Financial Markets Review

U.S. equities delivered another solid showing in June, extending the recovery since the Liberation Day sell-off in early April. The S&P 500 notched its second consecutive monthly gain while also eclipsing the previous all-time high set back in mid-February, climbing 4.96%. Not to be outdone, the tech-laden Nasdaq led the way with a 6.57% advance, marking its third straight month of gains and powering it to fresh all-time highs. Technology and Communication Services were the only sectors to outperform the S&P 500, underscoring the continued leadership of big-tech names throughout this recent rally.

The S&P 500’s advance in June was accompanied by healthy breadth with more than two-thirds of members trading above their 50-day moving averages, while more than 70% of S&P 500 constituents finished the month in positive territory. This is a notable shift from the past couple of years; however, a bit more needs to be done under the surface to confirm the recent record highs in the S&P 500. Given that the S&P 500 equal-weight index and Russell 2000 remain roughly 3% and 11%, respectively, below their record highs set back in November 2024, it is still evident that a handful of the largest companies remain in charge. In fact, according to BofA, since 1990 the S&P 500 has broken out to an all-time high after a significant pullback on seven occasions. And this most recent breakout on June 26th marked the fewest amount of S&P 500 companies simultaneously trading at an all-time high.



Source: BofA Global Investment Strategy, Bloomberg

It is often said that the market climbs a wall of worry and indeed it has over the past couple of months. Between the continued uncertainty surrounding global trade, geopolitical tensions, Fed independence and fiscal policy that has reignited questions around future deficits and debt, the market has not only climbed a wall, but rather a mountain. And to add, we have begun to see economic data paint a mixed but mildly softening picture. The Citi Economic Surprise Index plunged to its lowest level in nine months, dragged down by underwhelming readings across manufacturing, housing, and consumer metrics. The mixed economic picture has also extended to the labor market as recently seen by the ADP report of 33k jobs lost in June versus a rise in the June non-farm payrolls report of 147k jobs gained.

This begs the question – do any of these risks matter? Based on BofA’s latest Global Fund Survey, sentiment has rebounded back to pre-Liberation Day levels, so investors are not too worried. However, there is one overarching risk to markets that investors and pundits seem to disregard, and that risk is valuation. In a market where the path of least resistance is higher, there are many reasons to dismiss valuation levels. It might not matter in the very short-run as valuations are not the greatest market-timing tools, but in the longer-run, the price you pay today dictates your future return, so it’s certainly not something to disregard. According to Bloomberg, the S&P 500 is trading at 22 times expected profits over the next 12 months, which is 35% above its 20-year average. It’s also back to levels seen just before the market corrected in 2022 and earlier this year.



 

Source: Bloomberg

Another way to view the extreme valuation level of the S&P 500 is to analyze the equity risk premium. This metric compares the earnings yield of the S&P 500 to that of the 10-year Treasury note yield, which is simply the excess return one would expect to earn when investing in equities over fixed income. All else being equal, a higher equity risk premium indicates equities are more attractive than bonds and vice versa when the equity risk premium is lower. Based on the chart below from Bloomberg, there is no compensation to be had for taking on the risks of owning equities relative to bonds.



Source: Bloomberg

None of this is intended to imply a correction in the S&P 500 is imminent, but rather it’s worth understanding where the market is from a risk vs. reward standpoint. Valuations are stretched, but all that really boils down to is a reduction in the margin of safety and little room for error. As long as the economy can hold in and earnings continue to grow, there is no reason to believe the market can’t continue trading at lofty valuations. However, the risks embedded in the market today are vastly higher than they were at the Liberation Day lows, even though it might not feel like it.

Tandem Strategy Update*

While we dedicate significant attention to financial markets in the opening section of this column, that discussion doesn’t always align with the actions we take within our investment strategies. That’s because our focus remains on individual businesses, not the broader equity indices. Just because the S&P 500 is trading at historically elevated levels doesn’t mean every company shares that valuation. Irrespective of overall market conditions, we continue to find opportunities to buy and sell individual companies based on their own merits.

In June, we found opportunities to add to a few existing positions and establish a new position within our Mid Cap Core strategy. Across all strategies, we added to our position in Church & Dwight (CHD) and within our Large Cap Core and Equity strategies we added to Zoetis (ZTS). In our Equity strategy, we also continued to build out our positions in Adobe (ADBE) and Mastercard (MA). Lastly, we initiated a new position in Gartner (IT) within our Mid Cap Core strategy. Gartner is a research and advisory firm that provides insights for clients spanning IT, finance, HR, customer service, and compliance. The company creates and distributes research globally through publishing reports, interactive tools, peer networking, holding conferences, and consulting/advisory services.

On the valuation front, we trimmed our position in Amphenol (APH) within our Large Cap Core and Equity strategies. Amphenol has done everything we seek regarding consistent fundamental growth; however, the price has just gotten a bit ahead of its fundamental growth. When this happens and our quantitative model signals the company is unsustainably overvalued, we continue to hold the position but manage the risk around such an extreme valuation by reducing our allocation in the company.

And lastly, a few positions were liquidated last month as the companies bypassed their current leadership team in favor of hiring a CEO from the outside. One of our requirements for a company is to show depth in the management team and the ability and willingness to hire from within. We strive to provide a more consistent and repeatable investment experience at the strategy level and that really starts with management at each individual company. For this reason, we wrapped up the liquidation of CBOE Global Markets (CBOE) across all strategies and Fiserv (FI) within our Equity and Mid Cap Core strategies.

*The transition level activity taken by Tandem is applicable to new manager-traded accounts and new money in manager-traded accounts, not the composite or firm-wide level. New manager-traded accounts and new money in manager-traded accounts are not automatically invested on the first day. Rather, they are transitioned into our strategy over a longer time period that is dependent upon market conditions, this process differs from Tandem’s model-provided strategies, where money is invested on the day the account opens. Strategy level activity is applicable to the composite and action is taken at the firm-wide level.

Source: Source of all data is FactSet, unless otherwise noted.

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Disclaimer: Tandem Investment Advisors, Inc. is an SEC registered investment advisor.

This audio/writing is for informational purposes only and shall not constitute or be considered financial, tax or investment advice, or an offer to sell, or a solicitation of an offer to buy any product, service, or security. Tandem Investment Advisors, Inc. does not represent that the securities, products, or services discussed in this writing are suitable for any particular investor. Indices are unmanaged and not available for direct investment. Please consult your financial advisor before making any investment decisions. Past performance is no guarantee of future results. All past portfolio purchases and sales are available upon request.

All performance figures, data points, charts and graphs contained in this report are derived from publicly available sources believed to be reliable. Tandem makes no representation as to the accuracy of these numbers, nor should they be construed as any representation of past or future performance.​

This document was originally written/recorded in English. Tandem does not guarantee the accuracy, completeness, or reliability of any translated materials, and shall not be held responsible for any discrepancies, errors, or misinterpretations arising from the translation process.