Market Commentary

• The investing world is focused on the Trump/Xi meeting that starts tomorrow, but the outcome of that meeting is pure speculation at this point.
• In the meantime, we believe the current environment calls for more selectivity in terms of sectors, industries, and market capitalizations.

The investing world is focused on the Trump/Xi meeting that starts tomorrow, but the outcome of that meeting is pure speculation at this point. Prior to the war with Iran, the topic of soybeans would likely have been front and center. After all, American farmers represented a solid base of support for President Trump and much of the administration’s efforts have been focused on trade agreements. But now, given that 80% to 90% of Iran’s exported oil goes to China and the Strait of Hormuz remains largely closed with a U.S. blockade intact, it is likely that the war has moved toward the top of the list of topics to be discussed. The financial markets will be looking for and reacting to headlines throughout this two-day meeting between the leaders of the world’s two largest economies.

In the meantime, there are portfolios to manage. In our view, the current environment calls for more selectivity in terms of sectors, industries, and market capitalizations. Rather than jumping in and chasing equity sectors that look overdone in price, we have been looking for areas that we think are better values. A recent example is the Energy sector — the best performer on a year-to-date basis of the 11 sectors making up the S&P 500 Index (through May 11). Energy-related commodities such as oil, which have provided what we believe are temporary earnings benefits to companies in the S&P 500 Energy sector, have been recognized by the market through meaningfully higher share prices that our analysis suggests are fully valued for this point in time.

We see a better opportunity and more reasonable relative valuations in the S&P 500 Information Technology sector. This sector has gained in the past six weeks, but Bloomberg consensus 2026 earnings estimates for the sector have risen by much more. Part of the benefit we see is that many technology companies can benefit from a reliable source of energy. The U.S. has abundant natural gas and imports only 2% of its crude oil from the Middle East, giving the U.S. a comparative advantage to much of the world, including Japan, China, and the eurozone, which rely on energy imports from the Middle East. Consequently, on April 6 we downgraded the Energy sector to unfavorable (below market weight) and upgraded the Information Technology sector to favorable (overweight). More generally, we look to rebalance portfolios as opportunities present themselves in an effort to take advantage of price movements we feel are out of sync with the underlying fundamentals.

We also want to focus on sub-sectors where companies can pass along higher energy costs and that we think present opportunities as longer-term investment trends play out in such areas as artificial intelligence (AI), industrial automation, and defense.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility. Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility.

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