A Rocky Start

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Equity market weakness experienced during the first quarter got materially worse at the beginning of the second quarter, when President Trump declared a national emergency on April 2nd, in an effort to address the large trade deficits between the United States and its trading partners.  This declaration, made under the International Emergency Economic Powers Act, allowed the president to impose increased tariffs on a wide range of imports, as the administration cited concerns about unfair trade practices and their impact on the U.S. economy, national security, domestic manufacturing and job growth.  Trump referred to April 2^nd as “Liberation Day” and vowed to retaliate against any countries who failed to work with the U.S. to either reduce or suspend their tariffs against us.

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As for the details, a blanket 10% duty was applied on imports from all trading partners. Further, country-specific tariffs were announced, targeting countries that the Administration deemed to be the most egregious offenders of fair-trade policies. Certain goods like semiconductors, some raw materials, pharmaceuticals, etc. were exempt, although rhetoric throughout the quarter indicated that nearly everything was up for debate.

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One might ask, “how did this fly with our trade partners?” The response? Not very well! Within days, China announced 34% tariffs on U.S. exports, which in turn, provoked the U.S. to raise China import duties to 84%, eventually rising to 125%. Similar, although less severe, reactions occurred from other trade partners. A reasonable follow-up question might be, “how did the stock market react to this game of “tariff one-upmanship?” The response? Once again, not very well! Over the course of just a few days, the broad-based Standard & Poor’s 500 (S&P 500) fell by more than 12%, a decline not seen since the early days of the Covid-19 outbreak in March 2020. However, all of this proved to be the “storm before the calm.”

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Plenty to Worry About, Yet Cooler Heads Prevailed

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Flash forward, and the S&P 500 ended the quarter rising by 10.95% despite conflicts in the Mideast, continued aggression between Russia and Ukraine, and a Moody’s downgrade of the U.S. credit rating from Aaa to Aa1, due to growing deficits and interest costs. Further, the University of Michigan’s Consumer Sentiment Index, while registering improvement in June over May’s dismal reading, remains about 18% lower than in December 2024, reflecting ongoing economic concerns.

So, what drove the market higher? Although there were several factors, in our view, the primary driver of the rally off the April lows was President Trump’s announcement of a 90-day pause on the April 9 steeper, country-specific tariff increases. While the 10% baseline tariff remained in place, the higher “reciprocal” tariffs were suspended, delaying their implementation until early July, and subsequently extended to August 1. While the revised dates might merely be “kicking the can down the road,” investors cheered the news, sending the stock market to an all-time high by month-end.

Yes, the temporary pause in the implementation of elevated tariffs helped greatly, but there were additional reasons investors bid shares higher, in our opinion. Listed below are what we believe to be contributing factors to the strong market in the second quarter.

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·       Dovish Fed Pivot – By late May, Fed officials openly indicated that they would entertain the notion of cutting interest rates in the second half of 2025 if inflation continues to cool off. The prospect of lower rates is the fuel that powers the equity market, particularly growth stocks. While the Fed has adopted a “wait-and-see” approach to interest policy based on economic data, consensus forecasts call for two rate cuts this year, commencing in September.

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·       Prospects for a Soft Landing – Things have been relatively good on the economic front. Inflation has been cooling; labor markets have been steady – not overheating – and wage inflation has not been a problem. These are all positives, and U.S. GDP growth for the second quarter is estimated at 2.6%, according to the Federal Reserve Bank of Atlanta’s GDPNow Model. This rate represents what the growth would be if it continued for a full year. Modest growth and tame inflation – approaching the Fed’s 2% target – is often referred to as a “goldilocks” economy, which could potentially set the stage for a market-friendly monetary policy.

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·       Corporate Earnings – Eagerly anticipated first quarter earnings reports, particularly in the Information Technology sector, exceeded analysts’ expectations. In many cases, companies raised full-year guidance, signaling confidence in current business conditions. Commentary about AI (Artificial Intelligence) investment, whether related to software or infrastructure, continues to capture headlines, and anecdotal evidence points toward revenue generation and cost savings resulting from AI usage. It’s worth noting that there was a broadening of earnings growth in the first quarter to other sectors, including Industrials, Financials, and Healthcare.

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·       Lots of Dry Powder – There is plenty of additional cash on the sideline waiting for a home. In May, BlackRock CEO, Larry Fink, noted that part of the $11 trillion in U.S. money market funds, in addition to €12 trillion placed in European bank deposits, could be directed toward equities. Investor psychology can’t be underestimated, and as markets rise, individuals (retail and institutional) often suffer from FOMO (Fear of Missing Out). Of course, some of these funds might be parked to merely capture higher yields, rather than for immediate investment.

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Our Strategy in the Current Environment

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In a nutshell, we are picking our spots with great discipline, since volatility has been extreme. More recently, we have seen outsized and unwarranted reactions by investors that stemmed from headlines rather than fundamentals, creating asymmetric risk/reward opportunities, based on our analyses. In a dynamic environment where news is often released via “tweetstorm,” one must be ready to act quickly and decisively. For example, in our SMID-Core strategy, when the news cycle focused on automobile tariffs, we capitalized on the temporary weakness in shares of an online automotive marketplace that stood to benefit from more dealers gravitating to their platform in uncertain times. In our All-Cap Equity ex-MLPs portfolio, when questions were raised about the pace of AI capital spending, we added to our position in a high-quality company that provides critical services for power and electrification projects related to the growing infrastructure in the U.S. and internationally. With a large backlog of existing projects and new projects announced, the shares recovered sharply, and quickly.

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The same can be said for stocks we own that possess defensive characteristics, traits that should help them exhibit good relative performance when markets become extremely volatile. During periods of great market stress, investors frequently adopt a “risk-off” mentality, flocking to more conservatively oriented equities. When this phenomenon occurs, these stocks become “crowded trades,” raising valuations to levels that we believe are inconsistent with their long-term prospects. We’ve seen two such instances recently in the Communications Services sector, and trimmed our holdings to more reasonable levels, aiming to redeploy the assets to more attractive opportunities. We are keenly aware of the adage, “good companies don’t always make good stocks,” and prefer to focus on valuation.

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An Eclectic Approach

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It is often said that “concentration creates wealth, but diversification maintains wealth.” We believe an investor can have it both ways – but not without the benefit of having a long-term approach and plenty of patience. For clients who have been with us since 2011, when we launched our All-Cap ex-MLP strategy, they understand this concept well. It is our opinion that the calendar is indeed an investor’s best friend! As asset managers, we must be cognizant of manias, panics, fads, and other psychological conditions that can drive up/down asset prices yet always remain levelheaded. While we are exposed to nearly all of the stocks that represent “The Magnificent Seven,” our positions are moderate in size, so that we can participate in the upside, yet be cushioned by our other (non-correlated) holdings during a sharp market break.

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Across both of our strategies, we maintain a diverse group of holdings ranging from defense contractors to insurance brokers to entertainment companies… and plenty in between. Much is written in the investment media about “compartments,” or “buckets.” These terms refer to categories such as small-cap, large-cap, growth, value, and scores of other categories.  We prefer to use a bottom-up approach and focus on individual opportunities that we believe offer an attractive risk-reward profile, regardless of sector, industry, or market cap.  We are constantly searching for companies whose stock prices represent a disconnect between perception and reality, hoping to identify today’s underdogs that win tomorrow’s popularity contests.

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We look forward to communicating our thoughts to you in our next quarterly correspondence. As always, we appreciate your trust. For questions, please contact:

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Marshall Kaplan, mkaplan@ingalls.net 212-269-0264

Rochelle Wagenheim, rwagenheim@ingalls.net 212-269-0265

Michael Nelson, mnelson@ingalls.net 212-269-9785

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The material included herein is not to be reproduced or distributed to others without Ingalls & Snyder, LLC’s (the “Firm”) express written consent. This material is being provided for informational purposes and is not intended to be a formal research report, a general guide to investing, or as a source of any specific investment recommendations and makes no implied or express recommendations concerning the manner in which any accounts should be handled. Any opinions expressed in this material are only current opinions and while the information contained is believed to be reliable there is no representation that it is accurate or complete and it should not be relied upon as such. Any investment program involves certain risks, including loss of principal, and no assurance can be given that a certain desired investment objective will be achieved.

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The Firm accepts no liability for loss arising from the use of this material. However, Federal and state securities laws impose liabilities under certain circumstances on persons who act in good faith, and nothing herein constitute a waiver or other limitation of any rights that an investor may have under Federal or state securities laws. For additional information about the investment manager, please refer to Form ADV Part 2.

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