EWA Stock Market and Portfolio Commentary Q4 2025

Speaker 1 – 00:00
Welcome everybody. Excited to bring you our quarter four market commentary a little bit early. The reason we’re
bringing this to you early is because we are making some tactical asset allocation shifts in the portfolio overall to
address what we see going on in the marketplace today. 2025 has been far from ordinary thus far. Bouts of
extreme volatility coupled with an abundance of macroeconomic and geopolitical uncertainties, and yet risk taking
has been handsomely rewarded due to resilient economic growth and impressive earnings delivery. Our moves
earlier this year position us to advantage of relative earning strength opportunities across geographies, sectors,
styles and themes, and the moves in this rebalance extend further into our highest conviction ideas. Specifically in
this rebalance, from a broad asset allocation standpoint, we’re increasing our overweight to stocks, an increase of
a magnitude of 1% from our previous targets across the board.
Speaker 1 – 00:51
This moves our market risk higher on what we see as a friendlier policy backdrop while at the same time prudently
keeping key portfolio shock absorbers in place. Within equities, we’re leaning further into the relative earnings
strengths of the US over developed markets outside the US maintaining a preference for growth over value
domestically with a preference for value over growth abroad. We are also moving overweight emerging markets
partially based upon earning signals, but also on the view that easing policy in the US typically is oxygen for
emerging market companies. Thematically, we’re increasing our tilt into AI companies, seeking to increase
exposure to AI builders and enablers, the picks and shovels of the next industrial revolution.
Speaker 1 – 01:30
This extends a trade that has worked well up to this point, with companies at the epicenter of the AI theme having
experienced significant share price gains driven by an outstanding growth in underlying earnings delivery. Lastly,
within equities, as we see rising fiscal commitments to defense, cybersecurity and infrastructure, we are
introducing exposure to national resilience beneficiaries through defense oriented stocks. On the bond side of the
portfolios, we’re maintaining a generally neutral stance on duration while seeking more granular opportunities to
balance upside potential with defense, notably against the backdrop of a tight corporate credit spread. Specifically
in bond heavy risk profiles, we are adding to convertible bonds where we see technology sector driven upside with
the ability to preserve a bond like floor if growth disappoints.
Speaker 1 – 02:14
Finally, we are holding on to and modestly increasing exposure to precious metals as we have seen lower real
rates as historically friendly to these assets in addition to their potential ability to hedge against policy uncertainty,
fiscal dominance and geopolitical tail risks. The bottom line we believe the Fed is giving us the green light to be
selectively bold, repressing our advantage where the odds look good, but keeping our discipline where signals still
look murky. In our May rebalance, we highlighted the weakening jobs data, which we believe would soon give the
Fed confidence to cut rates before the end of the year. In recent months, as you can see from the chart, job
openings have continued to slow and have steadily trended downwards all the way back. Since 2022, many
employers have not increased or resumed hiring following the volatility we experienced earlier in the year.
Speaker 1 – 03:00
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There are many measures that we can use to assess the health of the labor market. For instance, the
unemployment rate is now at the highest level in four years, attributable to a number of factors. Initial jobless
claims, as shown in the red line of this chart, are on the rise, reaching the highest level in four years in the first
week of September. At the same time, U.S. job openings have fallen sharply in July and August. The diffusion
index from the BLS is an indicator that measures the dispersion of employment gains across industries. Index
ranges from 0 to 100, with 50 as the midpoint, indicating an even distribution of job gains and losses across all
industries.
Speaker 1 – 03:35
That index has just dropped below 50, indicating there are more job losses than gains for the first time since
COVID and it is at the lowest level we’ve seen in 30 years outside of recessions. One of the causes of this recent
lack of additional hiring is attributable to tariffs and trade policy shifts, especially in the manufacturing
construction industries. Further complicating hiring decisions are the impacts from the immigration policy and
demographic shifts impacting the labor supply. Jobs growth is slowing and if you strip health care out of the jobs
data, we’re actually seeing negative job growth. Additionally, we’re seeing prior reports being revised lower with a
recently historically large downward revision from the BLS of 911,000 fewer jobs in the 12 months through March
of 2025.
Speaker 1 – 04:15
While by many measures the economy remains strong, we see a rapidly cooling labor market as a telltale sign that
the Fed is set to cut starting this month. As widely discussed, the Fed has a dual mandate to both promote
maximum employment and stable prices. Shifting our focus to inflation for a moment, we show quite an
interesting chart here. In 2021, the Fed widely believed that inflation was transitory, driven by pandemic related
supply chain disruptions and the temporary fiscal stimulus. The Fed expected inflation ease as supply chains
normalized and pandemic effects faded. This led to a wait NC approach delaying rate hikes until March of 2022.
Even though inflation had already hit 7%.
Speaker 1 – 04:54
There were consequences to this delay as the Fed underwent its most aggressive tightening cycle since the 1980s,
raising rates 11 times between March of 2022 and July 2023, eventually reaching a target range of 5.25 to 5.5%.
Post hiking cycle inflation receded, but not to low enough levels where the Fed felt comfortable to step in and cut
rates. So we remain in a high rate environment for longer as the labor market was still relatively tight. Now we’re
seeing a cooling labor market. While there is some tariff related goods inflation, we continue to expect this
adjustment to be a one time short term price shock. The overall intermediate term trend is inflation is generally
moderating, especially in key areas such as services and shelter. Core CPI will still elevate it at annualized 3.5%, is
in a decent place and is on a nice trend line lower.
Speaker 1 – 05:40
Despite these impacts, the long term trends of demographic changes and technological innovation gives us
confidence that inflation will remain contained and this puts the Fed in a clear position to embark on a slow and
measured path to easing. As of this writing, markets are pricing in a 97 chance of a 25 basis point cut in
September and this expectation has jumped meaningly after the aforementioned payrolls miss and revisions. This
is also supported by the Fed rhetoric trending towards more dovish from peak hawkish levels in 2022. The Fed
speak Index on the left hand chart analyzes the text of Fed speeches, conferences and other statements to score
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the language on a spectrum ranging from hawkish favoring tighter monetary policy to dovish favoring looser
monetary policy.
Speaker 1 – 06:23
As you can see on both one and six month basis, the Fed is increasingly tailoring their comments to lean more
dovish. Fed Chair Powell’s Jackson Hole speech in late August signaled a greater willingness to cut rates, citing
shifting risk to the labor market. Prior to the symposium, the Fed plot from June of 2025 showed a median
projection around two cuts for the rest of 2025 in line with market pricing. While we await the updated September
2025 dot plot looking at the future markets, traders are now looking for quarter point trims at both the October and
December meetings and a total of six quarter point cuts by the end of 2026. Some would question if the Fed’s
actions are independent of political developments, but we have long believed the Fed wants to return to a more
neutral policy stance.
Speaker 1 – 07:07
The data now supports a new level of easing, with the Fed expected to embark on another rate cutting cycle. This
creates a supportive environment for risk assets evidenced by historical periods of strong market performance.
We have non recessionary cuts as we have often expressed in prior rebalances. We prescribe the idea of don’t fight
the Fed and believe the win is at investors backs beyond monetary policy let’s shift our focus to earnings for a
moment. The start of 2025 saw the benefit of diversification into non US markets working as international equities
outperformed their US counterpart. However, this outperformance did not endure as US equities have
outperformed international equities since bottoming out in April due to tariff concerns. Looking at the trailing
twelve month period since quarter two, US equities have slightly ed both international developed and emerging
equities in price return.
Speaker 1 – 07:52
However, the drivers of performance have been starkly different with the US continuing to deliver double digit
earnings growth over that period. International developed and emerging equities have seen much more muted
earnings growth over the last 12 months, delivering low single digit growth. This means that their price
performance has been driven more by multiple expansion and investors attracted to lower relative valuations. The
data shown on the charts on the slide look at the trailing twelve month period, but we have seen this be a trend for
more than a decade now where the US companies are material outpacing the growth of international companies.
The persistence of earnings growth in the US and notably the large amount of companies delivering earnings
surprises allows us to feel very comfortable with this positioning for quarter two.
Speaker 1 – 08:32
This earnings growth was also broad based with growth across most sectors and approximately 82% of
companies beating their earnings expectation compared to a historical rate of just 60%. When evaluating earnings,
we find that both earnings surprises and changes in earnings expectations drive returns in significant ways. If we
look at specific expectations, both the US and European earning expectations for 2025 they peaked coming into
the year before dropping significantly due to tariff concerns. Entering the summer we saw a large decoupling
between the two regions. US had experienced a strong rebound in earnings expectations after bottoming late in
the spring when the tariff mania was at its peak. US Earnings saw robust revisions and positive surprises in
quarter two. Europe, on the other hand, has seen a continued rewriting lower of earnings expectations throughout
the summer even as their US counterpart rebounds.
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Speaker 1 – 09:19
This chart shows a great ex not only of how the trend lines have changed, but also the levels have changed quite
dramatically. This summer’s earnings releases are a key piece of information for European equities. Roughly 2/3 of
companies abroad report on a semi annual basis and so we have a much more accurate picture of trends.
Following a recent refresh of that data, our signals favoring the US have jumped significantly in the last few
months following these updates. As a result, signals relative underweight position in Europe now stands near the
85th percentile of our historical observations. We have seen persistent preference for the US in our signals over
the last decade.
Speaker 1 – 09:55
The large divergence today gives us confidence to tactically lean into the relative preference for the US While the
trailing twelve month returns of the US and international developed equities have looked similar, we have seen
pretty significant divergence in terms of winners and losers. While US equities have been led higher by growth
stocks, international developed equities have seen strong value outperformance. The dominant story in the US has
been the fast paced expansion of artificial intelligence and the impact that has had on the mega tech companies.
We have seen this trend continue to evolve and grow beyond just the Magnificent Seven as names like Oracle have
been able to capture additional earnings and continue to revise guidance higher. The trend in growth is not a new
story as we have seen this outperformance persist beyond the 12 months shown on the graph.
Speaker 1 – 10:37
Value stocks have outperformed growth in only two of the last 10 calendar years. As this trend continues, the
models maintain a preference for growth stocks in the US Markets. International developed markets have much
less reliance upon the tech trade as evidenced by the construction of their indices. By the construction of their
indices, what tech makes up over a third of The S&P 500 is less than 8% of the MSCI EAFE index. The larger
contributors in the EAFE index have been sectors like financials which generally have larger tilts to a value factor.
In addition to the sector composition, developing markets, developed market central bank rate policies, currency
effects and valuation gaps have helped with performance and value cohort.
Speaker 1 – 11:17
The underperformance of international equities over the last decade has created pockets of opportunities to find
attractive multiples right for value invested testing, helping create momentum and as a result our models are
positioned for this trend to continue focusing on some of the more granular themes in the portfolios. In May of this
year we began positioning towards what we view as the most compelling growth story for the next decade,
artificial Intelligence. We often speak about the hyperscalers. Who are the companies like Microsoft and Google
Meta that operate the computing storage NETworking service for AI? As you can see on the left hand side, annual
spend for these companies has soared to incredible levels over the last few years in excess of 300 billion annually.
Speaker 1 – 11:55
Hyperscalers, however represent just a subset of the total AI infrastructure spend which is expected to reach half a
$trillion in 2026, or nearly 2% of GDP growth over the next five years. Estimates are that approximately 6.7 trillion
of CapEx is needed globally on AI infrastructure. We firmly believe that many of the leading companies in the
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space will continue to outperform beyond what is currently appreciated and actually view AI as not only being a
growth catalyst, but also a defensive hedge for with being underexposed to AI actually presenting an investment
risk. In our view, many investors underestimate this risk exposure. AI is a hedge against disruption and many other
parts of the market and economy. Consider the economic impacts of AI displacing jobs or slowing payroll.
Speaker 1 – 12:39
As a result, we are positioned the portfolio with a more concentrated focus on AI, also diversifying across the AI
landscape to include beneficiaries beyond the traditional technology sector. By investing in AI, you’re getting
exposure to the chip manufacturers, the data center builders, the power suppliers, cybersecurity and more.
Themes that are all associated with the proliferation of artificial intelligence. AI represents a multi decade
structural trend that is growing at a rapid pace and we view selectivity as key to capitalize on this growth. Well, the
build out of AI infrastructure is well underway. What we’re also absorbing is that AI adoption has also been
dramatically increasing. You can think of this role in three phases. Build out, adoption and transformation. On the
build out side, we just highlighted the historic CAPEX cycle that is underway.
Speaker 1 – 13:23
Investments are pouring in as AI growth is driving a huge demand for infrastructure from chips to data centers.
What we’re focusing here now is focusing on adoption and the expansion which AI has made its way into our
everyday lives. Continuing to astonish. What we highlight here is that in 2023, only 5% of enterprises were utilizing
generative AI in their businesses. Today that figure has reached 44% and this number is set to rise to 80% of
companies expected to use generative AI by next year. We remain in the very early stage of transformation and
how AI is going to reshape the globe. AI could contribute 7 trillion to global GDP growth through 2030, benefiting
wide swaths of the economy. We’re seeing incredible efficiency gains just from the releases in terms of the
hardware and software that are coming out right now.
Speaker 1 – 14:12
The compute capability per dollar spent from the leading kind of GPU platform is now 2.2 times faster more
efficient than it was just one year ago. And those innovations a rapid pace for further improvement in the economy
itself. The propagation of AI into business operations to raise efficiency is visible and it’s going to become more
and more visible as time goes on. One additional theme we’re leading into during this rebalance is following
government spending trends. Geopolitical fragmentation is reshaping global markets and investing through
shifting alliances, dynamic supply chains, new trade barriers, and rise in competition over critical technologies and
resources. These forces are accelerating investment in national security and resilience, with impacts reaching far
beyond traditional defense companies into sectors like aerospace, energy infrastructure and tech. This chart
shows the annual percentage increase in spending taken from the one big beautiful bill.
Speaker 1 – 15:05
You can see significant increases in shipbuilding, cybersecurity, air and missile defense. The defense theme not
only spans sectors, but regions as well. A rewiring of global trade, rising nationalism and competition over
emerging technologies may have reoriented national priorities across the world. While the US Is leading the way
here. Global defense spending had a new record of 2.7 trillion in 2024, 114% increase from the year 2000.
European countries are lifting their self imposed fiscal spending limits to allocate more towards defense. Germany,
leading the way in Europe, plans to double its defense spending within five years. The defense industry can also
offer defensive characteristics and portfolios. These stocks act as geopolitical hedges alongside gold and
uncertain environments. The theme is driven by strategic priorities rather than economic cycles.
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Speaker 1 – 15:51
We are positioned to portfolios to capture these secular themes, fueled by reinforced fiscal spending, geopolitical
activity and the demand upgrade aging equipment. So, three common themes here in this rebalance. Number one,
increased preference for stocks. Particularly in the United States, economic growth signals are mixed at best, and
the labor market has unquestionably softened. Fewer openings, fewer quitters, and more folks filing for
unemployment. This deceleration, however, has created space for more accommodative monetary policy. Sure,
inflation’s still limping around 3% and its descent has lost some momentum. But market history offers clear
guidance. Don’t fight the Fed. We’re inclined to obey and lean into that tailwind, but with seatbelts on, recognizing
that policy and geopolitics can still jolt markets. Number two, we are leaning further into relative earnings strength
across the portfolios within equities.
Speaker 1 – 16:44
We continue to view AI as a defensive hedge as much as a growth catalyst. With demand for high performance
computing infrastructure expected to nearly double annually and the intelligence models built upon it advancing at
an even more aggressive pace. We expect generative AI to compound into a force that reshapes entire industries
globally. Easing into the US typically softens the dollar, which is oxygen for emerging markets. And number three,
finally, we’re coupling offense with defensive ballast. Lower real rates are historically friendly to precious metals,
so we’re keeping and modestly adding to that hedge against policy uncertainty, fiscal dominance, geopolitical tail
risk where appropriate. Convertible bonds give us a pragmatic way to participate in upside while preserving a bond
floor if growth wobbles, and rising fiscal commitments to defense, cybersecurity, and infrastructure underpin our
Thematic Allocation to National Resilience Beneficiaries.
Speaker 1 – 17:36
Thank you for joining, and we look forward to catching you next quarter.