Financial Markets Review

U.S. equity markets wrapped up August on a constructive note, as most major indices closed within spitting distance of their respective all-time highs. The S&P 500 gained 1.91% and the Nasdaq added 1.58%, while the Russell 2000 soared 7.00%, which marked its best month since November 2024. The S&P logged its fourth consecutive monthly advance, the Nasdaq its fifth, and both indices visited fresh all-time highs in a month that was void of much volatility. Importantly, the advance was reasonably broad with the equal-weight S&P 500 index slightly outperforming the cap-weighted S&P 500 index, signaling that the rally was not entirely due to outsized strength of the largest mega-cap tech companies. Still, beneath the headline numbers lays a series of familiar market dynamics—policy sensitivity, earnings resilience, and a striking concentration that remains the market’s most consequential structural risk.

The month began with an abrupt reassessment of Federal Reserve interest rate policy after a softer-than-expected July nonfarm payrolls print and sizable downward revisions to May and June. Before the shocking July nonfarm payrolls report was released, a previously resilient labor market gave the Fed cover to focus on inflation as the main driver of interest rate policy. The July nonfarm payrolls report mattered not simply for its headline miss and massive revisions, but because it altered the market’s read of the Fed’s reaction function. Weaker economic data and cracks in the labor market drove rate-cut probabilities higher, and Fedspeak drifted incrementally dovish. Chair Jerome Powell’s remarks at Jackson Hole on August 22nd were read as less hawkish than anticipated, while still reminding the market that inflation remains the central risk. At the same time, inflation data remained a mixed signal with goods inflation easing more than feared, core PCE printing roughly in line with expectations, but core services CPI showed some reacceleration, which is an element the Fed continues to monitor closely.

Corporate earnings gave investors another reason to remain optimistic given the headline macro uncertainty. The Q2 reporting season featured an outsized beat on earnings, as earnings growth for the S&P 500 has come in at roughly 12% year-over-year versus roughly 4.8% expected at the start of the quarter. The enormous upside surprise was an important backstop for sentiment, but once again it was driven very much by the mega cap technology companies. The likes of NVIDIA, Microsoft, Amazon, Meta, Alphabet, Apple and Broadcom contributed over half of the S&P 500’s 12% Q2 earnings growth, as the average earnings growth rate amongst this group came in at 29.4% versus expectations of 16.6%. Outside of these companies, tariffs were a recurring theme in management commentary with many companies flagging cost pressures, but many also describing mitigation strategies that appeared credible to investors. Consumer demand, while showing some evidence of trading down in discretionary categories, remained broadly resilient, supporting the view that the economy retains underlying momentum even as the labor market cools.

Yet the month also reinforced one of the market’s persistent structural problems – concentration. The gap between the cap-weighted S&P 500 returns and the equal-weight S&P 500 returns is at its weakest in roughly 22 years.



Source: Bloomberg. Data is normalized with factor 100 as of January 2, 1990.

The largest ten stocks now account for a staggering share of market value where 2% of the S&P 500’s constituents represent as much as 40% of the S&P 500’s total market capitalization. It’s been well documented that the Magnificent Seven plus Broadcom make up the largest 8 names, with the final 2 of the top 10 being Berkshire Hathaway and JP Morgan Chase. This kind of concentration amongst tech companies creates an important technical and structural vulnerability to the S&P 500, which is that passive index buying no longer buys diversification in the classic sense.

To some extent, this concentration in the largest companies and their respective valuations can be rationalized by delivering superior real earnings growth. As noted earlier in this column, their earnings growth has indeed outpaced the rest of the market and has been doing so for quite some time.



Source: Bloomberg. Data is normalized with factor 100 as of April 30, 2015.

On the other hand, this concentration brings about the same risk for all these companies. Each one of them are plowing increasingly more cash into AI and related capex to the point that free cash flow for many of these companies has been compressing for several quarters. These investments may well pay off, but the path from increased capex to persistent incremental free cash flow, to sustainable operating leverage and ultimately to shareholder returns is not guaranteed. To that point, compressed free-cash-flow yields at the top of the market leave less margin for error. And absent continued profit conversion from this massive investment spend, it has the potential to lead to significant multiple contraction for these companies all at the same time.

Tandem Strategy Update*

In similar fashion to July, August was also void of volatility at the index level; however, underneath the surface it was a little bit different. There were certainly bouts of volatility at the individual company level, which ultimately gave us opportunities to add to existing positions and establish a new holding.

Over the past month, within our Large Cap Core and Equity strategies, we have added to Roper Technologies (ROP) and Automatic Data Processing (ADP). In addition, we established a new position in Intuit (INTU). Intuit is a financial software company known for its products that help individuals and small businesses manage their finances. Intuit’s main products include TurboTax for tax filing, Credit Karma for credit monitoring, QuickBooks for bookkeeping, and MailChimp for marketing automation. INTU has shown consistent growth in sales, earnings, and cash flow over time, resulting in its dividend growing at a 10-year compounded annual growth rate of 14.9%. Lastly, we also incepted ExlService Holdings (EXLS) within our Equity strategy. ExlService specializes in analytics, digital operations, and business process management. It supports a wide range of industries spanning insurance, healthcare, banking and financial services, media, and retail by delivering data-driven solutions to optimize performance and drive growth. EXLS has evolved from traditional business-process outsourcing to specializing in advanced data analytics, AI, machine learning, and cloud-enabled digital solutions. The company has a long history of consistently growing revenues, earnings and cash flows. In addition, EXLS has been a core position within our Mid Cap Core strategy since 2018.

Within our Mid Cap Core strategy, we found several opportunities to continue building out positions in Badger Meter (BMI), MSCI (MSCI), Roper Technologies (ROP) and Kinsale Capital Group (KNSL).

Lastly, we continued the liquidation of Essential Utilities (WTRG) across all three strategies due to insufficient growth over the past few years. There have been several issues plaguing WTRG starting with several rate case delays that significantly impacted the company’s top-line. In addition, WTRG’s decision to get more involved in natural gas services, specifically with their $4 billion acquisition of People’s Natural Gas in 2020, has made the company’s fundamentals less consistent given the timing difficulties in recovering costs from the purchase of natural gas and subsequent pass-through to their customers. For these reasons, WTRG’s insufficient growth and lack of consistency caused the company to no longer pass through our quantitative model.

*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.