Quarterly Insights – Q2 2025
“SHOW ME THE INCENTIVES, AND I WILL SHOW YOU THE OUTCOME”
~ Charlie Munger
INTRODUCTION
– THE OVERHANG VS THE OPPORTUNITY
The bond market is signalling expectations of an upcoming Fed rate cut, reflecting concerns that economic growth is slowing. In contrast, the stock market is favouring cyclical stocks over defensive ones, suggesting investors believe growth is set to pick up.
These two perspectives are at odds with each other. If the bond market is mistaken and growth is indeed accelerating, interest rates may need to rise. Conversely, if the equity market is wrong and growth is actually slowing, stock prices, especially among cyclicals, could face downward pressure.
Exhibit 1: The disconnect between cyclical equities making new highs vs bond markets pricing in meaningfully lower interest rates at the short end of the U.S. treasury curve:
Source: Bloomberg, Shard Capital, 30/06/2025
US economic growth is currently facing headwinds from rising uncertainty and slowing investment. In particular, uncertainty regarding the consequences of tariffs and a slowdown in global trade. Furthermore, volatility in oil prices, the resumption of student loan payments, and higher long-term interest rates associated with the fiscal situation, is also causing major headwinds.
The question is whether these headwinds to growth are sufficient to push the economy into a recession.
Exhibit 2: Macroeconomists and market pundits have been too pessimistic about the growth and inflation outlook, which have not materialised yet and resulted in a ‘positive surprise’. This in turn boosted risk appetite and the recent rally. But just like monetary policy, it is fair to assume trade policy works with variable lags. Stagflation is not off the cards, and the global economy is not out of the woods.
Source: Bloomberg L.P., Shard Capital, 30/06/2025
Exhibit 3: Where are we in the cycle?
With that, on to the quarterly letter…
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Disclaimer:
This document is provided for information purposes only and is intend for confidential and sole use by the recipient. It is not to be reproduced, copied or made available to others. The information set out in this document does not constitute investment advice or a personal recommendation. The views expressed in this document are not intended as an offer or a solicitation, to purchase or sell any security or other financial instrument, credit or lending product or to engage in any investment activity.
Past performance is not a guide to future performance. It is important that you understand that with investments, your capital is at risk. The value of investments, as well as the income derived from them, can go down as well as up and investors may get back less than the original amount invested. It is your responsibility to ensure that you make an informed decision about whether to invest with us, based on your particular objectives. If you are still unsure if investing is right for you, please seek independent advice.
The information and opinions expressed within this document are the views of (the company) and are based on information we believe to be reliable, but we do not represent that they are accurate or complete, and they should not be relied upon as such. Any information provided is given in good faith but is subject to change without notice.
No liability is accepted whatsoever by (the company) or its employees and associated companies for any direct or consequential loss arising from this document.