Strategy & Outlook – Second Quarter 2025

From Repricing to Reassessment 
April’s sharp market drawdown prompted a reset in expectations. Rather than causing a retreat, it encouraged a more deliberate reassessment of fundamentals. In the weeks that followed, both equity and credit markets regained ground, with several major indices reaching new highs by the end of the quarter. Investors who were able to move quickly had a brief window to take advantage of mispricings, though timing and execution remained critical.

The recovery has returned markets to a period of greater speculation driven by optimistic sentiment, and valuations now reflect more hope than fundamental strength. Once again, this is a moment to exercise caution instead of expanding market risk. How we position portfolios today will be key to navigating the uncertainty ahead.

What the Market is Showing Us
Equities posted modest gains after rebounding from April lows, though performance varied by region and sector. U.S. large capitalization stocks held up better, while international and emerging markets showed mixed results. A weaker dollar provided some support abroad, but growth concerns and geopolitical risks kept returns uneven.

We see targeted opportunities in defensive sectors while remaining cautious on broad market and growth-oriented exposures. Our focus is on positioning for resilience amid ongoing uncertainty rather than chasing broad recoveries. Valuations remain sensitive to slower growth, making careful allocation decisions especially important.

Credit markets also stabilized after April’s volatility. The ICE BofA US High Yield Master II Option Adjusted Spread widened sharply to around 461 basis points early in April before narrowing to 296 basis points by the end of June. This reflects improved investor sentiment as trade tensions eased. Although credit offers opportunities, we remain cautious with relatively tight spreads as challenges loom, including the upcoming maturity wall affecting both corporate and mortgage sectors in a high-interest rate environment.¹‚² Within credit markets, structured credit offers some attractive yields adjusted for risk, particularly across senior and select junior tranches.

Macro Conditions: Slower, Not Weaker
The economy is slowing but not contracting. Consumer discretionary demand is softening while services remain steady. Labor market data show early signs of moderation, including declining labor force participation and slower wage growth, supporting a moderate outlook. Overall, conditions remain stable for now. That said, we see limited scope for meaningful improvement and believe downside risks are underappreciated.

Inflation has eased overall, though core services inflation remains elevated. With wage growth slowing and employment steady, the Federal Reserve’s patient stance is appropriate. This environment reduces headline volatility but offers little directional clarity. A further economic slowdown and meaningful labor market deterioration will likely be needed before the Federal Reserve pivots decisively toward rate cuts.

Strategy and Outlook
As we enter the second half of 2025, we maintain an overweight stance on credit relative to equities, with structured credit representing our highest conviction. Within fixed income, we have adjusted duration and curve exposure to optimize yield and enhance correlation benefits. Liquidity remains a core pillar of our risk framework, ensuring the flexibility to act decisively when attractive opportunities arise.

Improved liquidity and momentum have supported the market rebound, but valuations still require solid fundamental backing. Risks remain underappreciated, including rising energy and commodity prices. Oil and copper have advanced notably as unresolved trade tensions could further complicate inflation and growth. Much of the optimism hinges on expected rate cuts, which may prove premature if cost pressures persist. We avoid policy speculation and focus on identifying real value.

We see growing risks in the housing sector. Mortgage demand remains weak, affordability has deteriorated, and higher financing costs are constraining both new construction and resale activity. A more pronounced slowdown here could weigh on consumption, household confidence, and spill over into related parts of the economy.

We are not guided by fear of missing out, but remain cautious, avoiding overplaying our hand in markets where recent gains have been sharp and valuations stretched. Our disciplined approach prioritizes managing risk and identifying value, helping us navigate what is likely to be a challenging environment ahead.