2025 Q2 Update

Happy April! While we’re only 25% of the way through the year, it feels like we’ve had several years’ worth of market mood swings already. Well, we have…but that is also because the last several years have been abnormally calm. Investors’ recency bias could be making things seem more sensationalized than they are from a historic standpoint. But then again, maybe not. Time will tell, but throughout the first 3 months of 2025, markets oscillated between cautious optimism and outright panic. Overall, the start of 2025 ushered in a risk off mode for domestic equities at the headline level as the S&P 500 notched its worst quarter since 2022.[1] It was the first time since the onset of the pandemic in March 2020 that bonds rose and stocks fell in a 3-month period.1 Looking outside our borders; 2025 has thus far seen non-U.S. stocks generally outperform domestic shares as capital appears to be rotating abroad following several years of American market outperformance. At large, we believe the recent weakness in domestic stock indices can be attributed to the following drivers:

• Increased uncertainty surrounding global trade. This has led to a sharp deterioration in forward looking economic data as both consumer and business sentiment has quickly dropped.

• Growing concern that the recent capital expenditure boom surrounding Artificial Intelligence has peaked. The massive technology-based firms have spent tremendous amounts of money on a rush into A.I and, at present, the profitability outlook across the space has become less clear.

Having outlined the big picture set up above let’s dive a bit deeper into the current economic/market set up as we at Sollinda see it:

• The 2025 sell off has been most pronounced among the stocks that had, until recently, been the market’s biggest drivers. Chipmaker Nvidia Corp. has seen its shares tumble 28% from the January peak.1 Microsoft Corp., Amazon.com Inc. and Alphabet Inc. and Meta Platforms Inc. have all fallen 20% or more from their own records.1 At its peak in February, the Nasdaq 100 had more than doubled from a December 2022 low. While the average valuation in the index has fallen to 24 times estimated profits from 27 times last month, prices remain elevated relative to the 20-year average of around 20 times.1 A range of companies throughout the market are currently relatively undervalued and far less exposed to a roll over in the AI spending cycle as compared to the massive technology names.

• Following a few years of negative returns, U.S. government fixed income has had a strong start to 2025. Yields have risen notably from the post covid lows and although inflation remains somewhat elevated, relative to the pre pandemic period, treasuries now offer yields at multi decade highs.1 Furthermore, domestic government bonds have once again started to produce strong diversification benefit having appreciated as stocks have declined year-to-date.

• Non-U.S. equities at large have had a several year horrible run of relative performance as tremendous growth from American mega cap companies and an appreciating United States dollar have pulled capital into the U.S. stock market. Adding to this is the fact that various types of investors inside our country have steadily divested from non-U.S. stocks. This could be changing as certain key factors that supported U.S. equity outperformance could be in the early stages of reversing. Historically this pendulum has swung both ways in large cycles.

Before looking ahead, we must first strongly emphasize that all efforts are made to eliminate political bias from our role as investment managers. To recognize opportunity and manage risk across our strategies we diligently strive to look at the specific inputs devoid of personal political beliefs. With that necessary disclaimer out of the way…Here are some key themes on our strategies at large:

• Coming into 2025 we made a defensive pivot across our more tactical strategies as domestic policy uncertainty was expected. We have also been highly cognizant to not be overweight mega cap growth stocks as valuations had become historically stretched. As the so called “sentiment data” has deteriorated we have shifted focus to the domestic labor market in order to gauge if and when the economy could start to roll over. Our outlook remains flexible as information comes in, but our data models suggest a more defensive posture is currently warranted regarding domestic stocks.

• This year, we have started to shift our fixed income to longer duration U.S. government bonds as yields look historically attractive on both absolute and relative basis. In addition, we believe these types of investments could appreciate markedly if the economy does in fact roll over into a recession. We are avoiding comparatively risky credit as we believe the potential reward is not worth the risk at this point in the economic cycle.

• Non-U.S. stocks have become increasingly interesting as we feel that recent polices out of Germany to increase fiscal stimulus could provide a tailwind to equities on the continent. Key policy changes and market flow dynamics in both America and abroad could be catalyzing a regime shift like what occurred at the turn of the century when non-U.S. stocks experienced a multi-year outperformance versus domestic shares. If this is in fact the case, we are in the first inning and can continue to patiently evaluate this opportunity across our strategies.

This year has already reminded us that when all else fails, markets love a good plot twist! Whether it’s just small changes amplifying the drama or a genuine shift in the economic tides, time will be the ultimate narrator. We can’t be certain how the rest of the year will turn out, but we’re confident our data-driven process will continue to lead us in the right direction. For now, we’re grateful to navigate these choppy waters alongside you, harnessing data over dogma to steer your investments through the storm. Thank you for entrusting us with your financial journey—we’re honored to serve you and occasionally marvel at the chaos together!

• Ryan Mumy, CFP® , CEO

• Justin Greenhill, CIO

[1] Source: Bloomberg