Chevy Chase Trust’s unique approach to Thematic Investing weaves together multiple themes across sectors, geographies, and industries, each designed to capitalize on research-driven insights. Listen to our quarterly update of economic conditions and investment strategy.
Everything we do starts with a conversation. Understanding your unique story is key in the development of a plan with your best interests in mind. To connect with us to learn more and begin a conversation, visit chevychasetrust.com.
Important Disclosures This commentary is for informational purposes only. The information set forth herein is of a general nature and does not address the circumstances of any particular individual or entity. You should not construe any information herein as legal, tax, investment, financial or other advice. Nothing contained herein constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments. This commentary includes forward-looking statements, and actual results could differ materially from the views expressed. Materials referenced that were published by outside sources are included for informational purposes only. These sources contain facts and statistics quoted that appear to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. Fact and circumstances may be materially different between the time of publication and the present time. Clients with different investment objectives, allocation targets, tax considerations, brokers, account sizes, historical basis in the applicable securities or other considerations will typically be subject to differing investment allocation decisions, including the timing of purchases and sales of specific securities, all of which cause clients to achieve different investment returns. Past performance is not indicative of future results, and there can be no assurance that the future performance of any specific investment or investment strategy will be profitable, equal any historical performance level(s), be suitable for the portfolio or individual situation of any particular client, or otherwise prove successful. Investing involves risks, including the risk of loss of principal. The level of risk in a client’s portfolio will correspond to the risks of the underlying securities or other assets, which may decrease, sometimes rapidly or unpredictably, due to real or perceived adverse economic, political, or regulatory conditions, recessions, inflation, changes in interest or currency rates, lack of liquidity in the bond markets, the spread of infectious illness or other public health issues, armed conflict, trade disputes, sanctions or other government actions, or other general market conditions or factors. Actively managed portfolios are subject to management risk, which involves the chance that security selection or focus on securities in a particular style, market sector or group of companies will cause a portfolio to incur losses or underperform relative to benchmarks or other portfolios with similar investment objectives. Foreign investing involves special risks, including the potential for greater volatility and political, economic and currency risks. Please refer to Chevy Chase Trust’s Form ADV Part 2 Brochure, a copy of which is available upon request, for a more detailed description of the risks associated with Chevy Chase Trust’s investment strategy. The recipient assumes sole responsibility of evaluating the merits and risks associated with the use of any information herein before making any decisions based on such information.
“There are decades where nothing happens, and weeks when decades happen,” Vladimir Lenin famously said. The first half of 2025 seems like the latter: a brief period in which decades of transformative change occurred. U.S. equity markets appear optimistic that these changes will not hurt companies’ ability to generate ever higher profit margins. We have our doubts and believe that a more balanced, discerning investment approach is more important now than ever.
REPEATED SHOCKS YET ALL-TIME HIGHS
If one looked only at the S&P 500’s beginning and ending levels, one might conclude that not much happened in the first half of 2025. The Index opened on January 2 at 5,903 and closed on June 30 at 6,205, generating a 6.2% total return over six months. Similarly, 10-year U.S. Treasury yields started the year at 4.54% and finished slightly lower, at 4.23%. The similarity of the endpoints, however, masks ample volatility, triggered by three largely unrelated shocks.
Chinese tech rivalry: In January, news of a Chinese artificial intelligence (“AI”) model named DeepSeek caused a sharp fall in high-flying tech stocks, such as Nvidia. DeepSeek’s technical capabilities and significantly lower production cost led many observers to conclude that U.S. dominance in technology is nearing an end.
Sky-high tariffs: On “Liberation Day” (April 2), the U.S. announced that it was imposing tariffs ranging from 10% to 50% on roughly 200 trading partners, claiming that unfair terms of trade had hurt U.S. manufacturing. The S&P 500 fell over 12% in justfour trading Investors feared that this abrupt reversal of the long trend toward tariff-free trade and global integration of manufacturing would slow economic growth and raise inflation.
War: On June 13, Israel bombed several military and political targets in Iran, claiming Iran was close to producing a nuclear Just nine days later, the U.S. bombed three Iranian nuclear facilities. Oil prices spiked over 15% in June on investor fears that the war would keep Iran’s 3.3 million barrels of daily oil production from the global market.
U.S. equity markets snapped back after each shock. Fear of the U.S. losing its dominance in tech subsided as four tech giants (Alphabet, Microsoft, Meta and Amazon) increased capital spending and reiterated their optimistic projections for AI. Fear of tariffs evaporated when, just a week after “Liberation Day,” the U.S. announced it would pause implementation for at least 90 days. It took just a few hours for fear of war to subside, as equity investors recalled that armed conflict usually stimulates economic growth and equity performance.
These market snap backs reinforced the “buy the dip” mentality that has driven equity investors for most of the past decade. After falling almost 20% from February 19 to April 8, it took only 55 trading days for the S&P 500 to set a new all-time high. Never before has the S&P rebounded from a decline of over 15% to an all-time high in a shorter period of time. Investors appear to have jumped right back to an all-in bet that AI-driven productivity gains will fuel continued declines in inflation and solid earnings growth.Consensus expectations call for two interest rate cuts in the second half of 2025 and strong earnings growth of almost 7%. While not impossible, this scenario is not probable in our view. The recent rebound leaves U.S. equity market valuations near their all-time high and “over-owned,” particularly by U.S. households.
Investors in U.S. fixed income and currency markets appear notably less sanguine. The yield on 10-Year U.S. Treasuries rose and the U.S. dollar fell during the April equity market selloff. That is highly unusual. In every crisis-driven equity market drop for the past 50 years, global investors flocked to the safety of U.S. Treasuries and the U.S. dollar, which drove yields lower and lifted the dollar’s value versus other currencies. The fact that the opposite occurred during this crisis may prove to be a significant turning point in the U.S.’s role in global financial markets. Only time will tell.
WHAT IF GLOBALIZATION REVERSES?
Global integration had been underway for many decades when it began to speed up in the early 1990s. First, after the Berlin Wall fell, capital began pouring out of the West in search of opportunities in Eastern Europe, Asia and other emerging markets. Then, in 2001, China joined the World Trade Organization, setting off a surge in global trade that deepened the integration of manufacturing and supply chains. Companies relocated production to regions where labor and other inputs (including energy) were available at lower cost, and they could sell to local consumers. Global trade continued to grow meaningfully as a share of GDP until the Global Financial Crisis of 2008-2009. Since then, it has bounced around that peak level.
Globalization has its advocates and its critics, but deepening economic integration over decades has led to two undeniable trends in the world economy:
Developing economies, most notably China, experienced a dramatic rise in per capita GDP, due to rapid export growth, sustained capital inflows and rising productivity, and
The prices of globally traded goods fell significantly relative to prices of other goods, bringing down overall inflation. Consequently, interest rates in high-income countries fell steadily in both real and nominal terms.
The largest beneficiaries of these trends were Chinese labor, U.S. multinationals and global owners of capital (investors). The biggest losers were factory workers in the developed world. Since 1990, over 800 million people in China have been lifted out of extreme poverty. Western businesses and U.S. multinationals also reaped massive gains. Moving production offshore boosted corporate profit margins and eroded labor’s bargaining power, allowing the business sector to take a larger share of national income.
Real wages for American workers have lagged behind output per worker, and wages as a share of GDP have dropped steadily since the late 1980s. At the same time, corporate profit margins have expanded to an unprecedented level.
Expanding profit margins encouraged massive inflows of foreign capital into U.S. financial markets, which both reduced the cost of capital for U.S. companies relative to their foreign peers and lifted U.S. asset values.
All else being equal, declining global integration will lead to:
Higher prices for goods,
Higher interest rates,
Higher wages, and
Lower corporate profit margins.
Few economists will argue that the net economic benefit of tariffs and other trade barriers is positive. However, several non-economic rationales, including national security, may justify trade barriers in certain sectors.
If the Trump Administration ultimately succeeds in imposing higher U.S. tariffs, and thereby reduces U.S. consumption of imports, foreign countries can choose one of two paths: either produce fewer goods or consume more. If too many countries opt to produce less, a global recession would likely ensue. If enough opt to consume more, the global economy will likely become more balanced and grow faster, but with a greater share of the growth generated outside the U.S.
Both Europe and China appear to be choosing to encourage greater consumption. Both regions have increased fiscal stimulus and lowered interest rates. In the short term, reduced U.S. demand for imports would create excess manufacturing capacity and likely spur non-U.S. suppliers to lower prices, reducing inflation abroad. Longer term, other nations choosing to run their economies “hot” will likely lead to higher inflation everywhere, less efficient supply chains and greater demand for commodities and infrastructure.
THEMATIC UPDATE
Equity investors may be starting to discount this possibility. Markets outside the U.S. outperformed the S&P 500 in the first half of 2025. The MSCI All Country World ex USA Index generated a total return of 17.9% year-to-date. We continue to see attractive investment opportunities in both our End of Disinflationary Tailwinds and Opportunities Abound Abroad themes.
We are actively adjusting the emphasis in our Heterogeneous Computing theme. To date, it has focused primarily on semiconductors and technology hardware and equipment stocks, many of which greatly benefited from the AI-related capital spending boom. We are shifting our focus towards software, services and applications that are well-positioned to capitalize on the infrastructure spending that has already occurred.
While we believe that AI has great long-term potential, we worry that the market is overly optimistic about its short-term impact. For example, The Carlyle Group estimates that more than $1.8 trillion will be spent on AI infrastructure by the end of the decade. But according to Coatue, another global investment firm, the combined sales of AI services are projected to be less than $20 billion in 2025. Even if AI service revenue doubles every year for the next five years, the aggregate revenue generated over those years would cover only about 70% of the projected capital spending. Few would consider that to be an acceptable rate of return. As companies and investors stare at this possibility, we expect the rapid growth in AI-related capital spending to level off in the quarters ahead.
We are phasing out our Post-Pandemic Consumer theme. While work-from-home and other lifestyle changes ushered in by the pandemic are likely to persist, we think these trends are now reflected in current valuations.
We believe global markets are still digesting the long-term implications of the policy changes and geopolitical events of the past six months. The magnitude of these changes suggests the reverberations will be significant, but unfold over years, not months or weeks. We remain intensely focused on our deep Thematic research. We are actively working on a new theme that we may introduce to portfolios in the second half of this year if our research substantiates some of our initial hypotheses. More generally, we continue to position portfolios relatively conservatively and look abroad for new opportunities. We are grateful for our clients’ continued support in this endeavor.
Important Disclosures This commentary is for informational purposes only. The information set forth herein is of a general nature and does not address the circumstances of any particular individual or entity. You should not construe any information herein as legal, tax, investment, financial or other advice. Nothing contained herein constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments. This commentary includes forward-looking statements, and actual results could differ materially from the views expressed. Materials referenced that were published by outside sources are included for informational purposes only. These sources contain facts and statistics quoted that appear to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. Fact and circumstances may be materially different between the time of publication and the present time. Clients with different investment objectives, allocation targets, tax considerations, brokers, account sizes, historical basis in the applicable securities or other considerations will typically be subject to differing investment allocation decisions, including the timing of purchases and sales of specific securities, all of which cause clients to achieve different investment returns. Past performance is not indicative of future results, and there can be no assurance that the future performance of any specific investment or investment strategy will be profitable, equal any historical performance level(s), be suitable for the portfolio or individual situation of any particular client, or otherwise prove successful. Investing involves risks, including the risk of loss of principal. The level of risk in a client’s portfolio will correspond to the risks of the underlying securities or other assets, which may decrease, sometimes rapidly or unpredictably, due to real or perceived adverse economic, political, or regulatory conditions, recessions, inflation, changes in interest or currency rates, lack of liquidity in the bond markets, the spread of infectious illness or other public health issues, armed conflict, trade disputes, sanctions or other government actions, or other general market conditions or factors. Actively managed portfolios are subject to management risk, which involves the chance that security selection or focus on securities in a particular style, market sector or group of companies will cause a portfolio to incur losses or underperform relative to benchmarks or other portfolios with similar investment objectives. Foreign investing involves special risks, including the potential for greater volatility and political, economic and currency risks. Please refer to Chevy Chase Trust’s Form ADV Part 2 Brochure, a copy of which is available upon request, for a more detailed description of the risks associated with Chevy Chase Trust’s investment strategy. The recipient assumes sole responsibility of evaluating the merits and risks associated with the use of any information herein before making any decisions based on such information.
How the Advent of Molecular Medicine Exemplifies the Power of Thematic Investing
In this interview, Thematic Research Analyst Garrett Collier explains how the theme demonstrates Chevy Chase Trust’s long-term, cross-sector approach to investing.
What is the Advent of Molecular Medicine, and why has it been such a long-standing theme for Chevy Chase Trust?
At its core, the Advent of Molecular Medicine is about using genomic sequencing to better understand human disease and develop more precise, targeted treatments. It’s one of our oldest themes because the underlying science continues to evolve and create new investment opportunities. Over time, it’s created what we call a flywheel effect. More sequencing drives better understanding of disease, which drives better diagnostics and therapies, which drives even more sequencing. This cycle continues to generate meaningful investment opportunities.
How does this theme reflect CCT’s Global Thematic Investing approach?
Molecular Medicine illustrates the way we think across sectors. The theme began with genomic sequencing and the companies making the machines that enabled this work. But as the science evolved, so did the opportunities, from diagnostics to drug development to advanced computing. It’s a great example of how following a single theme over time can lead to investments that span healthcare, technology and beyond. This cross-sector lens is a defining part of how we invest.
What sets your investment process apart when tracking themes like Molecular Medicine?
We’re not just reacting to headlines — we’re immersed in the science and in direct dialogue with the companies doing the work. We follow the evolution of a theme over time, which positions us to find opportunities early. A lot of our work is about thinking several steps ahead. For example, if genomic sequencing is taking off, what tools and infrastructure are going to be critical to support it? What technologies enable better and cheaper sequencing and what companies will benefit from these improvements? This long-term, fundamentals-driven perspective helps us identify promising companies early.
What role does rigorous research play in managing risk within this theme?
While innovation in healthcare is often exciting, not all of it is investable. We always ask fundamental questions: Is there a market for this? Is there a real business model behind the innovation? You can have the most exciting tech, but if it’s too costly to implement, it’s not going to work as an investment. So, it’s about marrying optimism on innovation with disciplined analysis — a sober approach that’s grounded in fundamental research. And by digging deep, we can separate the promising technologies from the interesting ideas that may not be investable.
How does your team identify cross-sector connections and translate them into investable ideas?
Themes like Molecular Medicine often generate ripple effects. As we dive deep, we sometimes uncover adjacent opportunities. For example, once you understand how critical data analysis is to genomic science, you start asking what technologies enable that. We started hearing researchers say they needed Graphics Processing Unit (GPU) technology — not Central Processing Unit (CPU) technology — to process the vast quantities of genomic data and realized that demand for high-performance computing would extend far beyond health care. That led us to invest in companies making GPUs well before ChatGPT became a common topic at the dinner table. It’s a textbook example of how following one theme closely can reveal opportunities in entirely different industries – an approach that is central to our thematic strategy.
You mentioned earlier the “Flywheel Effect” you see in Molecular Medicine. Can you share a specific example of this in action?
One example is cancer screening and detection using blood tests that detect tumor DNA. If you’ve been treated for cancer, these non-invasive tests can help detect recurrence by simply analyzing your blood. That’s possible from years of advancements in genomic research. And the more these tests are used, the more data they generate, which improves future diagnostic tests and drives further demand for sequencing.
How has the Molecular Medicine theme evolved since its inception?
It started with research-driven demand — sequencing DNA to understand it better. Then came targeted therapies, like gene and cell therapies. Some of those have been slower to play out, but others have led to real breakthroughs. Now we’re seeing widespread clinical applications — tumor profiling, noninvasive prenatal testing, early disease detection. What began as a research tool is now part of everyday patient care, helping to improve and save lives.
What are the most exciting emerging applications of Molecular Medicine you’re tracking right now?
AI is a transformative force in Molecular Medicine. DNA has billions of data points, and AI can help identify correlations humans might miss. That’s valuable in drug discovery and diagnostics. Companies that build massive data sets can harness the insights of improving AI models to differentiate themselves from competitors. As AI models require more data, sequencing demand should continue to grow, creating tailwinds to drive the theme forward.
Why Fixed Income Investing Might Be Right for You Today
In this interview, Fixed Income Portfolio Manager Carlton Davis explains how adding fixed income to your investment portfolio can help you weather market volatility.
What is fixed income investing, and what role does it play in wealth management?
Fixed income investing seeks to deliver predictable income while preserving capital. At its core, it’s a loan — a bond — to an entity where an investor provides capital in exchange for regular interest payments. Common examples include municipal bonds, corporate bonds, U.S. Treasury securities and asset-backed securities. Fixed income investments can provide stability and income, helping to smooth out the volatility of riskier markets.
What opportunities do you see in fixed income in the near future?
In the current environment, I believe the fixed income market is poised to deliver attractive returns relative to the broad equity market. Yields are currently at levels not seen since the great financial crisis. I believe it’s unlikely we’ll see yields return to the ultra-low levels of the past decade, which creates an opportunity for higher returns in the future. Starting yields are a strong predictor of fixed income total returns.
Credit spreads, the additional yield pickup for a corporate bond versus a Treasury bond, have generally moved tighter over the past several years, but the current environment has investors revaluating the trend. Real yields (current treasury yield – expected inflation) have reached levels not seen since before the Great Financial Crisis (2008-2009), providing investors with income well above the rate of inflation. There is also a divergence in global monetary and fiscal policy that may alter asset-class valuations. These factors have led to dislocations in the bond market and provide opportunities for active managers. We are moving into a period where investors should be rewarded for identifying relative value across sectors and individual credits.
Why is fixed income investing such an important tool in uncertain economic times?
It comes down to peace of mind. Fixed income typically offers lower returns than equities — but also significantly lower volatility. That means predictable income when markets are choppy. Even though bond prices can fluctuate day to day, our signature buy-and-hold strategy allows us to focus on the income being generated, not the change in market value due to interest rate volatility. That’s a huge advantage in uncertain economic times — clients can rely on their bonds to mature at par and avoid selling at depressed prices as they might experience with a bond fund or ETF.
Why does Chevy Chase Trust use individual bonds in its portfolios?
Many individual investors buy Bond Funds or ETFs to get broad exposure to fixed income, but we see several drawbacks to this approach.
Funds or ETFs, while a proxy for the market, do not have a predictable income stream and have no set maturity date or value. Ownership of funds or ETFs may include additional layers of management fees, and the passive approach is exposed to impacts from fund flows and trading decisions. This defeats the purpose of most fixed income strategies.
We believe individual bonds — not bond funds or ETFs — are the best fit for investors. With individual bonds, clients know exactly what they own, when the bonds mature and what income will be generated going forward. This clarity is incredibly useful for planning and managing expenses. Plus, individual bonds are more tax efficient, allowing you to better manage capital gains taxes. We focus on both taxable and tax-exempt bonds and tailor each portfolio to the client’s needs.
How does Chevy Chase Trust’s approach to fixed income differ from other firms?
Our approach combines a focus on the macroeconomic landscape with fundamental knowledge of bond issuer credit and market dynamics. This allows us to build portfolios based on where we believe the economy and interest rates are headed. We aim to add value to portfolios, not simply take the market return.
We are not a broker-dealer. We do not hold an inventory of bonds that we then sell to our own clients. This allows us to be nimble and focused on where we see value. We buy and sell bonds at institutional prices from a variety of sources, and our clients own bonds at the price we paid, with no markups. We’re always looking for the best ideas for our clients. When a client wants to understand why they own a specific bond, they can connect directly with the portfolio manager responsible for the decision.
Is fixed income investing only for older investors?
Not at all. While many older investors own bonds because of the lower risk profile, anyone seeking stability, income or lower volatility can benefit. For example, a younger investor who is risk averse or heavily invested in riskier assets may want to offset that volatility with a more predictable, stable investment. Fixed income investing is an exercise in risk management and serves as an attractive asset-liability matching tool. The common thread among fixed income investors is the desire for predictable income and lower volatility — not age or wealth.
What’s the biggest misperception about fixed income?
That it’s boring. In reality, it’s one of the more complex and technical markets. Bonds don’t trade on exchanges the way equities do — we have to source and negotiate every trade. It’s about the strategy, the research and the hunt. Every day we’re digging into economic policy, company and municipality fundamentals and market technicals. It’s incredibly intricate and intellectually rewarding.
Why were you drawn to fixed income investing?
Fixed income forces you to be curious — to constantly learn and understand what’s under the hood. It’s a highly technical, ever-evolving market that keeps me coming back for more. One day I’m looking at new issue corporate bonds, the next day I’m conducting macroeconomic research on updated Federal Reserve policy. I have learned something new every day for the past 15 years and I will continue to learn something new every day for the next 40 years. That’s what I like the most.
How CCT’s Boutique Status, Personalized Approach Builds Trust with Clients
In this interview, Senior Managing Director and Head of Business Development Marc Wishkoff shares insights into the firm’s commitment to comprehensive wealth management solutions.
How would you describe the Wealth Advisor/Relationship Manager role at Chevy Chase Trust?
At Chevy Chase Trust, relationship managers play a dual role. Our team serves as both advisors and coordinators. We draw on a team of specialists with deep expertise in investments, estate and financial planning, and trust matters. Our job involves understanding clients’ needs, identifying potential issues and bringing in the right specialists to create personalized solutions. This often involves coordinating with both internal teams and external partners, such as accountants or attorneys, to keep everyone on the same page and focused on solving the client’s objectives and goals.
What sets Chevy Chase Trust apart from other firms?
Chevy Chase Trust is truly a unique provider in a crowded industry. We offer national firm expertise in a boutique size, with a transparent investment philosophy and the ability to speak directly to the decision-makers managing your portfolio. We are intentionally not built for scale — a distinctive model that helps us maintain a focus on our clients’ objectives over everything else. As a pioneer in thematic investing, our philosophy, process and portfolios stand out in an increasingly homogenous industry.
Can you tell me more about your unique model?
Because we are privately owned and operated, we have the freedom to ignore the constraints of institutionalized money management and self-serving products. This unbiased approach allows us to provide truly client-centric advice. We’re also boutique in size and nature, and we offer the same level of service for all clients, regardless of how much they invest with us. With decisions made in-house and no bureaucratic layers, we can act quickly to address client needs. Our clients and colleagues avoid dealing with distant departments and resources to solve needs or obtain solutions. Instead, my colleagues and I can walk down the hall to get answers or bring the right team member on board. This streamlined structure helps us stay focused on delivering personalized, high-quality service.
Why do you believe your clients value this approach?
It comes down to trust. Our team is committed to putting clients’ interests first, guided by our fiduciary principles and a dedication to transparent communication. We serve as a trusted advisor our clients can call for any financial matter, even if it’s outside our direct purview. Additionally, clients appreciate knowing their investments are in expert hands, allowing them to focus on their lives. Whether it is financial planning, investment management or personalized attention, we adapt to meet each client’s unique needs.
What are your clients getting that they cannot find at larger institutions?
Our boutique structure and private ownership allow us to concentrate on long-term client objectives instead of quarterly company profits. We are able to allocate resources to handle client matters so that the timing aligns with their financial goals. We also heavily invest in our business and prioritize attracting and retaining experienced talent. In fact, our investment team comprising 21 members boasts an average of 21 years of industry experience. Over the past three years, we have also grown our firm’s employee base by almost 30%1, adding several relationship managers to ensure our clients receive the high-touch service they deserve. This investment in our team ensures that every client receives personalized attention, helping our firm maintain a more than 97% client retention rate2.
As the industry shifts toward passive investing and outsourcing, we remain active managers and differentiate ourselves by partnering directly with clients on their unique goals, leveraging our disciplined process and unwavering focus on long-term, stable growth.
Chevy Chase Trust’s unique approach to Thematic Investing weaves together multiple themes across sectors, geographies, and industries, each designed to capitalize on research-driven insights. Listen to our quarterly update of economic conditions and investment strategy.
Everything we do starts with a conversation. Understanding your unique story is key in the development of a plan with your best interests in mind. To connect with us to learn more and begin a conversation, visit chevychasetrust.com.
Important Disclosures This commentary is for informational purposes only. The information set forth herein is of a general nature and does not address the circumstances of any particular individual or entity. You should not construe any information herein as legal, tax, investment, financial or other advice. Nothing contained herein constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments. This commentary includes forward-looking statements, and actual results could differ materially from the views expressed. Materials referenced that were published by outside sources are included for informational purposes only. These sources contain facts and statistics quoted that appear to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. Fact and circumstances may be materially different between the time of publication and the present time. Clients with different investment objectives, allocation targets, tax considerations, brokers, account sizes, historical basis in the applicable securities or other considerations will typically be subject to differing investment allocation decisions, including the timing of purchases and sales of specific securities, all of which cause clients to achieve different investment returns. Past performance is not indicative of future results, and there can be no assurance that the future performance of any specific investment or investment strategy will be profitable, equal any historical performance level(s), be suitable for the portfolio or individual situation of any particular client, or otherwise prove successful. Investing involves risks, including the risk of loss of principal. The level of risk in a client’s portfolio will correspond to the risks of the underlying securities or other assets, which may decrease, sometimes rapidly or unpredictably, due to real or perceived adverse economic, political, or regulatory conditions, recessions, inflation, changes in interest or currency rates, lack of liquidity in the bond markets, the spread of infectious illness or other public health issues, armed conflict, trade disputes, sanctions or other government actions, or other general market conditions or factors. Actively managed portfolios are subject to management risk, which involves the chance that security selection or focus on securities in a particular style, market sector or group of companies will cause a portfolio to incur losses or underperform relative to benchmarks or other portfolios with similar investment objectives. Foreign investing involves special risks, including the potential for greater volatility and political, economic and currency risks. Please refer to Chevy Chase Trust’s Form ADV Part 2 Brochure, a copy of which is available upon request, for a more detailed description of the risks associated with Chevy Chase Trust’s investment strategy. The recipient assumes sole responsibility of evaluating the merits and risks associated with the use of any information herein before making any decisions based on such information.
We penned the attached first quarter 2025 Investment Update before the Trump Administration’s April 2nd tariff announcement and the strong reactions from trading partners and financial markets.
In our Global Thematic Equity research, we try to focus beyond the noise of the short-term news cycle, as we pursue long-term investment opportunities brought about by broad secular trends that impact corporate performance and stock valuations across geographies and sectors.
Occasionally, however, the news of the moment has long-term implications for businesses and investors. We believe this is one of those times. The new tariffs upend the calculus that business leaders have used to make decisions for decades. Therefore, they require careful consideration.
These tariffs also constitute the largest peace-time tax increase in U.S. history. Yet to be determined is how much of that tax will be borne by consumers versus companies. If unchanged, the tariffs will reduce corporate profitability and raise the risk of a U.S. recession. Retaliatory tariffs likely to be enacted in response by other countries would reduce demand for U.S. exports. $8 trillion in annual sales generated by foreign subsidiaries of U.S.-domiciled multinationals are also now in jeopardy.
Understandably, these changes have roiled equity markets. The S&P 500 declined 11% in the two trading days after the announcement. The index is now down 14% year-to-date.
In addition to studying significant near-term, first-order impacts, we are focused on understanding longer-term, second- and third-order impacts that may outlast this tariff regime, particularly if the announced tariffs are merely a starting point for negotiation, as some posit. This radical pivot in trade policy is only one of several changes that are recasting the role of the U.S. on the global stage, increasing the importance of our Opportunities Abound Abroad investment theme.
While these events are deeply unsettling, we believe our time-tested investment process will help us to navigate this policy-induced volatility with a clear-eyed, long-term perspective that will ultimately benefit our clients.
During this tumultuous period, please reach out to us, or to our wealth advisors and portfolio managers, who remain intensively focused on the opportunities and risks of this moment.
Sincerely,
In the first quarter of 2025, financial markets started to reflect several of the risks we noted in our Fourth Quarter 2024 Investment Update. Already grappling with high levels of uncertainty, U.S. companies and consumers started to defer spending and investment. This is an environment for which we have prepared; we will try to navigate it with equal measures of ambition and caution.
AN ABRUPT REVERSAL
U.S. financial markets had an unsettling first quarter. After starting out strong, with the S&P 500 reaching an all-time high of 6,144 on February 19, the index dropped 10% through March 13, wiping out more than $5 trillion of U.S. equity market capitalization in just three weeks. Non-U.S. equities, however, rose nicely.
The MSCI All Country World Index excluding the U.S. (ACWI ex U.S.) finished the quarter up 4.6%, driven by double-digit increases in Germany, Hong Kong, Spain and Brazil. The S&P 500 ended at 5,612, down 4.6%, delivering its worst quarterly performance relative to the ACWI ex U.S. in over 15 years.
These results defied widespread expectations at the start of 2025 for continued strong U.S. equity market performance and weakness in the rest of the world.
We didn’t share in consensus expectations. In our Fourth Quarter 2024 Investment Update, we stated that, in our view, “U.S. equity market valuations fully reflect both recent good news and expectations of more, increasing the risk of a correction.” We listed seven risks to the S&P 500’s extraordinary run: very high expectations, valuations near record highs, U.S. equity domination, unprecedented market concentration, high bond yields, policy risk and extremely broad and high levels of equity ownership.
Clearly, trade worries weighed on investor sentiment in the latter half of the first quarter. We believe two other factors were also meaningful contributors to U.S. market declines:
A newfound measure of realism about the future profitability of artificial intelligence (AI) and continued cash flow growth for the Magnificent 71
TRADE AND TARIFFS: ONLY PART OF THE STORY
During the first quarter, the Trump Administration imposed the highest U.S. tariffs in almost a century, called them off, put them back and threatened more to come, driving the Trade Policy Uncertainty Index to a record high.
High tariffs are likely to depress trade and raise consumer prices, if left in place. Uncertainty about tariffs and other policies has already had negative effects. Many businesses are delaying capital investments and hiring until they have more clarity on policy decisions that could affect their return on investments. Wealthy U.S. households have also cut spending due to concerns about an equity market decline. As a result, many Wall Street economists lowered their forecasts for U.S. GDP growth in 2025.
Nonetheless, tariff uncertainty doesn’t seem to fully explain the drop in U.S. equities in the first quarter. Many international equity markets that appear to be vulnerable to the new tariff policy performed remarkably well. Some highly cyclical sectors, such as energy, also rose.
AI REALITY BITES THE MAG 7
The Mag 7 fell by just over 16% in the quarter and are well off their all-time highs. Since they collectively represented more than one-third of the S&P 500 when the year began, they dragged the index down, after powering it higher for the past five years.
We suspect that the Mag 7 declined in the first quarter because of growing skepticism that AI will become profitable near term. Most of the Mag 7 are quasi-monopolies. It is hard to see how investing hundreds of billions of dollars in new infrastructure will make these companies more profitable than they already are. Furthermore, history shows that major shifts to new technologies have tended to disrupt the existing market hierarchy, not reinforce it.
Concerns about Mag 7 valuations may have also taken a toll. At year-end 2024, the Mag 7 were selling at extremely high valuations: about 44 times earnings on average, including 124 times earnings for Tesla. In recent years, many analysts have justified Mag 7 valuations by citing their low capital-spending burdens. But now, the Mag 7 are spending heavily on server farms and other assets in response to the AI opportunity. As a result, the Mag 7 have higher capital expenditures relative to sales than any other sector, except utilities.
As usual, some enthusiasts claim, “this time is different.” Unlike the market favorites during the tech bubble of the late 1990s, they say, the Mag 7 companies that are investing heavily in AI are profitable and cash-flow positive. We think that story is dubious at best. We suspect that the Mag 7’s AI businesses would be revealed as deeply unprofitable if we could separate them from the cash-cow, quasi-monopoly businesses that support them. Privately held pure-play AI companies are valued at extraordinarily high multiples of minimal sales and are incurring huge losses.
FOREIGN CAPITAL FLOWS MATTER (BOTH IN AND OUT)
Repatriation of foreign funds was another driver of the market drop in the first quarter. For many years, three concurrent factors made U.S. equities very alluring to non-U.S. investors: relatively strong U.S. economic growth, strong equity market outperformance and U.S. dollar appreciation. Much of the S&P 500’s 150% rise since January 2019 was due to unprecedented buying from outside the U.S. In aggregate, non-U.S. investors increased their holdings of U.S. equities by almost $10 trillion over five years, while the value of non-U.S. holdings by U.S. equity investors “only” increased by about $2 trillion.
The situation changed in the first quarter. Some non-U.S. investors withdrew from U.S. markets, due at least in part to the sharp rise in political tensions between the U.S. and its long-time allies. For example, the Danish teachers’ pension fund, AkademikerPension, with roughly $20 billion of assets under management, said it would sell its remaining Telsa shares, mainly in response to Elon Musk’s interference in European politics. The U.K. government is pressuring pension funds to commit 10% of their assets to British equities, up from roughly 4% today. Canada is similarly exerting pressure on institutions to bring assets “home”.
If the first quarter is a harbinger of things to come, outflows could weigh heavily on U.S. equities. There are also non-political reasons to expect U.S. and non-U.S. investors to diversify equity holdings into other geographies.
THEMATIC UPDATE – OPPORTUNITIES ABOUND ABROAD
Over the last 15 years, U.S. nominal GDP grew 94%, well above the 10.5% average for the Group of 7 nations2 excluding the U.S. Over the same period, the S&P 500 rose 427%, while the MSCI ACWI ex U.S. rose only 34%. The U.S. dollar also appreciated sharply versus its trade-weighted index.
There were many reasons for U.S. economic and financial market outperformance in this period. Europe was beset by integration issues and the Sovereign Debt Crisis of 2012-2013. The U.K. vote in 2016 to leave the European Union inflicted further damage. Japan was struggling with the challenge of an aging population, sustained deflation, competition from China, and a weakening yen. Meanwhile, rapid earnings growth from the U.S. tech sector contributed to outsized profits for U.S. companies.
A more prosaic explanation for faster economic growth in the U.S. gets less attention: greater U.S. fiscal stimulus. The U.S. government has spent lavishly and cut taxes to support economic growth over the past 10 years, while other nations ran much smaller deficits relative to their economies’ sizes.
This situation isn’t likely to last. Until 2022, extremely low interest rates allowed the U.S. to accumulate increasingly higher levels of debt without interest expense spiraling out of control. However, the higher interest rates of the last few years have caused interest expense to soar. Today, interest expense is a greater share of total expenditures in the U.S. than it is in Italy, a country long associated with fiscal profligacy.
Therefore, it seems unlikely that lavish government spending and tax cuts will continue to spur the U.S. economy. By contrast, we think that U.S. tariff and defense policies are likely to prompt expansionary fiscal stimulus elsewhere.
The policy changes underway in Europe are akin to shifting tectonic plates that could set off an economic earthquake. The European Union (EU) appears to have both the will and firepower to stimulate economic growth. In a paper published early this year in the Financial Times, leaders of the European Central Bank and European Commission declared: “Europe has got the message on change. We are ready to do whatever is necessary to bring Europe back on track.” The European Commission is an independent AAA-rated bond-issuing entity, and the debt-to-GDP ratio for the EU currently sits at a relatively low level of 81%, well below the 122% for the U.S.
One area that we are confident will garner additional European investment is defense. Historically, military spending has been a strong driver of countries’ economic growth, with benefits for innovation and productivity.
In addition, European banks, which dominate European sovereign lending, are the healthiest they have been in decades. They have ample capacity to step up purchases of EU and national debt and to make consumer and business loans.
Of course, it is not all rosy across the pond. The imposition of U.S. tariffs could severely dent European exports of goods to the U.S. A tariff war with the U.S. would be unambiguously negative for the EU economy, but the damage may be somewhat offset by stimulus from increased fiscal spending.
We added our Opportunities Abound Abroad theme to portfolios almost two years ago, in the second quarter of 2023. Admittedly, we were early in this call, but we are pleased with the traction we have seen since late last year. Despite the mid-single digit increase in the first quarter of 2025, European equity indices are still significantly cheaper than the S&P 500, and we think expectations are still too low for the Continent. We are excited by opportunities in other regions, as well.
CONCLUSION
The past quarter’s returns clearly demonstrated the benefit of diversification. After several years in which a handful of mega-cap U.S. technology stocks dominated global equity market performance, positive returns came from many geographies, sectors and ideas that have been overlooked.
While the Mag 7 are down significantly from their recent highs, they are still very expensive, and their outsize share of the S&P 500 still poses a significant risk to the U.S. index. Meanwhile many non-U.S. equities are priced at such a deep discount to the U.S. that not a lot has to go right for investors to wake up to their value.
As always, we are trying to look past the short-term noise to focus on longer-term opportunities we believe are emerging for our clients.
1Amazon, Apple, Alphabet, Meta, Microsoft, Nvidia and Tesla often referred to as the “Mag 7”
2Group of 7: Canada, France, Germany, Italy, Japan, the U.K. and U.S.
Important Disclosures This commentary is for informational purposes only. The information set forth herein is of a general nature and does not address the circumstances of any particular individual or entity. You should not construe any information herein as legal, tax, investment, financial or other advice. Nothing contained herein constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments. This commentary includes forward-looking statements, and actual results could differ materially from the views expressed. Materials referenced that were published by outside sources are included for informational purposes only. These sources contain facts and statistics quoted that appear to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. Fact and circumstances may be materially different between the time of publication and the present time. Clients with different investment objectives, allocation targets, tax considerations, brokers, account sizes, historical basis in the applicable securities or other considerations will typically be subject to differing investment allocation decisions, including the timing of purchases and sales of specific securities, all of which cause clients to achieve different investment returns. Past performance is not indicative of future results, and there can be no assurance that the future performance of any specific investment or investment strategy will be profitable, equal any historical performance level(s), be suitable for the portfolio or individual situation of any particular client, or otherwise prove successful. Investing involves risks, including the risk of loss of principal. The level of risk in a client’s portfolio will correspond to the risks of the underlying securities or other assets, which may decrease, sometimes rapidly or unpredictably, due to real or perceived adverse economic, political, or regulatory conditions, recessions, inflation, changes in interest or currency rates, lack of liquidity in the bond markets, the spread of infectious illness or other public health issues, armed conflict, trade disputes, sanctions or other government actions, or other general market conditions or factors. Actively managed portfolios are subject to management risk, which involves the chance that security selection or focus on securities in a particular style, market sector or group of companies will cause a portfolio to incur losses or underperform relative to benchmarks or other portfolios with similar investment objectives. Foreign investing involves special risks, including the potential for greater volatility and political, economic and currency risks. Please refer to Chevy Chase Trust’s Form ADV Part 2 Brochure, a copy of which is available upon request, for a more detailed description of the risks associated with Chevy Chase Trust’s investment strategy. The recipient assumes sole responsibility of evaluating the merits and risks associated with the use of any information herein before making any decisions based on such information.
In this interview, Senior Managing Director Ramona Mockoviak shares how Chevy Chase Trust fosters a culture of collaboration and teamwork where women thrive.
How would you describe your role at CCT?
I lead Chevy Chase Trust’s Virginia office. I’m an advisor, meaning I work directly with clients and client families as a relationship manager and as the leader of the teams that deliver our services. I’m also responsible for bringing new families into our Chevy Chase Trust family. We exclusively focus on both multigenerational wealth creation and preservation. There’s a very human element to all that we do—it’s a profound professional responsibility, particularly when we’re acting in a capacity as a trustee or executor, interacting with a family in a critical time of life. I’m motivated by the desire to help.
What drew you to CCT in the first place?
I strongly believe that we add value for our clients day in and day out. I’ve had the benefit of working in large organizations, including another private bank, where I encountered many sharp elbows. You can get to the top, but there’s no benefit in trying to help others along the way. At Chevy Chase Trust, it’s the opposite—an embracing culture from Day One. Do I think our clients benefit from it? I do. We’re a steady presence that can help in every phase of their lives.
How does CCT elevate women throughout the firm?
Chevy Chase Trust has a culture of mentorship. There’s a willingness among the experienced, longstanding members of the firm, to reach out to the younger cohort in a friendly way that isn’t contrived. When mentorship is natural like it is here, and people connect with leaders they want to emulate and create a real friendship, then it’s powerful. Additionally, there aren’t barriers at the firm. The women in leadership positions, like our Chief Investment Officer, Amy Raskin, and Managing Director, Blake Doyle, are outstanding professionals, regardless of gender.
Why is female leadership important at CCT?
Until I was in the interview process to join the firm, the high number of women in key leadership positions didn’t really strike me. Now I see that it’s created a collaborative and merit-based culture. Our firm is not hierarchical. Instead, it embraces collaboration and teamwork. By elevating merit and recognizing talent, talented women are more likely to rise to the top. I also believe women are in some ways uniquely suited to be wealth managers. Women tend to be very good listeners and that translates into better strategy.
What advice would you give to other women in this field?
What I say to young women, including the young women here at Chevy Chase Trust, is to look for an environment where you can thrive and be respected. Know that you can advocate for yourself, whether it’s about your position, compensation or opportunities.
In this interview, Senior Managing Director and Co-Head of Planning Group Laly Kassa explains why female leadership is essential to better serving today’s clients.
Why is female leadership particularly important in wealth management?
Women make up half of the population, so we need representation in leadership across all industries. But it’s especially important in wealth management where, traditionally, the breadwinner and financial decision-maker has been seen as more of a man’s role — even though there’s no reason it should be. As women increasingly become breadwinners and heads of households, it’s crucial to have more women leaders in our field. Even women who haven’t been involved in finances in the past are interested and often want to learn more; they may feel more comfortable asking questions of another woman. Finally, we believe it’s important that we look like the clients we serve at Chevy Chase Trust because that is the best way to build relationships.
You mentioned women increasingly becoming breadwinners. What other shifts have you seen during your career?
Women have always played a role in financial discussions, although often it was a secondary role. Today, women are increasingly stepping into primary financial roles. Many of our clients are powerful, successful women, and when they see someone like them across the table during meetings, it is a major differentiator for us. Similarly, in families where women haven’t been the major financial contributors, having a woman as part of their financial team means they know their concerns will be heard and addressed. It’s all well and good to say we serve such clientele, but it reinforces our credibility when female clients see that the portfolio managers and planners across the table from them are women, too.
What inspired you to pursue a career in this field?
It was entirely by chance. When I was in graduate school looking for an internship, the only position available was at a private bank, so I took it without any intention of making finance my career. Surprisingly, I discovered that I enjoyed working with the markets and found the environment of a New York trading room in the 1980s very exciting. At that time, there weren’t many women in the field.
Decades later, I moved to Washington to join my husband. I connected with my former mentor from New York, who held a senior position locally. She didn’t have a specific role in mind; she simply wanted me to join her firm. The position available was “financial planner.” That prompted me to quickly learn about financial planning and led me back to grad school again — much later in life compared to my classmates — to study it formally. Once I was immersed in it, I realized I loved it, blending my passion for mathematics with meaningful human interactions. It wasn’t planned, but it turned out to be the perfect fit.
Did your mentor’s presence in the industry influence your decision to stay?
Private wealth management, in my experience, has always been at the forefront of promoting women. When I started, not many women held senior positions, but there were plenty of women around to create a supportive environment that helped us advance together. Private wealth management consistently offered more opportunities for women to move into significant roles than did corporate or investment banking. I’ve had excellent mentors of both genders, but having female mentors was particularly inspiring because they actively supported and encouraged women moving into senior leadership roles.
What changes have you seen with female leadership in wealth management?
I’ve noticed more women occupying top executive positions. While this progress isn’t uniform across the finance industry, it’s particularly noticeable in wealth management. There’s still work to do, but it has improved. Having more women in leadership roles helps to create environments that recognize and accommodate the unique challenges women may face — especially those balancing family responsibilities. Early in my career, I benefited greatly from women leaders who understood and supported my needs as a mother with young children. It’s something I remember and try to emulate today now that my own kids are grown.
Did you face any challenges as a woman, and if so, how did you overcome them?
I haven’t viewed challenges specifically through the lens of gender, but there was one instance in which a male manager promoted my male colleague over me. He explained that, although I was qualified, my colleague wouldn’t accept reporting to a woman, but I could accept reporting to him. He was right practically, but it wasn’t right fundamentally. My strategy was to take a step back, not react immediately, evaluate the situation carefully, and then gradually work my way out. Not feeling resentful and not creating a lot of noise served me better in the long run. It also helped that I had support from those less directly involved in the situation and brought a different perspective. Aside from that clear example, I’ve not encountered many overt challenges related to gender — even when working in a trading room with hundreds of men and very few women.
How does Chevy Chase Trust elevate and support women throughout the firm?
It comes through in every single aspect of our work at Chevy Chase Trust. Support for women is simply built into our organizational DNA. It’s not a question of whether we hire and promote women; it simply is our standard practice that we hire the best person for the job and those are often women. Women are at the table in this firm in the same way that men are. They hold numerous senior roles — chief investment officer, head of marketing, senior portfolio manager — and their presence is felt everywhere. This naturally fosters a supportive environment, encouraging more women to join and men that are comfortable working as equals with women in every division of the firm. We highly value camaraderie and teamwork, and this inclusive atmosphere has become a defining characteristic of our firm.
What advice would you give to women considering careers in wealth management?
The prospects in private wealth management are endless — you can start at entry-level and rise all the way to the top. But first, you need to make sure this is a profession you truly love because it’s a lot of hard work and long hours. If you genuinely enjoy the work, it won’t feel like a burden. This field offers so many challenges but also very interesting work because our clients come from many different backgrounds, with fascinating careers and complex family situations and dynamics that we help them navigate. It’s a rewarding career, and loving the work is essential if you want to thrive.
The ranking methodology for 2025’s Top Women Wealth Advisors Best-In-State developed by SHOOK Research, is based on in-person, virtual and telephone due diligence meetings to evaluate each advisor qualitatively, a major component of a ranking algorithm that includes: client impact, industry experience, review of best practices and compliance records, firm nominations; and quantitative criteria, including: assets under management and revenue generated for their firms.
Source: Forbes.com, awarded February 2025. Data compiled by Shook Research, LLC based on time period from 9/30/23-9/30/24. Chevy Chase Trust paid no application fee to participate.
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Chevy Chase Trust’s Quarterly Investment Update
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Everything we do starts with a conversation. Understanding your unique story is key in the development of a plan with your best interests in mind. To connect with us to learn more and begin a conversation, visit chevychasetrust.com.
Important Disclosures This commentary is for informational purposes only. The information set forth herein is of a general nature and does not address the circumstances of any particular individual or entity. You should not construe any information herein as legal, tax, investment, financial or other advice. Nothing contained herein constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments. This commentary includes forward-looking statements, and actual results could differ materially from the views expressed. Materials referenced that were published by outside sources are included for informational purposes only. These sources contain facts and statistics quoted that appear to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. Fact and circumstances may be materially different between the time of publication and the present time. Clients with different investment objectives, allocation targets, tax considerations, brokers, account sizes, historical basis in the applicable securities or other considerations will typically be subject to differing investment allocation decisions, including the timing of purchases and sales of specific securities, all of which cause clients to achieve different investment returns. Past performance is not indicative of future results, and there can be no assurance that the future performance of any specific investment or investment strategy will be profitable, equal any historical performance level(s), be suitable for the portfolio or individual situation of any particular client, or otherwise prove successful. Investing involves risks, including the risk of loss of principal. The level of risk in a client’s portfolio will correspond to the risks of the underlying securities or other assets, which may decrease, sometimes rapidly or unpredictably, due to real or perceived adverse economic, political, or regulatory conditions, recessions, inflation, changes in interest or currency rates, lack of liquidity in the bond markets, the spread of infectious illness or other public health issues, armed conflict, trade disputes, sanctions or other government actions, or other general market conditions or factors. Actively managed portfolios are subject to management risk, which involves the chance that security selection or focus on securities in a particular style, market sector or group of companies will cause a portfolio to incur losses or underperform relative to benchmarks or other portfolios with similar investment objectives. Foreign investing involves special risks, including the potential for greater volatility and political, economic and currency risks. Please refer to Chevy Chase Trust’s Form ADV Part 2 Brochure, a copy of which is available upon request, for a more detailed description of the risks associated with Chevy Chase Trust’s investment strategy. The recipient assumes sole responsibility of evaluating the merits and risks associated with the use of any information herein before making any decisions based on such information.
The S&P 500 delivered another year of exceptional returns in 2024. It’s been quite a run. Today, U.S. equity market valuations fully reflect both recent good news and expectations of more, increasing the risk of a correction if inflation picks up, the economy slows or anything else goes wrong. We see the broad markets as less attractive than 12 months ago, but we’re still finding opportunities in individual companies at home and abroad that we believe will better withstand – or even benefit from – the challenges and disruption that may lie ahead.
INVESTING IN FROTHY MARKETS
It was another very strong year for global equity markets, and the U.S. again performed better than most. While the MSCI All-Country World Index generated a total return of 18% in 2024, the S&P 500 Index returned 25%.
The S&P 500 delivered similarly strong returns in 2023, and double-digit returns in five of the past six years. Its price has more than doubled from 2,507 at the start of 2019 to 5,882 at 2024’s close. In contrast, U.S. Treasuries have delivered four consecutive years of negative returns.
SOLID FUNDAMENTALS AND FROTH
There were good reasons for equity market strength in recent years. U.S. economic growth has beaten low expectations, and there still isn’t a recession in sight. In addition, inflation has fallen sharply from its highs of two years ago, prompting the Federal Reserve to lower its benchmark discount rate repeatedly, from 5.25%-5.50% in early September to 4.25%-4.50% at year end. Most analysts expect the Fed to continue cutting interest rates. There is also widespread optimism that the incoming Trump Administration will slash regulations and corporate tax rates, and that artificial intelligence (AI) will improve productivity.
But this “good news” is already reflected in share prices, and there are clear signs of froth. Consider:
The sudden surge in cryptocurrency prices
Massive retail inflows into speculative corners of the market, such as leveraged ETFs and options with zero days to expiration
Stock valuations that imply that every company related to AI will capture a significant share of a massive and highly profitable new market
Not to mention a banana duct-taped to a wall selling for $6.2 million at Sotheby’s.
SEVEN (OF MANY) RISKS TO CONSIDER
For the reasons below, we have worked over the past year to reduce risk in clients’ equity portfolios, and we think it prudent to position more defensively for 2025.
1. High Expectations: At the beginning of 2024, Wall Street economists were bearish, expecting the S&P 500 to rise by just 2% for the year, well below its long-term average annual gain. Instead, the Index rose far more than average. In contrast, the same economists now expect 2025 to be a banner year for equities, projecting above average returns despite slowing revenue growth and margins already near record highs.
2. Very High Valuations: The S&P 500 was trading at more than 26 times earnings at year end, far above its average of 19 since 2008. P/E multiples for the index have only been higher twice: in the 1990s heading into the tech and telecom bubble and for brief periods during the pandemic.
3. U.S. Equity Dominance: U.S. stocks now make up over two-thirds of the MSCI All-Country World Index’s market capitalization, an even larger share than in the Nifty-50 era of the 1970s. At $63 trillion, the total value of U.S. stocks is now four times bigger than all of Europe’s stock exchanges combined. Ten years ago, the U.S. market wasn’t even twice the European markets’ size. The Stoxx Europe 600 Index is trading at a record 40% discount to the S&P 500. In our opinion, U.S. outperformance has gone too far, even given the well-known structural deficiencies of other developed markets.
4. Unprecedented Market Concentration: The top ten companies by market capitalization in the S&P 500 now represent 39% of the Index’s total capitalization, a record high. On average, these companies are trading at about 58 times earnings, more than double the Index P/E, and more than three times their average a decade ago.
Within the top ten lies the Magnificent Seven (“Mag 7”), which drove well over half of the S&P 500’s return over the past two years. These companies may continue to do well in 2025, but we believe their best returns are behind them. Their profit-growth advantage is narrowing, and their market dominance is becoming less assured. Further, much of the excitement about the Mag 7 is tied to AI, which has thus far delivered low returns on investment.
5. High Bond Yields: Yields on 10-year Treasuries are not high relative to history, but they are well above levels typically seen since 2008. Higher bond yields theoretically raise the opportunity cost of investing in equities—particularly growth equities, whose value is expected to be generated far into the future.
6. Policy Risks: November’s U.S. election results buoyed equity markets, and small-business optimism rose markedly. While it’s true that deregulation, a cornerstone of the new administration’s platform, often leads to productivity improvements, and lower corporate taxes should boost earnings, two other pillars of its platform may be less market friendly.
First, widespread tariffs would increase the cost of goods for both consumers and businesses and may depress spending by both. More than half of global trade consists of intermediate goods that will likely be subject to higher tariffs, increasing expenses for both foreign and domestic companies. And the U.S. stock market is not an island: S&P 500 companies derive over 40% of their earnings abroad. After decades of global economic and financial market integration, the fate of many U.S. companies is intricately tied to economic prospects overseas.
Second, tight restrictions on immigration and deportation of current U.S. residents could slow the economy or increase inflation. The recent surge in immigration allowed the labor force to grow rapidly to meet demand, while wage growth normalized. As a result, U.S. policymakers, unlike most peers abroad, were able to moderate inflation without depressing economic growth. If immigration falls substantially and labor demand remains strong, the downtrend in inflation might reverse or economic growth might slow.
According to the National Foundation for American Policy, immigration has accounted for 88% of the growth in the U.S. labor force since 2019. Historically, slower labor force growth has led to slower economic growth.
7. Extremely Broad and High Levels of Equity Ownership: Strong equity market performance over the past several years has enticed U.S. investors to hold more of their wealth in equities. Today, a record-high share of U.S. families across all income levels own stocks, and equities comprise a larger share of total household financial assets than at any time since the Federal Reserve started collecting the data in 1952. That means more people would be hurt by a market drop, which could set off a broad decline in consumer spending and a negative economic feedback loop.
This list is far from all-inclusive. We could also have highlighted risks associated with record-high deficit spending and government debt, which have increased Federal interest expense from $350 billion per year in 2020 to nearly $1 trillion today; or structural issues in residential and commercial real estate; or the slowdown in U.S. job creation.
PORTFOLIO POSITIONING
Our responsibility as portfolio managers is to maximize returns while mitigating risk. In fast-rising equity markets, the responsibility of mitigating risk is often overlooked. It is hard to contend that the balance between risk and reward has not shifted at least a little after the dramatic rise in U.S. equities.
Over the past year, we have been thinking about an old quote from Bob Farrell, who was at the time chief economist at Merrill Lynch: “Exponentially rising or falling markets usually go further than you think, but they don’t correct by moving sideways.”
Farrell wrote this in late 1998, when the tech and telecom bubble was expanding to an unsustainable extreme. Farrell was right, but early. The bubble continued to expand for more than a year, before bursting in March 2000. Leaving the party too early can be very costly for investors, as can leaving the party too late.
We recognize that we, like Farrell, might be too early in taking a more cautious stance. Equity markets rise more frequently than they fall. That’s why we trimmed, rather than eliminated, many holdings that have experienced outsized returns in recent years. In general, we redeployed the proceeds from these sales into areas that have done less well and that, in our view, offer greater return potential.
Assessing the macroeconomic landscape is an important part of our four-step investment process. We use this judgment to weight our investment themes and the holdings within them. Over the past year, we reduced the portfolio weight of our Dawn of Heterogeneous Computing theme. Many of its technology stocks – including several in the Mag 7 – enjoyed outsized returns over the past two years. We believe these stocks are more vulnerable than others if the economy slows or the AI journey stumbles. After several years of underperformance, our Advent of Molecular Medicine and Next Generation Automation themes look particularly enticing to us. Significant technological advancements in the past few quarters have boosted the prospects for both themes, but this progress is not yet reflected in share prices.
We are now evaluating additions to our End of Disinflationary Tailwinds and Opportunities Abound Abroad themes. With inflation declining globally, countries outside the U.S. will likely stimulate their economies, by increasing government spending and lowering interest rates. Both actions would be likely to boost the relative performance of these two themes.
Energy, a key component of our End of Disinflationary Tailwinds theme, has been the worst-performing sector over the past two years, underperforming the S&P 500 by 54 percentage points. Investors seem to be expecting sharp declines in oil prices, despite all-time highs in global oil demand and very low inventories.
Investors may worry that the incoming President’s “Drill, Baby, Drill” rhetoric could drive up supply, depressing prices. We do not. Large U.S. energy producers have shown incredible discipline in managing their investments, balance sheets and uses of cash. They have reduced capital spending growth in recent years, and aggregate capex remains significantly below the levels of a decade ago, even in nominal terms. Many companies have told investors that they have no plans to increase production at current oil prices. Instead, they are returning cash to shareholders at record payout ratios. We view this as an opportunity.
In general, our portfolios are trading at lower valuations than their benchmark indices, while having similar-to- faster expected earnings growth. That is a setup we like and one we believe can deliver strong relative returns over time.
CONCLUSION
After more than doubling in price since the beginning of 2019, the S&P 500 was near record highs at year end. Therein lies the challenge: Defining an alternative to passive investing in a broad market that has continued to set new all-time highs and appears increasingly driven by flows and exuberance.
As active managers, we don’t invest in the market as a whole. We seek to invest in good companies with superior return potential, and avoid those with inferior potential, based on our research into broad themes that we see reshaping the economy and markets.
As 2025 begins, we are engaged in a delicate balancing act: carefully assessing risk versus reward, selling neither too early nor too late, pursuing opportunities while remaining clear eyed in the face of uncertainty. This is the mission that has energized us for decades.
Important Disclosures This commentary is for informational purposes only. The information set forth herein is of a general nature and does not address the circumstances of any particular individual or entity. You should not construe any information herein as legal, tax, investment, financial or other advice. Nothing contained herein constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments. This commentary includes forward-looking statements, and actual results could differ materially from the views expressed. Materials referenced that were published by outside sources are included for informational purposes only. These sources contain facts and statistics quoted that appear to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. Fact and circumstances may be materially different between the time of publication and the present time. Clients with different investment objectives, allocation targets, tax considerations, brokers, account sizes, historical basis in the applicable securities or other considerations will typically be subject to differing investment allocation decisions, including the timing of purchases and sales of specific securities, all of which cause clients to achieve different investment returns. Past performance is not indicative of future results, and there can be no assurance that the future performance of any specific investment or investment strategy will be profitable, equal any historical performance level(s), be suitable for the portfolio or individual situation of any particular client, or otherwise prove successful. Investing involves risks, including the risk of loss of principal. The level of risk in a client’s portfolio will correspond to the risks of the underlying securities or other assets, which may decrease, sometimes rapidly or unpredictably, due to real or perceived adverse economic, political, or regulatory conditions, recessions, inflation, changes in interest or currency rates, lack of liquidity in the bond markets, the spread of infectious illness or other public health issues, armed conflict, trade disputes, sanctions or other government actions, or other general market conditions or factors. Actively managed portfolios are subject to management risk, which involves the chance that security selection or focus on securities in a particular style, market sector or group of companies will cause a portfolio to incur losses or underperform relative to benchmarks or other portfolios with similar investment objectives. Foreign investing involves special risks, including the potential for greater volatility and political, economic and currency risks. Please refer to Chevy Chase Trust’s Form ADV Part 2 Brochure, a copy of which is available upon request, for a more detailed description of the risks associated with Chevy Chase Trust’s investment strategy. The recipient assumes sole responsibility of evaluating the merits and risks associated with the use of any information herein before making any decisions based on such information.
Our approach seeks opportunities across asset classes and around the globe. Perhaps our single most important distinction is this: At Chevy Chase Trust, we invest in global themes. We build equity portfolios of companies positioned to exploit powerful, secular trends, disruptive ideas, innovations, and economic forces.
The smartest investment strategies are informed by sound financial planning. Our clients appreciate an integrated approach and the difference it can make. Explore the difference in our financial planning, thematic investing, risk management and fixed income strategies.
Sometimes the greatest returns come from investing in people.
We’ve created a culture that values service over products, long-term goals over short term quotas, and your success over anything else. Our team of 90 professionals is comprised of CFAs , MBAs, CFPs® and other specialists in global research, thematic investing and planning.
