BHPW Newsletter Q2 2025
SUMMARY
The second quarter roller coaster ride has come to an end, wrapping up one of the more volatile stretches in recent memory. We can’t recall another time when a full market cycle played out over just three months – but global equities delivered exactly that, swinging from a -9.9% loss in the opening weeks to an +11.5% gain by quarter end.
That unexpectedly strong result more than erased the year’s earlier losses, bringing global equities up to a healthy +10.1% gain year-to-date. And, it happened despite a steady drumbeat of bad headlines, ranging from “Liberation Day” tariffs to renewed conflict in the Middle East.
International stocks continue to lead the way – up +19.5%, and well ahead of the +6.2% gain in their US counterparts. But nearly all that outperformance can be traced back to a falling dollar, which dropped by a whopping -10.8%. It was the steepest six-month decline for our currency since 1973, when the US came off the gold standard.
Finally, fixed income also delivered solid returns, with the Global Aggregate bond index up +7.5% to-date. Some of that strength came from the aforementioned declining dollar. But even here in the US, bonds got off to a strong start, gaining +4.0%.
Needless to say, it’s been an eventful first half of 2025 – and there’s little reason to think the volatility is fully behind us.
BHPW PERFORMANCE
BHPW’s equity portfolios performed well in this environment, delivering returns slightly ahead of our global benchmark. We benefitted from an overweight to international stocks and a tilt toward value, though those gains were partially offset by our underweight to some of the stronger-performing growth categories.
Perhaps even more gratifying than our double-digit start was our downside protection. Our portfolios exhibited a down-market capture ratio of just 42%. In practical terms, that means on days when the market fell, our holdings declined by less than half as much as the broader index. As a result, our clients avoided the deeper losses – often exceeding -15% – that many other investors experienced this year.
Elsewhere, our bond models performed steadily, returning approximately +3.5%. While this trailed the stronger returns of our bond benchmark, the gap stemmed largely from our focus on US dollar assets. Even so, we believe we’re on track for a compelling full-year result – supported by our higher yields and a handful of unique, idiosyncratic opportunities.
More on that shortly. But first, here are a few broader market thoughts.
THE JENGA RALLY
We’ve been calling this latest rebound in US stocks the Jenga Rally – because while markets keep climbing to new highs, each new level seems to rest on an increasingly shaky foundation. Risks and uncertainties continue to pile up at the base. To highlight just a few:
- Policy uncertainty is rising. Tariffs are a prime example, with rates set to increase on August 1st. But few details have been finalized, and the ripple effects remain unclear both here and abroad.
- Structural imbalances are growing. The trade deficit is up +50% year-to-date, and the federal budget deficit still sits at 6.2% of GDP. It’s projected to reach 9% by 2034.
- Consumer strength is fading. Daily card spending is now tracking negative year-over-year.
- The dollar keeps sliding. Investors appear to be diversifying away from US-centric risks.
And yet, US stocks continue to hover near record highs.
ALREADY ALL IN
Meanwhile, US households seem to be “all in.” Equity allocations (in gold below) are back at their all-time highs of roughly 65%. That level has only been breached twice – in 1999 and 2021 – and both instances were followed by meaningful market pullbacks.
Intuitively, when investors are already heavily allocated to stocks, there’s simply less new money left to push prices higher. But things can still reverse quickly if fear takes hold and investors rush to safety. That’s why high equity allocations like today’s have often been followed by weaker forward returns.
Source: Federal Reserve Z.1 Household Balance Sheet, BHPW Research Note: Allocation methodology differs from prior chart; based on investor equity share of total financial assets.
NO STRIKES
Thankfully, we don’t have to own the US market as a whole – or even limit ourselves to just buying US stocks. As Warren Buffett often says, investing is a game with no called strikes. We don’t need to swing at every pitch or have an opinion on every stock – we just need to build a diversified portfolio of securities we believe in, at prices we find compelling. And we can pick our spots from anywhere in the world to do exactly that.
Right now, many of those “better pitches” lie outside the US. As the chart below shows, US stocks trade at a forward price-to-earnings ratio of 22.9 times – well above both their historical range and every other major region. In contrast, markets like Europe, Japan, and emerging economies remain far more reasonably priced.
Even within the US, we don’t think valuations are universally bad. We’re still finding plenty of opportunities that fit within our mandate – offering double-digit annual return potential (based on fundamentals), with a high degree of confidence, and meaningful protection on the downside.
HOW WE’RE POSITIONED
Every stock has a bull and bear narrative – a reason to be optimistic and a reason to be cautious at the current share price. Right now, the bear narrative for many of the market’s most popular names is simple: they’re just too expensive. Investors are crowding into companies that either don’t make money or are priced as if they’ll be wildly more profitable in the future. The problem is, “future value” is the hardest variable to predict.
We take a different approach, placing far more emphasis on the cash flows along the way. It might seem unconventional in a market focused on flipping, but we always start with a simple question: Can we justify how this business earns today’s market cap? We think it’s a big reason our portfolios held up so well during the early April selloff.
Recently, we’ve been trimming winners in our portfolio and rotating into names with stronger forward prospects. By our estimate, our equity portfolio still trades at just 11x normalized earnings – a 9% earnings yield. Many of those companies return a meaningful portion of that cash flow back to us each year, and most still offer solid growth, giving us a clear line of sight to meeting our return targets.
ON THE BOND SIDE
We’re also finding strong opportunities in fixed income, with our bond model reasonably positioned for a falling rate environment. That timing appears fortunate, with markets now pricing in a 75% chance of two or three cuts by year-end. With a 5.6% yield – locked in for an average of five years and backed by strong credit quality – we see meaningful value here relative to cash and short-term bonds, which may soon see rates fall back into the 3s.
Over the past quarter, we’ve been taking advantage of smaller offerings and special situations, focusing on securities often overlooked by larger managers. Many of these yield between 6% to 9%, and almost all are investment-grade. They’re also often backed by structures or circumstances that, in our view, make them especially secure.
The biggest constraint isn’t risk, but size. Because many of these bonds are thinly traded, we can only buy so much. But, for the portion we’ve been able to build, these niche securities are currently delivering an average yield of 7.1% – with the only real drawback being how difficult they are to accumulate at size.
CONCLUSION
Uncertainty remains a defining feature of today’s environment, particularly around tariffs and elevated valuations. But markets have always come with volatility. Our job is to stay prepared – and to continually review our holdings with an eye toward what’s ahead. Fortunately, we’re still finding opportunities that meet our standards using reasonable assumptions. Just as important, we continue to see the kind of downside protection that supported our portfolios earlier this year. That gives us the confidence to stay the course – and if volatility does return, we expect to be ready when others are not.
As always, we thank you for your continued trust.
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.