The market continued to rebound in May as volatility returned to normal levels and market sentiment recovered from President Trump’s tariff-induced scare. The market rally was fueled by the three months pause on the proposed draconian Reciprocal tariffs announced on Liberation Day and the subsequent accumulation of evidence that the final outcome of bilateral trade negotiations is likely manageable. As the market climbs this “wall of worry”, markets are closing in on prior peaks. The S&P 500 Index has climbed over 18% from the April low and it is now flat year-to-date.
This recovery has been swift as extreme fear was replaced by green shoots of hope about trade and a recognition of the economy’s underlying strength. The economic data has been better than feared supported by continuing labor market stability and declining inflation. Businesses too are generally doing better than feared. Although, the 2025 estimates for the S&P 500 index continue to trend lower, they still represent 6% year-over-year growth[1].
Perspective Around Tariffs
Over the last month we have engaged in numerous discussions regarding the potential economic impact of tariffs. No one knows, including us, the outcome of all the ongoing bilateral trade negotiations. We can surmise only that the outcome will be lower than the Reciprocal tariffs proposed and higher than the prior status quo of around 3%. During this Reciprocal tariff pause, the overall average effective tariff rate on imported goods is 17.8%, according to Yale University’s Budget Lab[2]. They estimate that inflation will increase in the short run by 1.7% resulting in a -0.7% drag on Real GDP.
The key takeaway is the likely range of outcomes on tariff policy with our global trading partners is manageable. There will be some sectors significantly harmed, such as shoes and apparel, however many other sectors will navigate these changes with minimal impact. One of the primary drivers is that imported goods comprise just 14% of GDP. In other words, most of the economy has no direct impact from higher tariffs. However, we expect there to be a smaller, more manageable ripple effect that will affect nearly all sectors of the economy. The key word here is “manageable”.
From an investment perspective, whatever the outcome of these new tariffs, we too can navigate. This is one of the key reasons that we invest in powerful secular growth themes. Such themes include artificial intelligence, cybersecurity, electrification and remilitarization possess powerful tailwinds of demand. Our global approach also provides geographical diversification to economies, such as India and Japan.
Putting Tariff Reform in Context
While the outcome of the push to restructure global tariffs remains unclear, it is likely useful to put these tariffs in context. Tariffs are a piece of the Trump Growth Agenda, and we think is useful to frame it as such. Despite the oft-seeming chaotic pace at which the Trump Administration is proceeding, we believe the Trump Growth Agenda is being executed along an intentional time frame set forth below. We believe that while Stages 1 and 2 are ongoing, the Administration has moved into Stage 3.
Stage 1 in the Trump Growth Agenda was unleashing DOGE on the Federal Government. In anticipation of his “Big, Beautiful Bill” and related deficit spending, the Trump Administration needed to generate budget savings. DOGE’s efforts to uncover and eliminate wasteful spending were a necessary pre-condition.
Stage 2 focused on raising tariff revenues. Increased tariff revenues further improve the optics of the “Big, Beautiful Bill”. April saw a doubling of Customs Receipts (i.e., tariff collections) but there is no clarity on tariff revenue on an ongoing basis as the final rules are not in place[3].
Stage 3 is the “Big, Beautiful Bill”. This spending bill does two things. Firstly, it extends the 2017 tax cuts, which is necessary to avoid a deep recession. Secondly, it cuts taxes further and provides significant tax incentives for physical investments, such as building factories. Parallel to this bill, the Trump Administration has received pledges this year from 54 companies to open or expand production facilities. President Trump’s recent visit to the Middle East was also a part of this strategy. The “Big, Beautiful Bill” will likely add fiscal stimulus to the economy if and when it gets through the Senate. We will have to wait and see what is in the final bill.
Stage 4 is deregulation. Removing restrictions that put unnecessary impediments on economic expansion. This strategy worked for Margaret Thatcher and Ronald Reagan. It is too soon to know how this will take shape and how much impact such actions will have, but deregulation tends to stimulate economic growth.
The Trump Growth Agenda is ambitious. The goal is to accelerate economic growth and ultimately de-lever the nation’s balance sheet. Success will not come overnight nor is it guaranteed. For investors, there are many considerations to assess as the agenda is executed. The range of outcomes is wide, and we will adjust accordingly.
Portfolio Positioning
Last month we wrote:
“There is a scenario where the market sees a V-shaped recovery and we need to be just as prepared for that scenario as an adverse one.”
- Lear Monthly Newsletter, April, “Trump vs the World”
In short, we were prepared for a market rally, as our strategies have performed well. Today, however, we think the “easy money” has been made and the market may struggle in the coming weeks as we learn more about the specific impacts of tariffs. Certain sectors are particularly at risk, so it is imperative to be selective. As we discussed on our last webinar, we see more upside opportunity in Technology and commodity-driven stocks. In fact, the more we use AI ourselves, the more convinced we become that AI is the most disruptive technology we have ever seen. The capabilities are mind blowing and the models keep getting better. Furthermore, Agentic AI promises to drive our productivity even higher. This points to our Electrification, AI and even copper holdings to being in a strong position to benefit as AI applications evolve.
Commodities have continued to be an effective hedge for our strategies. Our positions in gold and gold miners have benefited from the dollar weakening and when tariff fears increase. New fears about budget deficits could further fuel this hedge. Our uranium exposure is finally getting rewarded. There is no question that nuclear power generation is the cleanest, most efficient way to generate the enormous additional power needed over the next decade. Exposure to copper through a copper miner is a more recent addition poised to benefit from growing global electricity grids and data center expansion. These commodities will potentially benefit from significant increases in future demand and constrained supply.
From a shorter-term trading perspective, this is a market where you are rewarded for taking the other side of market sentiment. For instance, President Trump has a penchant for making aggressive tariff asks only to quickly walk them back. Last Friday, he announced 50% tariffs on the EU and the market did not like that. Over the weekend, he “paused” them, and the market rallied on Tuesday. We have seen this pattern several times now.
Conclusion
To reiterate another statement from last month, the hardest part of investing is not de-risking portfolios during market pullbacks, it is knowing when to add back risk. This is where our proprietary research and investment process allows us to excel. Every big market pullback stems from an event that creates a dramatic, negative shift in sentiment. Quickly diagnosing the issue and creating a framework for taking more risk is paramount. Accomplishing this requires keeping one’s composure when everyone else is losing theirs. The recent sell-off is a great example of why this is important in helping investors achieve their financial goals.
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.
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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.