As we move into the second half of 2025, we want to update you on our positioning and share key reasons why we’ve maintained a reduced equity exposure during this phase of the market. Despite the strong rebound from March lows—and new highs on the S&P 500 in early July—we’ve stayed disciplined and defensive, because the market’s recent surge has been powered by speculation rather than fundamentals.
H1 2025: A Market That Defied Gravity
The first half of the year delivered one of the most dramatic market reversals in recent memory. After a sharp correction early in the year-where the S&P 500 dropped approximately 14% between February and April-the index surged off its lows.
This rebound was largely driven by:
- Record-breaking retail investor inflows, particularly into speculative instruments like meme stocks, penny stocks (which made up 47% of total volume), and leveraged ETFs.
- A rapid shift from fear to FOMO-driven risk-taking, further amplified by high turnover and zero-day options activity.
- A powerful momentum reversal, where high-beta stocks surged-even without a Fed rate cut or improved macro data.
Why We’ve Stayed Defensive
Throughout this rebound, we made the conscious decision to remain on the sidelines in a reduced-risk posture. Our view has been grounded in caution, not complacency. This rally may feel strong, but in our view, it is fragile and overextended. Despite the price recovery, several underlying signals remain concerning:
- Valuations are elevated, especially relative to weakening macro data.
- Market breadth is poor-fewer than 40% of S&P 500 stocks are trading above their 200-day moving averages.
- Markets are overbought and over-owned. Positioning indicators show extreme levels of bullishness, especially among retail investors.
- Retail activity is distorting price discovery, while institutional investors are increasingly reacting to flows-not leading them.
- Speculative excesses are dominating flows, with sentiment indicators now deep in “Extreme Greed” territory.
Looking Ahead: Navigating 2H 2025
Earnings & Margins
H2 earnings are expected to decelerate from +12% YoY in Q1 to just +4%—with further pressure likely from:
- Tariff-driven input cost inflation
- Slowing top-line growth
- Margin compression due to wage pressures and weak breadth
Trade & Tariff Volatility
The U.S. has extended its tariff deadline to August 1, threatening 25% duties on imports from Japan and Korea. While the UK and Vietnam have negotiated exemptions, other regions remain in flux. The implications could be significant for semiconductors, autos, and electronics. These developments will also influence Fed policy, especially if inflation expectations begin to rise.
Bottom Line: Disciplined, Not Complacent
While the market’s recovery has been dramatic, we remain focused on managing risk rather than chasing momentum. H2 2025 still offers upside, but the risk/reward profile has compressed.
Our strategy moving forward emphasizes:
- Trimming into strength, especially in overbought names
- Rotating toward quality, favoring companies with pricing power and resilient cash flows
- Staying diversified and hedged, as we anticipate pockets of volatility around earnings and macro headlines
