2025 Q1 Client Investment Commentary

Market Updates and Insights

S&P Price Index

• U.S. stock valuations are approaching historic highs, comparable to the late 1990s internet boom and bust period.
• Over the last five years, the S&P 500 has experienced significant growth. Based on historical patterns, returns over the next 5-10 years are expected to be lower.

Magnificent 7 Stock Performance

• Over the last decade, tech-growth stocks, including the Magnificent 7, have driven market returns.
• Since June 2024, there has been a shift away from these stocks toward value stocks such as consumer staples, energy, and financials.
• In 2025, the Mag 7 stocks are no longer dominating returns, which could signal the early stages of a tech stock bubble burst similar to the dot-com boom of the late 1990s.

International Markets

•  International markets have been outperforming U.S. markets, with strong returns across Europe, Asia, and emerging markets.
• These markets are now attracting more investment, and their valuations are expected to rise.

Strategies

Diversifying S&P 500 Exposure

• We are reducing our exposure to the Mag 7 stocks to protect against the possibility of a tech stock bubble burst.
• By investing more evenly across the S&P 500, we aim to improve long-term returns and safeguard the wealth built during recent market booms. 

Buffer ETFs

• To further protect client portfolios, we have begun implementing Buffer ETFs. These investments help reduce downside risk while maintaining the potential for upside growth.

International Investments

• We are gradually increasing our exposure to international stocks, carefully selecting countries with strong returns, including Japan, parts of Europe, and select emerging markets like Argentina.

Risks to Be Aware of

China

• China's economy poses a significant risk due to demographic challenges, looming tariffs, and extensive debt.
• Its stock market has remained flat for two decades, with further declines possible.

Housing Market

• The housing market remains resilient despite 7% mortgage rates and the Airbnb boom, which has contributed to rising home prices.
• A millennial home-buying surge could drive demand but may have negative long-term effects on affordability and prices.
• For clients with mortgage rates of 3% or less, we recommend continuing to invest rather than paying off the loan. Investment returns are likely to outpace mortgage interest rates, helping to build long-term wealth.

Labor Market

• Widespread layoffs, particularly in federal jobs, signal a weakening labor market.
• The Fed must balance inflation control with employment stability:
  • Strong labor market = Higher inflation
  • Weak labor market = Declining prices

Extended Valuation

• U.S. stock valuations are nearing historic highs, echoing the late 1990s tech boom.
• We are shifting client portfolios away from overvalued stocks into international stocks, small-cap stocks, Buffer ETFs, and structured notes to mitigate downside risk and capture growth opportunities.