One could be forgiven if they had fallen asleep in early April, woken up at the end of June, and wondered if they had merely had a bad dream. Following a rocky April in the markets, the U.S. economy saw continuing growth and strength, with key indicators pointing toward a further recovery throughout the quarter, and the market came roaring back. Overall, the global economy showed resilience in the face of tariff chatter, with many countries experiencing solid growth and improving economic indicators.
However, the second quarter saw higher volatility than previous quarters as new developments whipsawed market participants and their expectations. Accordingly, we were reminded how quickly market participants’ views can change and the many questions that remain. Despite conflicting headlines and fast-moving political and global developments, the United States saw robust growth, driven by strong consumer spending, a rebound in business investment, and sustained strength in the labor market. In fact, consumer confidence remained high and business investment increased over the period. The labor market continued to expand and wages grew. Inflation appeared to be under control, though the prospects of potential tariffs offsetting the gains are still being assessed by governments and consumers alike – prompting the Federal Reserve to pause rate cuts in recent meetings. In summary, the economy remained a point of strength even though big political, economic and technological developments percolated just beneath the surface.
Aggregate S&P 500 earnings per share increased 8.7% year over year. Technology stocks again outperformed while energy and healthcare stocks lagged, and the disparity in their relative valuations continued to expand.
In this environment, we remain cautious on the highest multiple stocks and continue to see multiple ways for lower-valued stocks to drive attractive returns. While we, too, are bullish about innovation coming out of tech companies, our crystal ball — the signal as hazy as it sometimes can be — has trouble justifying current tech stock valuations.
Additionally, we are seeing opportunity in more modestly priced industries, and within these, we think there are multiple ways to win. For instance, we are excited to see many of our companies buying back shares at prices that we think represent discounts to their intrinsic values. As a company buys back its own shares, remaining shareholders’ ownership rises. As such, we would potentially receive a double-barreled economic bump on the back end, if the market’s valuations return to more traditional multiples and we own more of the economics because of the lower share count.
In a highly uncertain environment, we will continue to focus on the same things that we always have: investing in good businesses, adept management teams and purchasing those businesses at reasonable prices. That said, there is no better time for you to contact us about your specific financial needs if you are contemplating a new phase in your financial life or want to discuss the effects of market volatility. We remain grateful for your trust and hope that you are having an enjoyable summer.
Sincerely,
The Lawson Kroeker Team
Tom, Chad, Bruce, Adam and Pat