving phenom whose career was derailed early, and he makes a comeback decades later. F1 is viewed as the “crème de la crème” of international motorsport as teams of drivers compete each season across over two dozen races for the championship.

F1 tracks have a unique design element known as chicane, where after a series of long straights there is a sequence of tight corners. For a sport that prides itself on drivers racing 200 miles per hour on average, why do this? The design is intentional to slow drivers, improve safety, and create opportunities.

Healthy markets, much like the thoughtful design of an F1 track, have long periods where the market grinds higher followed by episodic periods of volatility that help to recalibrate investor sentiment levels. The second quarter of 2025, much like the first, embodied these characteristics.

The first week of the second quarter saw the S&P 500 decline nearly 12% due to tariff fears¹. On April 9th, President Trump announced a 90-day pause on “reciprocal” tariffs, which fueled one of the fastest market recoveries in history.

The recovery from the April 8th low was the 4th strongest recovery in market history off a major index low as highlighted in the table below². The S&P 500 finished the quarter with a positive total return of +10.47%³.

Investors were rewarded for staying the course during the second quarter. While tariffs were at the forefront of the market’s angst, the conflict between Israel and Iran as well as the uncertain passage of the Big Beautiful Bill by Congress aided in investor uncertainty. The market found solace in:

• Corporate margins that continued to impress.

• A labor market that softened but is not soft.

• Lastly, a retail, or individual investor, who continued to “buy the dip” when stocks declined.

The corporate margin story may be underappreciated. Companies have shown the ability to expand margins - despite various headwinds – leading to new highs in the equity market. The COVID-19 period stress tested businesses and management teams who in turn learned to more effectively brace for slowdowns and potential recessions.

As we look forward to the future, the adoption and application of artificial intelligence should continue to allow companies to do more with less. While it is uncertain what that may mean long term for the labor market, from a purely financial perspective it likely will be profit margin accretive. As with any new technological revolution, bubbles will form in certain pockets of the AI story, so it will be important to be discerning as an investor. One theme we remain bullish on is the need for more, cost-effective power

Tariffs remain the most significant near-term overhang – and risk – to the equity market. Tariff impacts are felt at numerous levels. For corporations and businesses, it may slow down decisions on capital projects (ex: building a plant or factory) and lead to higher costs when sourcing materials from outside the US. For consumers, tariffs may lead to higher prices, which impacts a consumer’s willingness or ability to spend.

Uncertainty around tariff policy has made it difficult for the Federal Reserve who has adopted a “wait-and-see” approach. Higher structural levels of tariffs may put upward pressure on prices. Currently the market expects the Fed to cut interest rates by 0.50% by year-end, which feels appropriate³.

When the changes to tariff policy are ultimately known it will create a new set of challenges for companies, but challenges we’d expect to be successfully navigated over time. The S&P 500 is home to many of the best companies and management teams in the world. The CEOs, like the skilled drivers in F1, are adept at adjusting to the elements.

We are also encouraged by the expansion in market breadth and the resilience of the consumer. Market leadership has broadened – which is healthy - beyond technology and Magnificent 7 stocks to include other sectors, such as financials and industrials. Furthermore, while the consumer is more discerning on how or what they spend on, the important thing is they continue to have the confidence and ability to spend.

We found the brief period in April when the market sold off to be an exciting time to reposition our equity portfolio. Investors were indiscriminately selling everything, including high quality stocks. Our strategy was to reduce exposure to defensive sectors that performed admirably during the decline, such as consumer staples, utilities, and healthcare. Then rotate these proceeds – plus any uninvested cash – into harder hit sectors with better long term growth prospects, such as technology, financials, and industrials.

The summer months are typically characterized by heightened volatility and less robust returns due to the seasonality of market returns. Entering the second half of the year we find it advantageous to have dry powder, or cash, available given our expectation that volatility will persist – creating new opportunities.

We’ve navigated numerous tight corners in 2025 and more are ahead, but it’s critical to remember that over long periods these bouts of volatility are just that – inconsequential. It’s important to stay invested and allow investment returns to compound over long periods.

We appreciate your continued trust and confidence. Have a wonderful summer.

Bryce Goldbach, CFA®
Portfolio Manager& Investment Strategist
07/10/2025