VANN EQUITY MANAGEMENT

Financial Market Insights

The market rally over the past six weeks has been impressive, not only because of its size, with the S&P 500 rising nearly 20% from its recent low, but also because the rally has had fundamental support behind it.

Two key factors have helped underwrite the move higher:

1. Very strong earnings growth

2. Resilient economic data

That combination has created a constructive macroeconomic backdrop. However, a strong market is not the same thing as an invincible market. While the current setup remains positive, several meaningful risks remain on the horizon.

We normally bring our Financial Market Insight towards the middle of each month; however, because of the increased geopolitical concerns following the U.S./lsraeli conflict with Iran over the weekend, we wanted to get out our immediate thoughts.

As of writing this Monday at 5 AM Oil is up 7%, gold is up 3%, and global stocks are lower as markets price in greater geopolitical risk. However, these moves are right in line with expectations (so currently no worse than feared).

Today's trading focus will be on geopolitics, specifically whether the U.S./Iran conflict widens and expands the number of contributing countries on both sides.

The recent pullback in equity markets in February has been pinned all on AI. First showing up in software, as investors fear that AI could disrupt business models and pressure margins across parts of the industry. From there, the weakness spread in a familiar pattern, like a sector-by-sector game of Whack-a-Mole, with selling pressure rotating through several industries, including transportation, wealth management, insurance, and commercial real estate. That sequence has left many investors asking the same question: What area gets hit next?

Markets are often said to dislike uncertainty. That view has been tested over the past year, as stocks have advanced despite rising uncertainty around trade policy, immigration, geopolitics, and, more recently, the government's relationship with industries and corporations. Even if markets can absorb a meaningful amount of uncertainty, it is not clear that they can absorb unlimited uncertainty. Policy volatility from Washington could become a headwind for stocks in the year ahead.

U.S. equities rallied into the middle of the month on progress toward ending the government shutdown. Still, concerns about stretched valuations and uncertainty around delayed economic data erased most of those gains. The S&P 500 is now up 15.77% year to date on a total return basis.

Within that backdrop, the technology sector declined again last week and has been a drag on the S&P 500's performance for the month. Investors are growing more uneasy about the scale of AI-related capital expenditure and what could happen to both tech stocks and the broader economy if that spending slows.

Last month, it felt like driving a steady highway and suddenly hitting a patch of gravel. Headlines about U.S. and China trade tensions reminded everyone that policy can still jolt prices, even when the economy itself changes more slowly. At the same time, leadership in the stock market remains very concentrated. A relatively small group of companies tied to artificial intelligence continues to do most of the heavy lifting for the indexes. That concentration can work, until it does not.

The S&P 500 has pushed to new all-time highs month-to-date, even as the flow of news has been more negative than positive. Inflation metrics remain stubborn: CPI was mixed but still above the Fed’s 2% target, while PPI came in hot. Corporate earnings in the AI sector were also uneven—AMAT issued soft guidance, and both C3.ai (AI) and Core Weave (CRVW) sold off sharply. Geopolitical tensions persist, and expectations for Fed rate cuts have been trimmed, though markets still broadly anticipate a September cut.

As we move into the second half of 2025, financial markets remain a mixed bag… resilient in some areas, fragile in others. We are still in the midst of a complex transition: inflation continues to ease, but interest rates remain elevated; consumer confidence is improving, but global geopolitical risks continue to cast shadows over the outlook.

To kick off the beginning of the month, President Trump issued letters to several major U.S. trading partners, proposing a significant hike in tariffs. The proposal would raise baseline tariffs on all imported goods from 15% to 20%, up from the current average of about 10%. These new tariffs are scheduled to go into effect on August 1, pending implementation.

At the time of writing this, Monday morning Futures are sharply lower again (down close to 2%) as there was no meaningful tariff relief over the weekend while administration officials reiterated their support for the current tariff policy. The stock market got absolutely pummeled last week thanks to a material escalation in the global trade war initiated by President Trump’s tariff announcement that shocked us and the markets with much larger than expected tariffs. Stagflationary¹ economic data did not help either, and when the dust settled last Friday the S&P 500 plunged 9.08% for the week and is now down 13.73% YTD.

Donald Trump is now the 47th President of the United States and many investors are wondering how his policies will impact markets. So, our investment team wanted to identify the four key areas in Trump's policies that could impact markets, either positively or negatively. We are doing this because, now that Trump is President, the amount of news making comments, tweets, and "leaks" about potential policy decisions is likely to increase rapidly. To help cut through the noise, we highlight the four main areas Trump/Republican policies could impact the markets and what would make them broadly positive or negative for the economy/markets.

It is not an exaggeration to say that the next two weeks could likely determine if stocks hold (and potentially extend) the YTD gains, or if volatility re-emerges and we have a tumultuous end to what has been, so far, a good year in the markets. We say that not to be hyperbolic, but instead because it is true, as each of the major supports of this rally will be tested over the next two weeks, and if the current positive market expectations are undermined, the S&P 500 could hit an air pocket of roughly a 5%-10% pullback (or possibly worse).

Over the weekend our investment team spoke to several investors who were in somewhat of disbelief that stocks remained so resilient in the face of political uncertainty and, what is to them a slowing economy; and in those discussions, we pushed back on some of their negative expectations, and it was very well received, so we wanted to share our points with you below.