As we reach the mid-point of the year, it is worth pausing to reflect on the remarkable path the stock market has traveled. The year began with a solid economy still juiced with post-election euphoria. Then DeepSeek and tariff uncertainty took hold. In January, the revelation of DeepSeek’s R1 AI model torpedoed the crowded AI trade. Stocks exposed to AI were sold indiscriminately. In April, the Trump Administration’s reciprocal tariffs ignited concerns of stagflation. Fears of recession and inflation drove the market down further. At the bottom, which was marked by the pause in the reciprocal tariffs, the S&P 500 had declined 19% from its prior high. The Magnificent 7 had declined 30%.
“Uncertainty” was the word of the day and, as with every market pullback, the naysayers came out in droves and fretted about the economy. Warnings of tariff-induced inflation became the clarion call. Consumer sentiment dropped to all-time lows. We, on the other hand, saw opportunity and it has significantly benefited our clients.
What We Told You…
In March, we warned about politics infecting your investing mindset. We also urged you to stay invested even heading into Liberation Day because you could miss one of the biggest up days. Sure enough, on April 9th the S&P 500 jumped 9.5% - the third biggest single day gain since World War II. In our early April Market Strategy webinar, we pondered “What Could Go Right?” and cited that the economy was still fundamentally strong, tariffs may not be as bad as feared and noted that the Big Beautiful Bill and increasing deregulation could fuel a strong 2026. We also turned positive on technology stocks and began adding back exposure. Later in April, we published a newsletter that applied the negotiation framework from President Trump’s book “The Art of the Deal” to present day trade talks and declared that peak uncertainty had been reached. This could not have been more accurate.
…Translated into Performance[1]
The purpose of reflecting on our previous comments is to demonstrate how we think and how this thinking translates into performance. As we exit June, our flagship Global Vigilance strategy, which has a balanced, moderate risk profile, is up over 12% for the year – outperforming the S&P 500 which is up just 5%. Our more aggressive equity strategy Tilt is up 20% this year. These returns were achieved by applying our research to tactically managing portfolio risk and excellent stock-picking.
The charts below plot our Global Vigilance and Tilt strategies indexed against the S&P 500 this year. Not only have both strategies outperformed, but they did not decline as much during the market pullback. At the market bottom on April 8th, the S&P 500 was down -15.3% for the year. Global Vigilance and Tilt only fell -7.8% and -10.3%, respectively. Our risk management process was effective in protecting portfolios during the pullback.
Since the market bottom, our strategies have outperformed as the market has recovered. As the S&P 500 has rallied 23%, Tilt has increased 34% and Global Vigilance has added 22% - not bad for a strategy with over 30% allocated to fixed income and cash[2]. I noted in recent newsletters that re-risking portfolios during periods of heightened uncertainty is much more difficult than de-risking as uncertainty is building. Being tactical like that requires experience and an investment process that has been tested. It also takes mental discipline to rely on data not emotions and the courage to buy when everyone else is selling.
So, What’s Next?
The market has recovered and is now at record highs. It would not be surprising to see a pause or pullback for no other reason than profit-taking as investors head to the beach. Valuations have recovered as shown in the chart below. The solid line represents the forward price-to-earnings (“PE”) ratio for the Magnificent 7. Today, the PE is in line with its historical average. Given the powerful tailwinds from themes like AI, cloud computing and cybersecurity, we believe there is still room for multiple expansion. The dashed line represents the PE for the “Other 493” stocks in the S&P 500 index. Currently, that PE is near the high end of its historical average indicating that valuations are stretched. As we have discussed in prior research, should the economy weaken, or trade deals fail to materialize these stocks are more likely to face headwinds. So, we would be a bit more careful here. Although, there are plenty of individual stocks that remain attractive.
Stocks tend to work higher when earnings estimates increase. As shown below, one of the attractive characteristics of the Magnificent 7 is the consistency of higher earnings revisions. Also notable, the “Other 493” have experienced a rebound in their earnings estimates. Given its inclusion of cyclical sectors, the economic growth scare this Spring led estimates lower only to turnaround after a better-than-expected earnings season. As we move into the July earnings season, the bar will be higher, and it may mean a pause in upward earnings revisions.
While there are plenty of reasons why the market should take a breather, there are several potentially positive catalysts in the coming weeks that could fuel a further rally. First, the reciprocal tariff pause end date (July 9th) is approaching. Commerce Secretary Howard Lutnick commented recently that a trade deal with China is complete (although no details were provided) and there are ten agreements with major trading partners set to be announced imminently. The details of such deals may further reduce uncertainty and enable businesses to better assess tariff implications. Investors call this “boxing” a problem.
Second, the Big Beautiful Bill looks likely to pass. While its final form is not fully known, it will at least extend the 2017 Trump tax cuts. Failure to do so would dramatically increase personal taxes and create enormous economic headwinds. The bill, however, looks like it may create additional tax breaks that could further stimulate the economy.
Third, there could be more deregulation announcements. President Trump campaigned on reduced regulations. Financial services is one sector where we believe such deregulation could have a materially positive impact. Recently, the enhanced supplementary leverage ratio was relaxed, and we would expect more announcements like this that will promote bank lending growth and higher capital returns to shareholders.
Conclusion
The volatility of the last few months has provided an opportunity to showcase how we tactically manage our strategies. It is rewarding to outperform in both the drawdown and the recovery. It does not always happen this well, but the intention is always present. To achieve our clients’ financial goals, we must first protect their irreplaceable wealth and then grow it by taking an appropriate amount of risk for the moment. Tactical management when done right should produce higher returns per unit of risk.
Performance (as of June 30, 2025)
Disclosures
LIM is an Investment Advisor based in Dallas, Texas and registered with the Securities and Exchange Commission. Registration does not imply a certain level of skills or training. LIM is a company with purpose, dedicated to creative and unique thinking. We focus on portfolio valuation and research, along with superior client experience. We seek to identify investment opportunities by looking at economic factors, security valuation and human behavior. We start with the fundamentals of portfolio management and valuation. Then we build on these fundamentals with unique thinking and creative intelligence gathering to form a viable investment thesis. We believe this approach leads to dynamic global portfolios with increased return and managed risk. LIM utilizes Charles Schwab & Co. Inc. (“Schwab”), a FINRA-registered broker-dealer, member SIPC, as its custodian of assets. LIM is independently owned and operated and not affiliated with Schwab.
Additional disclosures:
This document may contain forward-looking statements based on LIM’s expectations and projections about the methods by which it expects to invest. Those statements are sometimes indicated by words such as “expects,” “believes,” “will” and similar expressions. In addition, any statements that refer to expectations, projections or characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Such statements are not guaranties of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual returns could differ materially and adversely from those expressed or implied in any forward-looking statements as a result of various factors.
This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results.
Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.
This document is a general communication being provided to you for information purposes only. This communication is educational in nature and not designed to be a recommendation for any specific investment product, strategy, plan design feature or any other purpose. By receiving this communication, you agree with the intended purpose described above. Any examples used in this material are completely hypothetical and for illustration only. The document is for the sole use of the person to whom it is addressed and is privileged and confidential. Use by anyone other than the addressee is strictly prohibited.
Definitions
The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market-value weighted index (stock price times number of shares outstanding), with each stock’s weight in the Index proportionate to its market value.
The Nasdaq Composite Index is a market cap-weighted index, representing the value of all stocks listed on the Nasdaq Stock Market. The composition of the Nasdaq Composite is a mix of long-established companies that have been on the exchange since inception, to IPO newcomers, companies that grew from OTC exchanges or switched from other exchanges.
The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.
The Bloomberg US Aggregate Index is a broad-based flagship benchmark that measures the investment grade, US dollar-dominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, mortgage-backed securities (agency fixed-rate pass throughs), asset-backed securities and commercial mortgage-backed securities.
The S&P 500 Equal Weighted Index is the equal-weight version of the S&P 500. The index includes the same constituents as the capitalization weighted S&P 500 index, but each company is allocated the same fixed weight at each quarterly rebalance.
The Russell 2000 Index is comprised of the smallest 2000 companies in the Russell 3000 Index, representing approximately 8% of the Russell 3000 Index total market capitalization.