BHPW Newsletter Q1 2025
2025 – 1ST QUARTER REVIEW
Market sentiment deteriorated during the first three months of the year, as investors grappled with a new regime of heightened risk and uncertainty. The knee-jerk reaction for many: shift to the sidelines, amid rising tariffs, threats of retaliation, and escalating geopolitical tensions. Even the “R word” – recession – was back on the table, and global equity markets responded accordingly, with the MSCI ACWI index ending the quarter down -1.3%. The selloff intensified into April.
This time, US stocks underperformed their international counterparts, falling -4.3%, with the steepest losses coming from last year’s biggest winners, such as technology, cyclical, and momentum-driven names. Case in point: the “Magnificent 7” largest US tech stocks, which collectively dropped by an average of -16% during the period. All seven companies ended in the red.
Ordinarily, a -16% drop in a handful of names wouldn’t draw much attention. But over the years, the Magnificent 7’s weight in major indices has climbed to outsized levels, now making up roughly a third of the S&P 500. And while we continue to like many of these businesses in our own portfolios, we’ve always been uncomfortable allocating that large a share to seven highly correlated names.
* Weights reflect index compositions as of December 31, 2024. Returns are total return figures.
Meanwhile, just as last year’s stars were becoming this year’s laggards, the reverse was also taking shape. We flagged these underperformers in January:
“While the “winners” last year were diverse, spanning a wide range of sectors and geographies, our underperformers largely fell into three key areas: Europe, Consumer Staples, and Healthcare. This clustering is typical in our experience but predicting in advance which themes will underperform has always been extraordinarily challenging.“
To wit, those same areas emerged as early bright spots in 2025, with Europe up +10.5%, Consumer Staples gaining +5.6%, and Healthcare rising +5.0% through the first three months. It’s a reminder of how quickly sentiment can shift – and how easily one year’s disappointments can become the next year’s leaders.
In fact, since Trump’s election, European stocks have now outperformed US markets by a sizable margin. Just five months ago, everyone knew that his return would ignite enthusiasm in the US and malaise in Europe. Instead, the opposite has unfolded, with his early actions prompting many investors to diversify away from US policy risk. The experience underscores a broader point we often share with clients: timing Mr. Market’s mood swings is very, very challenging.
BHPW PERFORMANCE
For our part, BHPW portfolios performed well in this environment. On the equity side, we meaningfully outpaced the broader markets, helped by our international exposure and value-oriented tilt. That strength was partially offset by weakness in a handful of our cyclical and Canadian names.
In fixed income, we also delivered solid results, with returns topping +2% on an absolute basis. Falling interest rates and conservative credit positioning contributed meaningfully, and while we slightly trailed our longer-duration benchmarks, we remain pleased with the trajectory of our fixed income gains this year.
More recently, as risk assets sold off sharply in April, our stock and bond models continued to hold up well – delivering the kind of downside protection we’ve consistently championed in these letters.
THE TARIFF TRADE OFF
On to the main topic: tariffs. Few issues are more top-of-mind for investors right now – and rightly so. The proposed measures have the potential to dramatically reshape the business landscape, with meaningful implications for both investors and companies.
A quick caveat: in our experience with complex problems – whether in investments, economics, or most other major fields – we’ve come to realize that you can understand 97% of a topic and still end up entirely wrong on the outcome. One overlooked variable can swing everything. So, we approach the following musings with humility. Still, this is one of those rare instances where we believe our perspective – shaped by both economics training and years of studying businesses – is worth sharing.
Let’s start with what should be most obvious: the world isn’t ending. Recent market reaction aside, an effective tariff rate increase of 20% across the board – while disruptive – isn’t enough on its own to derail the broader economy. Think of it as a $600 billion burden placed on a $30 trillion system. Unpleasant, yes – but not economically catastrophic. And as we’ve seen, those policies can pivot to something more palatable at any moment. We’ve been telling clients: It’s a downturn of our choosing.
The table below outlines where proposed tariff increases would fall and what the landscape could look like after potential trade negotiations:
* A 90-day pause has since been announced, temporarily setting incremental tariffs on imports from the EU, Japan, and Rest of World trading partners at 10%
Unfortunately, that’s where most of the good news ends. Our base case is that we may now be nearing – or already in – a mild economic slowdown. The reasons are twofold:
- Business investment, which typically makes up roughly 20% of GDP, has almost certainly fallen in response to recent uncertainty.
- We expect the more indirect ripple effects of tariffs to begin straining the economy as well.
It’s not just that an iPhone costs $300 more to import – it’s that sales slow, store traffic drops, and accessory purchases dry up. That pressure ripples through to retailers, parts suppliers, service providers, and even ad spending – subtly, but with a broader multiplier effect that’s difficult to fully quantify.
We think the President took a meaningful step in the right direction with his recent pause announcement. That said, the administration still appears intent on reordering the global trade landscape, as evidenced by the higher tariff rates still in effect on our three largest trading partners (Mexico, Canada, and China).
Will the plan succeed? That’s hard to say. But any path to success will ultimately have to contend with two fundamental challenges:
- Labor availability: Unemployment started the year at just 4.0%, which means the capacity to meaningfully reshore production appears fairly limited.
- Policy stability: Businesses are inherently returns-focused – and few scenarios justify large-scale investment without confidence that policies will stay stable for years to come.
Regardless of how successful the policy shift proves to be, one thing is clear: investors now face heightened tail risks. Rising retaliation, investor panic, and a more acute downturn than we currently anticipate are all on the table. After all, the ripple effects – from consumer prices to capital spending to sentiment – are only beginning to play out.
There’s one last irony worth noting: the US accounts for 65% of global stock market value but just 26% of global GDP, highlighting how much we’ve benefited from the very system we now seek to revise. Our hope is that the tariff approach evolves – ideally with a clearer recognition of real economic constraints, especially around labor, and a more targeted focus on critical sectors – rather than a blunt policy that impacts all sectors and countries at once.
Then, the business community can return to what it does best: conducting business, serving customers, and investing in future growth.
MARGIN OF SAFETY
As investors adjust to a landscape marked by greater volatility, we’d argue that fundamentals matter now more than ever.
It’s no coincidence that Benjamin Graham introduced the concept of margin of safety in the aftermath of the Great Depression. Shaped by the pain of that era, Graham emphasized buying securities at prices meaningfully below their intrinsic value – which can be assessed in two main ways:
- Fundamentals: what the business earns, and what you get to reinvest or collect over time.
- Strategic value: what a buyer might pay to own the entire business, either for its cash flows or its strategic fit.
In recent years, many investors have drifted from these principles, growing used to the idea of Mr. Market as their exit plan – that is, expecting someone else to come along and pay more for their shares. The result: plenty of portfolios now include assets with little to no grounding in actual value.
If the only plan is to sell to the next buyer, that feels more like musical chairs than investing. And in a tougher environment such as this, we’re optimistic that focusing on intrinsic value will continue to help us stand apart from the benchmarks.
LOOKING AHEAD
While today’s environment is marked by elevated risk and volatility, we believe much of the pessimism is already reflected in stock prices. For those with a longer-term perspective, we believe the current landscape offers compelling opportunities – even if a mild slowdown takes shape before growth ultimately resumes.
Here’s how we’re approaching it:
First, we’re proceeding with patience and discipline. The recent pause announcement gave us a framework to begin forecasting both near- and long-term earnings power. But policy and economic uncertainty will likely remain a theme, and we don’t see value in chasing every dip. Instead, we’re focused on fundamentals and preparing for earnings season, where we expect greater clarity to emerge. There will be winners and losers from these policy shifts – and we don’t believe they’re all priced correctly just yet.
Second, we’re trimming selectively. Some of our more stable holdings have held up remarkably well during the recent pullback. With forward returns on several of these now in the single digits, we’ve taken the opportunity to reduce those exposures and free up capital for higher-conviction ideas.
Third, we’re staying invested and active – and not overreacting. It’s worth remembering that missing just a handful of the market’s best days can significantly impact long-term returns. The chart below illustrates this: a fully invested $1,000 would have grown to $2,581 over the last decade, but missing just the 10 best days would have cut that return nearly in half.
That’s why we’re staying invested and looking to navigate – rather than avoid – this volatility. We don’t pretend to know exactly when sentiment will turn, but history has shown that some of the strongest gains often come when the outlook feels most uncertain.
BHPW POSITIONING
So how are we positioning our portfolios?
In equities, we continue to favor the most resilient businesses in industries we believe will endure. In our experience, these businesses often emerge from challenging periods in stronger positions, gaining market share as weaker players retreat. We’re watching closely for these names to approach valuations that offer compelling returns, even if the economy slows or enters a recession.
We’re also closely monitoring tariff-related dislocations, both broadly and within our portfolio, as we believe some assets still underprice the likely impact.
In fixed income, we’re staying conservative. A modest pickup in yield doesn’t justify taking on excess credit or duration risk right now. Instead, we’re emphasizing quality and downside protection in our bond models – especially with policy missteps still very much on the table.
We believe the next six weeks will bring much greater clarity. But we’re not waiting for certainty to act, taking comfort in the fact that the economy entered this period on solid footing – and that sentiment can shift quickly, sometimes with the stroke of a pen. With dislocations still present in prices, this environment offers the kind of setup where some of the most rewarding investments can be made.
Sincerely,
The BHPW Investment Team
Beverly Hills Private Wealth, LLC is a registered investment adviser. This is solely for informational purposes. No advice may be rendered by Beverly Hills Private Wealth, LLC unless a client service agreement is in place. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Past performance does not guarantee future results. Investing involves risk, including loss of principal. Consult your financial professional before making any investment decision. Other methods may produce different results, and the results for different periods may vary depending upon market conditions and portfolio composition. This newsletter does not represent an offer to buy or sell securities.