2025.Q1 PERFORMANCE
1st Quarter Recap - "Changing Winds"
As of March 26, 2025
The SP500 is looking to have a small loss for the quarter while bonds have provided positive returns as the 10-year benchmark treasury yield has fallen from 4.6% to 4.3%, producing capital gain and interest income.
Client portfolios generally held up better than their benchmarks as we reduced equity exposure and shifted into more defensive holdings.
The year started with optimism that economic growth would continue, and earnings would remain robust. The SP500 hit all-time highs in late February, then quickly declined 10%. The combination of new tariffs and Department of Government Efficiency (DOGE) driven budget cuts spooked investors and their economic expectations, causing Gross Domestic Product (GDP) estimates to plummet.
Atlanta Fed GDP Now Forecast; near 4% decline on announcement of tariffs.
Clients should be aware of the massive changes occurring under the surface of equity markets, rotating from winners to losers.
For several years, technology and innovative growth orientated companies have been top performers, while traditional consumer, industrial, and staple providers have materially lagged the SP500. So far in 2025, the leadership has reversed. Initially investors may have been motivated by realizing gains in the market leaders such as Nvidia, Constellation Energy, or Arista Networks. As the quarter progressed, investors may have sold stocks as early signs of an economic slowdown emerged. As we exit the 1st quarter, our top holdings have materially changed from the beginning of the year as circumstances have warranted quick action.
Economic Outlook: “Uncertain”
The economy grew 2.5% at an annualized rate in the 4th quarter of 2024, in line with the long-term trend of GDP over the past 30 years. Looking forward, the outlook is uncertain. The Trump Administration is rapidly attempting to re-shape the U.S. economy from a global services-based economy to a domestically focused, self-manufactured orientation which will be a challenge. Forcing businesses to re-shore manufacturing and supply chains to the US will most likely result in lower margins, lower returns on capital investment, and less efficient operations.
Since the end of WWII, the U.S. has pursued globalization of business whereby countries could sell products which have a competitive advantage to others lacking in resources. This has allowed the United States, with 68% of GDP from consumer spending, to purchase a wider variety of goods at a lower price than locally sourced goods.
The Trump Administration is pursuing three current tactics:
- Tariffs
- Immigration controls
- Budget Cuts
Tariffs are generally a bad policy for the economy in the long term. While tariffs are a good defense against foreign countries with a surplus commodity, only a few situations would be categorized as “dumping”. The U.S consumer who buys more products than any other country has benefited from lower priced goods. Foreign competition has led to superior quality products as well. President Ronald Reagan’s 1987 radio address highlighted the long-term negative implications of tariffs which are more impactful than ever. The link to his address is Ronald Reagan on Tariffs. President Reagan’s comments on the impact of tariffs on innovation and competition are still valid today.
In the short term, the fear of tariffs may have helped the economy as businesses are building inventories and purchasing goods potentially in advance of future tariffs. Over the next three to nine months, we hope the impact of tariffs on the economy, consumers and businesses will be more defined. At present, the uncertainty is leading to lower business activity and lower stock prices.
The tariff issues have the potential to escalate into a trade war. Our conflicts with China already are beginning to have this appearance. Nvidia maybe at the center of this conflict as the Biden Administration restricted the sale of advance AI technology. China has been aggressively investing in many leading technologies. With China having about 5x the number of STEM (Science Technology Engineering and Mathematics) graduates as in the United States, we have a challenge in front of us to maintain our competitive advantages technology.
The first impact on businesses is resulting from budget cuts. White House discussions have mentioned $2 Trillion of budget cuts of the total budget of about $7 Trillion. Accenture (ACN) and TetraTech (TTEK) are two noticeable stocks that have collapsed due to contracts with the U.S. government being cancelled. Fortunately, we do not hold any positions in these companies, but they serve as a precursor for long term reduction in Federal spending, which accounts for 19% of GDP. With our interest focused on capital appreciation from owning the right stocks, the environment is getting harder.
Immigration is the final challenge to the economy. The two underlying issues are the difficult process of legal immigration and U.S demographics. Gaining access to legal immigration is difficult and often requires legal assistance. With U.S. births and deaths about equal, the U.S population is not growing and needs workers. Illegal immigrants often take on jobs that don’t appeal to the average middle class worker, such as agricultural labor. A trip to Immokalee, FL will provide a snapshot of the importance of farm workers. Too bad we could not find an easy way to provide work visas for this population.
To sum up Trump’s policies being implemented to date, expected GDP growth is anticipated to be lower, and inflation is expected to be higher than previously projected. Yet to come are tax and regulatory policies. It will be difficult to expect material tax cuts given the current deficit is 27% of government spending. Relief to the banking sector and corporate transactions will be a major improvement from the Biden Administration who lacked an understanding of the financial markets.
Asset Allocation – “Bonds Chance to Lead”
Since the fourth quarter of 2024, equity exposure has been decreasing materially. Last year, our equity sales could have been characterized as “profit taking” as large gains were harvested. This year uncertainty around the economic policies of the Trump Administration, especially tariffs, has driven the SP500 index lower, beginning in February with a 10% drop over 3 weeks.
Given the weakening economic circumstances and still attractive yields, the bond market may be the best asset category until there is more clarity on the economy and policy. In addition to reducing exposure to equities, we have allocated 2% – 3% of most client portfolios to gold.
Commodities – “Going for the Gold”
Much like financial assets, commodities are being influenced by global tariffs and trading policies. Gold has been hitting record highs as investors have found new interest, possibly due to Central Bank purchases, as confidence in the US banking system has been damaged recently. We hold gold via GLD ETF in many client accounts.
Energy commodities have been a mixed bag. Oil had declined from the mid $70’s/barrel per light sweet crude to $66/barrel. The big question in the oil space is the impact of EV’s and new high bond technology on demand, especially in China. China also has the best battery technology. Electric and hybrid autos now account for 50% of new vehicle sales. In the U.S., EVs’ and hybrid sales are growing but at a more moderate growth trend. Unlike in China, there is not a “budget” EV car being sold in the US like BYD’s “Seagull” model costing approximately $10,000.
Natural gas prices have risen due to a colder than normal winter. Longer term, exporting of liquified natural gas (LNG), offers a growth opportunity. Natural gas in Europe is about $13/mcf whereas it’s $4/mcf in the US. Thus, it is still economical to ship LNG to Europe profitable. Also, natural gas utility demand is expected to grow from replacing coal and data center demand. In most client accounts, we hold positions in EQT, the largest domestic producer of natural gas, and GE Vernova the largest gas turbine manufacturer.
Fixed Income – “Boring but Hopefully Profitable”
As equities have been reduced in most client portfolios, we have added bonds. Beginning last year, it has been our strategy to realize some of the large gains in stocks over the past two years and reallocate funds to reduce risk. Generally, we have added bond ladders extending maturities. The beautiful thing about buying a high-quality bond is that you know your return if held to maturity.
Given the risk of a weakening economy, recently we have focused on buying bonds with at least an A (Standard & Poor’s) credit rating. Buying lower grade bonds with higher yields is not worth the stress. Below is the chart of the spread between high yield bond yields less the U.S. Treasury yield. The high yield spread rises as the risk of default increases.
Equities – Rough Seas Likely, Hoping for Calm
With the SP500 close to breaking even year to date, the turmoil and mental anguish makes it feel like a significant bear market. SP500 reached an all-time high in February 2025. When investors began to calculate that tariffs were happening and not a tool of negotiation in combination with cuts to Federal expenditures, stocks were sold off. Further, global investors may have been aggressive sellers too. Selling has targeted those with the biggest gains over the past several years. Many of the leading technology companies were some of the biggest losers, despite sales and earnings still growing.
At present, most portfolios are positioned defensively with large exposure to healthcare, financials, and utilities. Last year, the artificial intelligence (AI) ecosystem, including technology providers, users and utility providers accounted for a large portion of client gains. While we have reduced our exposure, we could quickly allocate funds back.
The characteristics of companies we invest in remain focused on a few key factors:
- Leading industry positions with strong competitive advantages
- Growth in sales and earnings
- Stock price momentum
- Good corporate citizenship
- Positive earnings revisions
In the short term, companies with rising sales earnings estimates published by analysts have positive stock returns. We monitor earning revisions via analytics of our Bloomberg terminal. Core holdings showing the greatest earning revisions over the last 3 months include:
The equity market represented by SP500 has produced above average returns for several years. However, many of the factors associated with strong equity markets are no longer in place. The Bloomberg Intelligence Equity Research Team watches 17 market factors. Six months ago, the checklist was green & yellow. Now greens are almost all gone and replaced with red as shown below.
In addition to the factors listed on the charts, investor confidence in the future is often measured by the price to earnings ratio or “P/E”. Often used as a measure of value, it is a psychological indicator of confidence. Should these factors be threatened, investor confidence could be permanently downgraded. The SP500 is currently trading 21 times earnings per share. The long-term average P/E is 16.9 according to JP Morgan asset management. A less optimistic investor group that fears return of their principle may not be willing to risk paying for high growth. The chart below highlights the potential longer-term investment returns under a new more restrictive authoritarian government. Should the SP500 return to the historical P/E ratio of 16.9, the index would be about 20% lower.
The key issues in why a lower P/E is possible include:
- Shift from a highly profitable service economy to less profitable service and manufacturing economy.
- Political shifts to a more authoritarian government
- Offsetting factors could include lower tax rates and regulatory burden
An opportunity we have been watching closely is in international markets. China has been the best performing market year to date. The singular international equity we hold is BYD, a Chinese Electric Vehicle maker. Another market we are watching closely is Europe. European defense stocks have soared on a new spending bill that will increase European commitment to defense.
Comments on Top Core Holdings
Johnson & Johnson (JNJ): JNJ is the top holding in many portfolios due to its defensive characteristics. First, with an AAA credit rating and 3% dividend yield, JNJ is a very financially secure company. As a result, stock performs well during bad market environments. The company is also meeting growth expectations at 6% with a well-diversified drug portfolio and strong pipeline.
Progressive Insurance (PGR): PGR is one strategy to profit from climate change. PGR focuses on insuring homes, autos, boats, and small businesses. With competitors leaving fire and flood prone states, PGR has reduced competition and the opportunity to earn attractive returns.
JPMorgan Chase (JPM): JPMorgan Chase is a cornerstone of the global financial system. The company has consistently demonstrated robust growth across 5 business units. With a strong balance sheet and diversified revenue streams, JPMorgan Chase is well-positioned regardless of the macro environment.
Netflix (NFLX): Netflix has become synonymous with movie streaming from home, dominating the market based on most metrics. Last year, Netflix added 41 million subscribers, bringing the total number of members to over 300 million, far above competition. This growth was driven by their high-quality content, supported by a diverse workforce creating shows and movies that appeal to members worldwide. As a software company, Netflix is immune to tariff threats, and as one of the main platforms for entertainment, they are likely insulated from economic downturn.
Apple (AAPL): Apple continues to lead the tech industry with its innovative products. The company’s growth is driven by its strong brand loyalty and ecosystem of devices and services. Apple is leaning into Artificial Intelligence with its own “Apple Intelligence” integrated into new devices. With cash on hand and a revenue mix of subscriptions and purchases, Apple is positioned for reliable growth.
Amazon (AMZN): Amazon has two main businesses: Amazon Web Services (AWS) serving cloud customers, and their better-known retail platform. AWS has been supercharged by developments in Artificial Intelligence and huge spending from customers. The retail platform continues to be the biggest and best in the world, with the fast shipping attracting more customers. Amazon has high revenue diversification, serving some of the world’s biggest companies as well as individual customers.
Duke Energy (DUK): Duke Energy is a traditional regulated electric utility with growth potential due to its geographic location near data centers and industrial growth in the eastern U.S. Duke is like Next Era Energy but has more regulated businesses that are lower risk. During the current risk, adverse investors’ appetite. Duke has limited tariff risk and a 3.5% dividend yield.
Garmin (GRMN): Garmin is one of the longest client holdings, although it’s never been embraced by investment analysts. The company has five separate businesses that share Global Positioning System (GPS) technology. Marine, fitness, and wearables are consumer focused, while aviation and auto manufacturers serve industrial markets. Garmin’s unique technology provides leadership in each of its businesses. Garmin’s stock has held up better than the overall equity market this year and should be a growth-oriented company worth holding through. A potentially rough environment although the company is exposed to tariff risks.
Microsoft (MSFT): We have recently increased the holding in MSFT due to its defensive attributes. First, its AAA credit rating suggests the ability to withstand a long economic decline. Second, over 95% of Microsoft’s revenues are recurring subscription based. Third, Microsoft’s role in data centers and AI position the company growth for years to come. Leveraging the core M365 business applications (Excel, Word, PowerPoint, etc.) with Copilot has been a valuable addition, although at $30/month additional cost.
2024 IRA Contribution Deadlines & Limits:
We would like to remind clients that the deadline to contribute to Traditional and Roth IRAs for the 2024 tax year is April 15th, 2025. However, certain clients may qualify for an extension to May 1st, 2025 (please see the chart below). Below is the maximum amount you can contribute:
- Under 50: $7,000
- 50 or Older: $8,000 (including a $1,000 catch-up contribution)
Please reach out to us if you would like assistance contributing to your account, confirming your contributions for 2024, or are wondering if you qualify for the May 1st extension.
Beware of Email Fraud
As we are at the peak of tax season, we urge clients to be mindful that this is the time of year where identity theft and cybersecurity attacks are rampant. Email fraud is on the rise, and we recommend clients follow these best practices:
- Be cautious with links in emails: Avoid clicking on unexpected links and scanning QR codes in emails, or text messages. When in doubt, call the company directly and/or visit the website.
- Closely review the sender’s email address: Often, a fake email will look very similar to the legitimate email. See example below:
- Legitimate Email: [email protected]
- Fake Email: [email protected]
- Verify “urgent” or “past due” requests for payment: An email requesting you route payment to a new account is a red flag. Businesses rarely change their bank accounts. Do not respond to this email and call the business directly to confirm.
The security of your financial information remains a top priority at Andrew Hill Investment Advisors, Inc.
Please let us know if you have any questions regarding your 2024 tax documents and/or security.
OUR TEAM
Andrew “Andy”
D. W. Hill, CFA
President and
Co-Founder
Jennifer R.
Figurelli, CTFA
Managing Director
and Co-Founder
Elicha D.
Moore
Client Concierge
Representative
Sean
O'Brien
Associate
Portfolio Manager
