The new normal
Soon after, the administration’s messaging turned more sanguine, suggesting that the proposed rates were not set in stone and were instead meant to be a starting point for trade negotiations. That was seemingly all the fuel the market needed for an abrupt rebound (up ~20% off the April 8th bottom), despite the fact that (a) few if any bilateral trade deals have been finalized, (b) passage of the One Big Beautiful Bill Act is (as of this writing) uncertain despite a self-imposed July 4th deadline, and (c) the United States has become entangled in the increasingly volatile conflict in the Middle East while efforts to broker a Russia-Ukraine truce have stalled. We will try to make sense of what’s driving the market higher below.
U.S. stocks, as measured by the S&P 500 Index, rose 11% in the second quarter, including dividends. International stocks, as measured by the MSCI All Country World Index ex-US, rose 12.3% in the quarter, including dividends. The continued rebound in international stocks is notable after years of underperformance and has been driven in part by compelling relative valuations as well as expansionary fiscal measures taken by large Western economies at a time when concerns about the U.S. seem to be growing.
From a valuation perspective, the S&P 500 Index currently trades at 22x forward earnings estimates, which remains well above its long-term average. International stocks, by contrast, trade at just 14x forward earnings.
One of Wall Street’s oldest axioms, “markets hate uncertainty,” seemingly did not apply in the second quarter, as the equity market brushed aside tariff questions, an increased likelihood of inflation, the prospects of perilously high national debt, and U.S. involvement in various wars. After falling nearly 20% from the peak in February, the S&P 500 Index rebounded and is up nearly 5% for the year – as it “climbs a wall of worry.”
Let us start with what was certain in the quarter: S&P 500 earnings grew by 13% in the first quarter, delivering double-digit growth for the second straight quarter and coming in nearly double Wall Street’s expectation of 7%. It is reasonable to consider that first quarter earnings were largely unimpacted by tariffs, but also worth noting that company management teams were aggressive in getting ahead of the issue, with >400 companies discussing potential tariff impacts on their quarterly conference calls. As a result, expectations were guarded heading into first quarter earnings reports, which took place during the second quarter. This set the market up for positive moves as results cleared a low bar. For now, it appears that another one of Wall Street’s oldest axioms, “stock prices follow earnings,” has won the day.
Nonetheless, tariff uncertainty remains, as evidenced by management teams widening or even withdrawing their full-year earnings guidance. That said, there were signs of progress in the quarter, most notably with China, as both sides agreed to a 90-day pause to reciprocal tariffs. The United Kingdom followed suit, with other major industrial economies expected to come to the table in the weeks and months ahead.
The market has similarly shrugged off the conflict in the Middle East, even the direct involvement of the United States. Without wading into geopolitics, the initial cease fire between Israel and Iran appears to be holding and suggests a potential path to a more permanent cease fire and stability to the region that may follow. This would be a clear positive for both domestic and international equity markets. While the Russia-Ukraine quagmire continues, it has been somewhat less impactful to the stock market thus far.
The thread that unifies these uncertainties is that the Trump administration begins discussions with extreme comments and proclamations, but results often land within traditional norms. Whether that strategy amounts to “chickening out” or “The Art of the Deal” is beside the point. The equity market appears to be learning to avert its eyes from headline uncertainty and focus instead on more certain results.
Outlook
In pursuing its reshoring agenda, the Trump administration led with aggressive tariff policies, a headwind for many businesses that the market has largely digested. Step two has the potential to be more stimulative: the One Big Beautiful Bill Act, with its mix of tax accounting changes and permanent tax cut extensions that should drive improving cash flow, particularly for small businesses. Progress has been slow (given razor-thin majorities for the Republicans in both the House and Senate) but steady, and passage may be a step forward in blunting the negative impact of ongoing tariff uncertainty.
The economically stimulative benefits of additional administration priorities remain on the horizon, notably (a) the prospects for lower capital requirements and their beneficial effect on bank lending, and (b) a more lenient Federal Trade Commission and a corresponding uptick in mergers and acquisitions. Not to mention most large multinationals are well positioned to profit from both a weak dollar and operating leverage, driven in part by the cost saving benefits of artificial intelligence. Overall, we believe the outlook for corporate earnings remains relatively strong with more long-term upside potential driven by AI, excluding the tail risk of a major global conflict.
The outlook for geopolitics is, of course, less certain. We are not in the business of forecasting international diplomacy, which is why we aim to own a diverse mix of high quality companies that we believe are likely to outperform in uncertain environments. We have also been working to increase our exposure to a range of alternative investments (real estate debt, private credit, gold, to name a few) that generally perform well during periods of uncertainty and are generally uncorrelated with traditional public equity markets, further diversifying clients’ overall return stream. And importantly, we have our pencils sharpened in the event a more prolonged conflict in the Mideast were to trigger a series of selloff.
At Howland Capital, we believe our buy-and-hold approach to investing allows us to stay invested during these uncertain times. However, we also understand that life’s ups and downs do not always align with market peaks and troughs. That is why open communication is such an important component of our relationships with our clients. We are here to help you plan ahead, no matter what life brings.
