• Rising government debt and continued issuance may be increasing the risk of sovereign solvency crises

• At least in the U.S., stable employment, resilient consumer spending and continued economic growth underpin the higher rate environment

• Inflation is well off post-COVID highs but remains well above comfortable targets. Central banks will remain vigilant in their pursuit of price stability

• The substantial financing needs associated with AI infrastructure may be increasing competition for capital

• Rates are back to where they were prior to the Great Financial Crisis of 2008-09

• We do not expect rates to move materially higher from here, but neither do we anticipate a broad decline absent a recession, clear signals of which have yet to appear in the data

Higher for Longer?

Across the developed world, yields on longer-term government-issued (“sovereign”) debt are meaningfully higher than at the start of 2026. Bond prices generally move in the opposite direction of yields, so the shifts higher have pressured bond returns. Enquiring minds want to know what those higher yields might be telling us about investor sentiment. The list of observations and explanations is long, but most can be summarized by the more obvious statement that the risks of owning government bonds are perceived to be higher now than they were at the beginning of the year. As generally must be the case for such a broad change in trend, investor thinking must have changed in dramatic ways over the past few months. That is, investors are digesting new information and/or rethinking prior perspectives. Pondering why and how investors have changed their minds can be useful, but it’s an exercise without the potential benefit of any manner of certainty.

Rising Global Sovereign Indebtedness

Among the stronger cases for higher rates is the fact that many developed countries have seen their debt burdens swell to increasingly uncomfortable levels (see Figure 2). Growing sovereign debt can be blamed on persistent budget deficits, which reflect total government spending in excess of tax revenue. Here in the States, deficits are among the highest they’ve been outside of times of war and macroeconomic crises. At nearly 6% of gross domestic product, that level is not widely expected to fall over the medium term. Meantime, though balance sheets can be qualified as generally healthy in the aggregate, corporate debt issuance has grown this year, with a notable dominance of generative AI-related capital raises having come to market.

Importantly, more debt supply does not automatically bring more investor demand. If investors are not looking to increase their fixed income exposures, new bonds may need to offer higher yields to compete with other investments that potential buyers believe offer more favorable expected returns. So, yields can rise even without investors selling the bonds they already own. With additional issuance coming to market, insufficient new demand to absorb that supply may be enough to push rates higher and bond prices lower.

Another self-reinforcing trend is the fact that, as rates rise and older debt matures, new debt must be issued at those higher rates. So, even if governments or companies are merely refinancing older debt, they may be doing so at a higher cost. For many governments, both the level of debt and the cost of that debt are rising. When those trends might become unsustainable remains open for debate, but the increasing potential of a developed-market sovereign debt “event” (we’re looking at you, France) likely has pulled rates higher.

Higher, Not High

While of little explanatory use for the rest of the developed world, another reasonable take on the why of higher rates is the fact of strong domestic growth. U.S. GDP growth has remained resilient despite higher rates, suggesting that they have not proved a hindrance to macroeconomic activity. While growth has been bolstered by investment in artificial intelligence infrastructure, consumer spending also has remained relatively robust, supported by higher wages, tax cuts and greater household wealth in the aggregate. Given that strong growth backdrop, and in the context of bond market history (see Figure 1), current yields are not altogether high, even as they are higher than they have been for some time.

Prices Matter

Another possible explanation for higher bond yields is that investors want more compensation for inflation. Robust growth, alongside already high and potentially worsening inflation trends, could lead them to expect inflation to remain uncomfortably high or to rise further. A regularly cited data series offers limited support for that explanation. Figure 3 shows the difference between yields on 10-year Treasury bonds and 10-year Treasury Inflation-Protected Securities (TIPS). That comparison can be used to gauge inflation expectations over the next 10 years. The difference between the two yields can be read as the rate of inflation at which a potential buyer of a Treasury bond is indifferent to the choice between one with and one without inflation protection. That difference has barely budged of late, suggesting that this measure of long-term inflation expectations, at least, has not increased. But the comparison is imperfect: the TIPS market is dramatically smaller than the non-TIPS Treasury market ($1.77 trillion versus $34.4 trillion, according to Bloomberg), which might have a way of skewing the results (e.g., the size disparity suggests the opinions of many would-be, but non-buyers of Treasuries are not being expressed by the yield gap; many would-be buyers have more direct/efficient means of expressing views regarding inflation). Shorter-term inflation expectations, as reflected (again, perhaps imperfectly) in the 1-year breakeven rate, have run higher, though. So, while these data do not rule out inflation concerns, neither do they clearly establish them as the driver of higher yields.

Even so, it may be that inflation remains a broader, perhaps not-so-obvious concern. As one argument against the TIPS take suggests, some investors who expect inflation to be higher for longer might at the same time expect the Federal Reserve to remain vigilant to that risk and maintain higher rates for longer in order to counteract upward pressures on prices. That expectation might be expressed further out the nominal Treasury curve (investors still pause purchases until the price/yield is right). One arrives at higher longer-term rates, but without the corresponding uptick in inflation expectations.

Wobbly Fed

Interestingly, that the Fed held steady on its rate target this month may run against that narrative. Lots of scratching-head commentary wondering why, given the employment/growth/inflation backdrop. Indeed, the latest wholesale inflation readings have been moving in the wrong direction, with elevated energy costs arguably beginning to flow through to downstream prices. At the same time, though, many will argue that there’s not much the Fed can do to influence energy (and food) prices, which is why they prefer an inflation gauge that excludes both buckets of goods. Even so, prices at the pump and in the grocery store are among those most closely watched...and deeply felt...by U.S. consumers, so we expect concerns that the Fed isn’t doing enough on the inflation front (by continuing to raise rates) to remain in the headlines, even as the current administration reiterates its narrative that rates should be much lower than they are now. Uncertainty regarding future Federal Reserve rate decisions, then, also may be adding to the risks of further-out bonds.

May be true that the Fed needs to do more on the inflation front. But we’d argue (along with many others), too, that the broadly still-higher term structure of interest rates in the U.S. is doing a fair bit of work for the Fed already. That is, it’s quite difficult for the Fed to directly influence longer-term rates (Chairman Alan Greenspan spoke to this “conundrum” in his February 2005 testimony to Congress), which will have actual influence on the economy, by changing its target for the rate at which banks lend to each other overnight, which theoretically has little direct impact on the broader economy. Some may ask, then, why the Fed takes this approach. The methodology rests on the idea that longer-term rates can be seen as a sequence of short-term rates plus a premium for uncertainty. For example, the current 10-year yield can be viewed as reflecting a sequence of ten future 1-year rates plus some amount of additional compensation to help make the longer-term commitment attractive. Higher long-term yields may therefore reflect both a bias toward higher future rates and greater uncertainty about their paths.

If actions that the Fed takes at the front end are broadly expected to be durable, then those shifts may “transmit” out to longer durations. But the deeper the look into the future, the greater the weight that other factors may have in investor math, so the indirect transmission mechanisms may prove weaker.

Who Knows Why, But Here We are

In sum, myriad explanations may account for higher rates this year. We’ve highlighted just a few on these pages. No single explanation gives us certainty about what comes next. We’d argue, though, that there is little reason for rates to be broadly lower than they are at present. Current rates are not high by bond market standards, nor do they yet appear to be weighing heavily on macroeconomic activity, the backdrop of which can be seen as justifying the rate environment. But this return to rates of yore is still relatively new, and potentially necessary fiscal adjustments may not yet have taken place. With the era of cheap debt ( “free money”) now well in the past, rising interest burdens will force corporations and governments alike to reckon with higher financing costs.

We have the sense (because such is normally the case) that bond markets might digest a modest increase in business distress without too much drama. Some manner of recessionary turn, not seemingly in the data at present but always lurking, could cause a more dramatic widening in spreads, however. A sovereign debt crisis could have wider, more dire implications. France is at the top of relevance for this thread, with any potential dislocation and contagion effects in Europe and abroad certainly among the greater risks to bond markets and even investment markets in general.

Portfolio Context

Our fixed income approach starts with two relationships: bond prices generally move opposite to interest rates, and sensitivity to rate changes generally increases with time to maturity. Duration is the measure we use to describe that sensitivity. When the yield curve is “normal,” rates are higher the longer the time to maturity (the curve is upward sloping). In such times, higher expected returns in the form of higher yields come with higher expected volatility; the additional income is not a risk-free benefit. While we generally favor the shorter end of the yield curve for its lower sensitivity to interest-rate changes, we retain flexibility in two ways. The funds we select generally can change the average maturity of their holdings in an effort to capitalize on changes in rates. We also seek to adjust potential portfolio-level duration exposure through the choice and mix of funds, responding to what we see as potential secular, or long-term, shifts in rates. These choices are intended to balance income and rate sensitivity while remaining true to our mantra: the future is truly unknowable.

Rising rates are generally bad for bonds, and rates are higher on the year across the board (see Figure 4). The price impacts from that shift upward in rates generally will be greater for longer maturities, because sensitivity to interest-rate changes typically increases with the time remaining until repayment. As we penned this note, longer-term rates are near the middle of their 3-month average, while front-end rates are pinned near the top of that trailing-quarter range. For investors positioned generally at the shorter end of the curve, the initial price effect may have persisted, although the additional income by now may have offset some or even all of that decline. Investors with positions further out the curve may have experienced a wider range of outcomes, though even here the combination of the round-trip in rates since the end of June along with the higher income may have brought some relief from the more severe drawdown in September.

Important Information

Signature Resources Capital Management, LLC (SRCM) is a registered investment adviser. Registration does not imply a certain level of skill or training. This material is provided for informational purposes only and should not be construed as investment advice or as an offer to buy or sell any security or implement any investment strategy. A decision to engage SRCM should be made only after carefully reviewing the applicable investment management agreement and SRCM’s Form ADV Part 2A and Part 2B, conducting any due diligence you consider appropriate, and consulting your legal, tax, and accounting advisors. All investing involves risk, including the possible loss of principal. Additional information regarding SRCM’s services, fees, risks, and conflicts of interest is available in the applicable investment management agreement and Form ADV. Information presented here is unaudited, subject to change, and intended only as a general guide to current views.

Past performance is not a guarantee of future results. The views expressed reflect SRCM’s opinions as of the date of writing, are subject to change, and may not reflect current thinking. This material is based on proprietary research and analysis, together with information believed to be reliable; however, SRCM does not represent that such information is accurate or complete and accepts no liability for any loss arising from its use. Certain content may be theoretical in nature and subject to inherent limitations. Any references to market exposures or specific investments are provided for illustrative purposes only and may or may not be reflected in client portfolios. No reader should assume that any investment or strategy discussed was or will be profitable. This material may also contain projections, targets, or other forward-looking statements based on current expectations and assumptions. These statements are not guarantees of future outcomes, and actual results may differ materially. You should consult your financial advisor to determine whether any investment or strategy is appropriate for your individual circumstances.

• Secular shifts in interest rates create variability across fixed income investment outcomes

• Over most any meaningful time frame, bond prices have proved rather reliably less volatile than stocks

• While it’s true that directional changes in bond prices periodically align with those of stocks, such positive correlation is not a reliable characteristic (a statement of the opposite is generally more accurate)

• Just as one can invest in stocks in a manner well different than all stocks (i.e., the “market”), one can invest in bonds in a manner well different than the “bond market”

Bonds as Ballast

“60/40 is Dead!” memes come in various forms, often focusing on stock/bond correlations and flare up conversationally when that number turns meaningfully positive or when bond prices are falling by their lonesome, such as they may have been more recently as longer-term bond yields were reaching multi-decade highs. The notion implicit to many of these takes is that investors should look to other asset classes to fill portfolio role(s) for which bonds otherwise may have been utilized. Time and again, the notes fail to present such periods as occasionally expected behavior, while also generally failing to revisit the core reason many invest in bonds: their relative price stability, even when the direction of price changes is near-term negative and/or directionally aligned with stock price moves. In Figure 1 we present the historical range of three “markets”: the U.S. stock market (SP500, represented by the S&P 500 Index), the U.S. Investment Grade bond market (AGG, represented by the Bloomberg U.S. Aggregate Bond Index, which tracks the U.S. investment grade taxable bond market), and our preferred bond benchmark (ST-IG), the Bloomberg 1-5 Yr Government/Credit Index, which comprises a short-duration subset of the Aggregate. Readily apparent from the data is the fact that stocks are more volatile (showing wider ranges with markedly higher highs and lower lows) than the broader bond market over each of the rolling periods reviewed, while the historical ranges of returns for the short-duration index are narrower still. This despite the fact that bond returns are not altogether reliably positive on a month-to-month basis (bonds carry investment risk too!!!) and that, fair to the core arguments of the T6040PID crowd, stocks and bonds rather often, actually, move down at the same time. See Figure 2 for more.

The data in Figure 1 support our preference for an approach that generally emphasizes shorter duration bonds in the portfolio. Bonds carry two primary risks: interest rate and credit. The former reflects a bond’s sensitivity to changes in interest rates, with bonds that have a longer time until maturity tending to carry more interest rate risk. Credit risk is the potential for the issuer to default. While we have sought across the portfolios we manage to modulate exposure to interest rate risk over time, both higher and lower, we generally have maintained less-than-market sensitivity to changes in interest rates (measured by “duration”; duration tends to increase with time to maturity, though the math will depend on additional bond characteristics).

Investors generally seek additional compensation for that interest rate risk, such that interest rates tend to be increasingly higher for bonds of increasingly longer duration . In normal times, therefore, it may seem attractive to add duration to a portfolio in order to pick up additional income. But as is the case with all investing, a higher expected return carries higher expected risk. These facts inform our twin preferences of 1) preferring equity exposure when seeking higher returns while 2) seeking to use bond holdings as a damper against stock market volatility. Since we mostly seek to use bonds as a stock-risk offset, we tend toward the more cautious side of the spectrum when seeking incremental income through an extension in portfolio duration.

Softening the Blow

Our preference for seeking to add portfolio stability with fixed income is not merely a personal predilection. While the range-out-outcome view of Figure 1 helps to demonstrate the relative stability of bond returns, Figure 3 conveys a characteristic of bonds perhaps even more meaningful to client investment experience. Decades of work have shown us that clients have tended to appreciate the generally more stable performance of bonds during larger equity market meltdowns, even though bonds may have limited their absolute returns during more favorable equity market climes. That is, bonds can help limit the depth, duration and/or emotional tax of market declines. In this context, history is relatively less ambiguous. In Figure 3 we show twelve of the largest U.S. equity market drawdowns (decline from prior peak back to breakeven) along with the corresponding performance of our fixed income benchmark over the same timeframe. Due to a limitation of the bond data, we are using monthly data up to September 30, 1997. From then onward we show daily data. The monthly periodicity certainly flatters the stock drawdowns over that earlier period, in that we are missing intra-month market troughs, and may well flatter the bond performance for the same reason, but we cannot know this as the data are not available. That qualification noted, this relative stability during times of market duress is among the more defensible reasons, in our view, to maintain exposure to fixed income in portfolios that, for whatever reason, require some manner of potential damper against equity market risk (e.g., intention for the funds, owner tolerance for investment risk).

There are numerous ways to demonstrate this potential dampening effect, and we present another in Figure 4, which shows the relative drawdowns of the various benchmarks that we use to compare performance of the accounts that we manage. Because we tend to target equity exposure in 10% increments, we maintain benchmarks at eleven risk levels: 0% equity/100% fixed income, 10/90, 20/80 and so on through 100% equity. The implication of the chart is that portfolio drawdowns tend to be lighter in more or less direct proportion to the amount of fixed income owned relative to equity in the portfolio. Even so, the lighter expected drawdown that tends to come along with higher ratios of fixed income to equity in a portfolio may come at the cost of lower long-term returns. In Figure 5 we chart those same data we used to create Figure 4, only this time without resetting the value to zero at each new peak. Starkly outlined by the final values is the potential benefit that may come from assuming additional investment risk, in the case of this chart by taking on additional equity exposure.

There is No 60/40

There really isn’t any “one” 60/40, which means that “the” 60/40 can’t be dead. Indeed, potential implementations of a 60/40 approach (or 20/80 split; 70/30 split, etc.) likely are as varied as there are managers who build them. We believe the construction of the 40% fixed income slice of the 60/40 portfolio can be every bit as impactful to long-term returns and client comfort on the way to realizing them as can be the composition of the 60% equity portion. As we have sought to show on these pages, for example, investor experiences likely differed widely during the Fed’s 2022-23 hiking cycle depending on how their managers had positioned the fixed income side of the ledger vis-à-vis interest rate risk. Importantly, we look for our approach within fixed income to neatly align with our overarching belief that striking an appropriate balance of expected returns against tolerance for investment risk is central to success in the pursuit of long-term financial goals.

Important Information

Signature Resources Capital Management, LLC (SRCM) is a registered investment adviser. Registration does not imply a certain level of skill or training. This material is provided for informational purposes only and should not be construed as investment advice or as an offer to buy or sell any security or implement any investment strategy. A decision to engage SRCM should be made only after carefully reviewing the applicable investment management agreement and SRCM’s Form ADV Part 2A and Part 2B, conducting any due diligence you consider appropriate, and consulting your legal, tax, and accounting advisors. All investing involves risk, including the possible loss of principal. Additional information regarding SRCM’s services, fees, risks, and conflicts of interest is available in the applicable investment management agreement and Form ADV. Information presented here is unaudited, subject to change, and intended only as a general guide to current views.

The S&P 500 Index measures the performance of the large-cap segment of the U.S. equity market.

The Bloomberg U.S. Aggregate Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, mortgage-backed securities (MSB; agency fixed-rate pass-throughs), asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS; agency and non-agency).

The Bloomberg 1-5 Yr Government/Credit Index is a broad-based benchmark that measures the non-securitized component of the U.S. Aggregate Index. It includes investment grade, US dollar-denominated, fixed-rate Treasuries, government-related and corporate securities with 1 to 5 years to maturity.

Past performance is not a guarantee of future results. The views expressed reflect SRCM’s opinions as of the date of writing, are subject to change, and may not reflect current thinking. This material is based on proprietary research and analysis, together with information believed to be reliable; however, SRCM does not represent that such information is accurate or complete and accepts no liability for any loss arising from its use. Certain content may be theoretical in nature and subject to inherent limitations. Any references to market exposures or specific investments are provided for illustrative purposes only and may or may not be reflected in client portfolios. No reader should assume that any investment or strategy discussed was or will be profitable. This material may also contain projections, targets, or other forward-looking statements based on current expectations and assumptions. These statements are not guarantees of future outcomes, and actual results may differ materially. You should consult your financial advisor to determine whether any investment or strategy is appropriate for your individual circumstances.

When most investors think about their portfolio, they focus on what they own. They compare mutual funds, ETFs, individual stocks, bonds, alternatives, etc., and determine their appropriate mix of investments. Those decisions certainly matter, but an important piece of the conversation is often overlooked. Where are those investments being held? The answer to that question can have meaningful implications for taxes, retirement income, estate planning, and long-term wealth accumulation.

Asset location refers to placing investments in the most appropriate type of account. Generally speaking, most investors may own assets across three primary account types: pre-tax accounts, such as traditional IRAs and 401(k)s; Roth accounts, such as Roth IRAs and Roth 401(k)s; and taxable brokerage accounts, including individual and joint accounts. While the investments held within each account may look identical, the way they are taxed and accessed can be very different when it comes to portfolio income or withdrawals.

Because each account type comes with its own set of tax rules, withdrawal rules, and planning opportunities, asset location often becomes much more of a financial planning decision than an investment decision. For example, someone hoping to retire at age 55 may have very different asset location considerations than someone planning to work until 70. A family focused on leaving wealth to children may approach asset location very differently than someone intending to spend the majority of their assets during retirement. Likewise, an individual concerned about future tax rates may make decisions unlike those of someone primarily focused on generating current income.

In practice, asset location is less about finding a single correct answer than about coordinating account characteristics with household goals. The same investment can play a different role depending on whether the priority is tax deferral, tax-free growth, current liquidity, retirement income, estate planning, or future flexibility.

One commonly discussed asset location strategy involves placing investments with higher growth potential inside Roth accounts. The rationale behind this approach is straightforward. If an investment experiences significant appreciation over time, that growth can potentially be withdrawn tax-free from a Roth account, assuming applicable requirements are met. The more growth that occurs within the Roth account, the more valuable that tax treatment becomes.

Perhaps the most famous example is Peter Thiel’s Roth IRA. While PayPal was still in its infancy, Thiel reportedly purchased founder shares within a Roth IRA for a relatively small amount. At the time, it was a speculative investment with substantial risk. Few people could have predicted the eventual outcome. As PayPal grew and Thiel’s holdings appreciated, the value inside that Roth IRA reportedly expanded into the billions of dollars. Though most investors will never experience anything remotely resembling that outcome, the example highlights a broader principle rather than a repeatable strategy. When meaningful growth occurs inside a Roth account, the potential tax benefits can be substantial.

Of course, asset location isn’t only about growth. It is also about understanding how different investments are taxed along the way. Certain investments generate taxable income on a regular basis. Bonds may produce interest income, REITs often distribute income to shareholders, and some alternatives can generate highly tax-inefficient cash flows. For example, a hedge fund exposure may generate substantial short-term gains, which are taxed as ordinary income. When these investments are held in a taxable account, they can create an annual tax liability regardless of whether the investor actually spends the income. In some situations, it may make sense to hold these assets inside a tax-deferred account, whether that is a traditional or Roth IRA, where that income may continue compounding without creating a current tax bill.

At the same time, there can be advantages to maintaining certain investments in a taxable brokerage account. Unlike retirement accounts, taxable accounts generally provide unrestricted access to capital. This flexibility can be particularly valuable for individuals retiring before age 59½, navigating a career transition, funding a major purchase, or simply maintaining a larger emergency reserve. While taxable accounts often receive less attention because they lack some of the tax benefits associated with retirement accounts, their accessibility can make them an important component of an overall financial plan.

Asset allocation determines what you own. Asset location determines where you own it. Both inform long-term, after-tax total returns. Two investors could own the exact same investments and, purposefully or not, experience very different outcomes simply because those investments were distributed differently across their accounts. Given that potential, we generally seek to coordinate allocation and location decisions as we help clients develop and address their financial objectives. Ultimately, there are no universal formulas that work for everyone; potentially appropriate strategies will depend on a wide range of factors specific to the household.

We find that investors often devote enormous amounts of time and energy trying to identify the perfect investment. Far fewer seem to spend the same amount of time considering where that investment should actually be held. Yet over the course of decades, decisions about where you hold your investments can have a meaningful impact on your flexibility, tax burden, and the amount of wealth you ultimately retain.

• Diversification is not designed to maximize returns in every period but, rather, to reduce dependence on any single market outcome

• A properly diversified portfolio near always will contain holdings that appear disappointing in hindsight; the strongest arguments against diversification often emerge after a lengthy period of narrow market leadership

• Market leadership has historically changed over time, though the timing of those changes is unpredictable

• Not to identify tomorrow’s winner, among the goals of diversification is to improve the probability of achieving long-term financial objectives across a wide range of possible futures

Diversification’s Drawbacks

The past decade has been kind to equity investors. It has been kinder to investors with more concentrated portfolios—most notably those focused on the U.S. large-cap stocks represented by the S&P 500 Index—than to investors holding more diversified combinations of domestic and international stocks. In hindsight, there nearly always will have been a “better” portfolio to own. For U.S. investors in particular, who already enjoy efficient access to a large and widely diversified home market, international stocks can be especially difficult to defend when they lag for an extended period. We continue to emphasize that broader approach, even though the empirical case for diversification may appear less compelling after a decade of unusually narrow market leadership.

Since 2009, with relatively few exceptions, U.S. large-cap growth stocks have outpaced developed international markets on an annual return basis. Smaller companies also generally failed to keep pace. Value-oriented investments remained largely out of favor as investors paid increasingly high prices for realized growth and the promise of a continuation of recent trends. Against that backdrop, many investors found themselves asking a reasonable question: why own anything other than what has been working?

Hindsight Is No Guarantee

Investment decisions often are evaluated with the benefit of hindsight. Looking backward, it can seem obvious that a concentrated investment in the strongest-performing market segment would have been preferable to a more diversified allocation. But in 2015, few investors could have precisely identified the companies that would dominate market returns over the following decade. At the time, sentiment toward Nvidia (NVDA), in particular, was far less enthusiastic than later results would appear to justify. Coverage was concentrated on gaming and personal computer exposure, while artificial intelligence was mostly discounted and cryptocurrency mining was not yet a key component of the investment narrative. Although Nvidia eventually delivered the strongest performance among the group, a review of contemporaneous expectations suggests it may have been among the least appreciated of the companies that later became known as the Magnificent 7 [Alphabet (GOOG/GOOGL), Amazon (AMZN), Apple (AAPL), Meta (META), Microsoft (MSFT), Nvidia and Tesla (TSLA)].

The difficulty, of course, is that investors do not make decisions with the benefit of hindsight. They make them before the future unfolds, and the future often develops in ways that differ meaningfully from prevailing expectations. Recent performance across the Magnificent 7 offers a useful reminder. Several members of the group have roughly kept pace with, or even trailed, the broader market this year. Apple has been a notable exception. Once scolded for its lack of aggressive AI investment, the stock now seems to have found relative strength largely because the company took a slower, more thoughtful and defensible approach to investment in AI.

Even Nvidia has trailed the market as investors seemingly have begun to realize that there must be profit to come from all this investment in capacity for AI compute capacity, while they also may be glomming onto the idea that many (most?) of us might be better off investing in our own personal AI infrastructure (side note: we are editing this doc on a MacBook Pro, which we purchased seeking to test and eventually ensure we can safely take advantage of the remarkable capabilities that genAI tech can bring without compromising privacy and blowing up our tech budget).

So, the challenge is identifying market-beaters before they become winners, maintaining conviction long enough to benefit from being correct and getting out before sentiment and fundamentals shift. Diversification acknowledges that this task is extraordinarily difficult. Rather than attempting to identify a narrow set of future chart toppers, diversification seeks exposure to a broad range of potential outcomes. The tradeoff is obvious: a diversified portfolio will almost certainly own some investments that disappoint. It may be just as likely to own some that surprise positively. The objective is not to maximize returns in every period. The objective is to pursue attractive long-term returns while reducing the risk that a single error meaningfully derails a financial plan.

Cycles Cycle

The strongest arguments against diversification often emerge near the peak of a particularly dominant trend. By then, investors have become increasingly convinced that recent winners deserve larger allocations and that underperforming areas are no longer worth holding. History suggests such conclusions may be unwarranted. One of the recurring lessons of investment history is that leadership changes. The individual stocks, sectors, countries and investment styles that dominate one decade often look quite different from those that dominate the next. That does not mean market leadership changes on a predictable timetable. It does mean that investors should be cautious about assuming recent trends will continue indefinitely. The challenge is that timing those transitions is exceptionally difficult. Investors frequently abandon lagging investments shortly before performance improves and enthusiastically add to recent winners after much of the gain has already occurred. The result can be a cycle of buying high and selling low that gradually undermines long-term outcomes.

Balancing Breadth

A diversified approach will always be judged against the best-performing investment(s) over some trailing period. That comparison virtually guarantees disappointment for diversifiers. But while concentration can be rewarding, it can also dramatically increase the consequences of being wrong. One need not look too far into the past to see when shares in Nvidia lost two-thirds of their value on account of the reversal of the cryptocurrency mining trade.

Our preference for portfolios diversified across a range of exposures—asset classes, regions, currencies and individual security characteristics—accepts the possibility that not every holding will shine simultaneously. In exchange, it seeks to avoid excessive dependence on a single market segment, economic outcome or investment narrative. As U.S.-domiciled investors, we maintain relatively unique home-market characteristics that push against the more-can-be-better narrative. This fact generally supports our broader tilts toward U.S. stocks and bonds across all but the most aggressive portfolios we manage. Even so, our preference for broad diversification nods to the fact that equity market records represent a moment in the course of human history. The broader historical context shows that global, regional, macroeconomic and industrial supremacy ebbs and flows in manners hard to predict, in ways generally obtuse to the preferences and predictions of the contemporary hegemon.

Less dramatically, instead of attempting to identify the single best-performing asset class over the next ten years, investors should be seeking to fund retirements, support future spending needs, preserve purchasing power and maintain confidence through a wide range of market conditions. These objectives rarely require perfection. Rather, they require discipline, patience and a portfolio construction approach that acknowledges the limits of our ability to correctly predict the future.

Important Information

Signature Resources Capital Management, LLC (SRCM) is a registered investment adviser. Registration does not imply a certain level of skill or training. This material is provided for informational purposes only and should not be construed as investment advice or as an offer to buy or sell any security or implement any investment strategy. A decision to engage SRCM should be made only after carefully reviewing the applicable investment management agreement and SRCM’s Form ADV Part 2A and Part 2B, conducting any due diligence you consider appropriate, and consulting your legal, tax, and accounting advisors. All investing involves risk, including the possible loss of principal. Additional information regarding SRCM’s services, fees, risks, and conflicts of interest is available in the applicable investment management agreement and Form ADV. Information presented here is unaudited, subject to change, and intended only as a general guide to current views.

Past performance is not a guarantee of future results. The views expressed reflect SRCM’s opinions as of the date of writing, are subject to change, and may not reflect current thinking. This material is based on proprietary research and analysis, together with information believed to be reliable; however, SRCM does not represent that such information is accurate or complete and accepts no liability for any loss arising from its use. Certain content may be theoretical in nature and subject to inherent limitations. Any references to market exposures or specific investments are provided for illustrative purposes only and may or may not be reflected in client portfolios. No reader should assume that any investment or strategy discussed was or will be profitable. This material may also contain projections, targets, or other forward-looking statements based on current expectations and assumptions. These statements are not guarantees of future outcomes, and actual results may differ materially. You should consult your financial advisor to determine whether any investment or strategy is appropriate for your individual circumstances.

2026-SRCM-32

Why maxing out a 401(k) could be a good idea:

There are certainly good arguments to max out a 401(k) every year. For starters, it automates the entire saving process. The money leaves your paycheck before you have a chance to spend it, which removes much of the emotion and discipline required to save consistently. For many people, consistency is far more important than finding the perfect savings vehicle. A traditional 401(k) also provides an immediate tax benefit, allowing you to defer taxes and potentially reduce your current tax bill. And if your employer offers a matching contribution percentage, that should almost always be the first place you save for retirement. It’s difficult to find another opportunity where someone essentially offers “free” money to you.

Where the strategy could break down—the tax problem:

The problem isn’t the 401(k) itself. The problem begins when a 401(k) becomes the only place you’re saving.

One of the biggest risks that often gets overlooked is the tax risk that comes along with it. Many people think of traditional 401(k) contributions as tax-free since you don’t immediately pay taxes on the money you contribute. They’re not tax free. They’re tax deferred. All you are doing is postponing tax payments until a future date. And every contribution you make creates a silent partner in your retirement account: the IRS.

The challenge is that nobody knows what future tax rates will look like. When you contribute to a traditional 401(k), you’re effectively making a bet that future tax rates will be the same or lower than they are today. Or you will be in a lower tax bracket in retirement, than you are today in your “working” years. That may happen. It may not. Historically speaking, we’re operating under relatively favorable income tax rates today. Could those rates increase in the future? It’s certainly possible. Given our growing national debt and the long-term funding concerns surrounding Social Security and Medicare, policymakers may be forced to make decisions. There are really only two ways to address those issues: increase revenue (taxes) or reduce spending, or any combination of the two. None of those options tend to be particularly popular.

The tax risk becomes even more pronounced for disciplined savers because high savers often create high taxable income later in life. Retirement income has a way of stacking. Required minimum distributions, Social Security benefits, pension income, dividends, interest, and portfolio withdrawals will all show up on the same tax return. What started as a strategy to reduce taxes decades earlier can sometimes result in surprisingly large tax bills later in retirement. Higher income can also trigger things like Medicare IRMAA surcharges and/or cause a larger percentage of Social Security benefits to become taxable.

Required minimum distributions create another challenge because they remove a degree of control. Once RMDs begin, the government dictates how much must come out of the account each year whether you need the money or not. Currently, RMD age starts at age 75 if you are born 1960 or later. That’s one reason many retirees find other retirement accounts like Roth accounts so valuable. Roth accounts provide tax diversification, as you pay taxes before the money goes in. And since the taxes have already been paid, your silent partner, the IRS, isn’t there waiting for its share when you do choose to withdraw. You don’t have RMDs on Roth dollars either. A dollar sitting in a Roth account is worth more than a dollar sitting in a traditional retirement account because there isn’t an unknown future tax liability attached to it.

Where the strategy could break down – the liquidity problem:

Another often-overlooked consideration is liquidity. A dollar in your 401(k) is valuable, but a dollar you can access may sometimes be more useful. Life rarely unfolds exactly as planned. Job changes happen. Business opportunities appear. Family needs arise. A home remodel becomes necessary. An unexpected opportunity presents itself. When most of your wealth is locked away in a 401(k), your options become much more limited. Technically, you can access those 401(k) retirement funds before retirement age, but that often comes with large penalties and taxes.

This is one reason taxable brokerage accounts deserve more consideration than they often receive. They don’t provide the same upfront tax deduction, but they offer flexibility. If you need funds, they’re available. If you’ve held investments for more than a year, you’ll typically pay long-term capital gains rates rather than ordinary income tax rates like with a traditional 401(k) withdrawal. You also have significantly more control over when gains are recognized and how much income shows up on your tax return.

So what’s right for you?

Unfortunately, the answer depends entirely on the individual. Your goals matter. Your income matters. Your spending habits matter. Your personality matters. Some people are excellent candidates for maxing out every available retirement account. Others may benefit from balancing contributions between traditional retirement accounts, Roth accounts, and taxable investments. That’s why it’s very difficult to create a hard-and-fast rule for what qualifies as “too much” savings. It depends completely on a person’s goals and the plan they have in place.

The better question(s) to ask:

The better question isn’t, “How much should I save?” The better question is, “Where should I save?”. Before blindly maxing out every retirement account available, ask yourself a few questions. Do I have adequate emergency savings? Do I have access to money if I need it? Am I taking advantage of my employer match? Do I have any Roth assets? Most importantly, am I creating flexibility for my future self?

So, is it possible to save too much in a 401(k)? I suppose the short answer is yes. But it has less to do with the amount and more to do with the trade-offs. More savings doesn’t automatically create more security. Sometimes it simply creates a different set of constraints. The goal isn’t to maximize account balances at all costs. The goal is to maximize flexibility, control, and have the ability to make choices when they matter most.

At a minimum, this evolution should increase focus on return on investment, rationalize compute budgets, and influence the ways both enterprise and casual users incorporate AI into work and daily life. In that sense, the trend adds immediacy to broader questions surrounding the timing, scale and ultimate returns on AI-related capital expenditure. This trend might prove lasting even over the long-term, though prior shifts to the cloud (first storage, then compute), while historically presenting a radically different profitability dynamic, leave us open to a wide range of long-term scenarios.

While three of the U.S.-based hyperscalers (Alphabet, Amazon and Microsoft) and many of the larger non-U.S. hyperscalers (Alibaba, Baidu, Huawei and Tencent), in our view, already have and will further develop natural use cases and potentially profitable revenue models for their in-house compute capacity (Meta might well figure something out, too), it seems increasingly likely that the stand-alone frontier model/agentic systems providers (predominantly Anthropic and OpenAI) will be challenged to square the investment/profit circle. Presuming as seems increasingly true that durable moats are unlikely at the model level, further development in agentic expertise may provide the means for differentiation, but TBD if agents can provide immutable business model defense and thereby serve as a basis for competitive longevity.

Setting aside the fantasy of AI in space, it likely will prove fortuitous, then, that data center construction projects are measured in years (not in months or even weeks, as it seems many thought to have been the case), as incremental gains in inference efficiency should extend the lives not only of freshly purchased hardware for which there presently is no available electrical outlet, but also otherwise idle and aging silicon that can be repurposed for AI-related tasks. Even as the local story reads strong to us, then, it also seems the jury is out re: the extent to which incremental local hardware expense will be required.

As we’ve discussed, Apple may have (inadvertently?) arrive at this same conclusion more than a few quarters ago.

None of this is novel, and the thinking seems unlikely to dent excitement for the troika of AI-Summer IPOs, but these threads already are finding increasing weight in the broader discussion re: ongoing AI capital investment and investability.

...

Signature Resources Capital Management, LLC (SRCM) is a registered investment adviser. Registration does not imply a certain level of skill or training. This material is provided for informational purposes only and should not be construed as investment advice or as an offer to buy or sell any security or implement any investment strategy. A decision to engage SRCM should be made only after carefully reviewing the applicable investment management agreement and SRCM’s Form ADV Part 2A and Part 2B, conducting any due diligence you consider appropriate, and consulting your legal, tax, and accounting advisors. All investing involves risk, including the possible loss of principal. Additional information regarding SRCM’s services, fees, risks, and conflicts of interest is available in the applicable investment management agreement and Form ADV. Information presented here is unaudited, subject to change, and intended only as a general guide to current views.

Past performance is not a guarantee of future results. The views expressed reflect SRCM’s opinions as of the date of writing, are subject to change, and may not reflect current thinking. This material is based on proprietary research and analysis, together with information believed to be reliable; however, SRCM does not represent that such information is accurate or complete and accepts no liability for any loss arising from its use. Certain content may be theoretical in nature and subject to inherent limitations. Any references to market exposures or specific investments are provided for illustrative purposes only and may or may not be reflected in client portfolios. No reader should assume that any investment or strategy discussed was or will be profitable. This material may also contain projections, targets, or other forward-looking statements based on current expectations and assumptions. These statements are not guarantees of future outcomes, and actual results may differ materially. You should consult your financial advisor to determine whether any investment or strategy is appropriate for your individual circumstances.

• In the end, timing themes/trends/stocks is virtually impossible on a consistent basis. Resulting portfolio overweights can lead to disappointment when trends flag, fads stale, momentum shifts

• So, we seek broad diversification in an attempt participate...even if only partially...in any trend before it takes off. To the extent novel themes catch an unexpected bid, we may already own the names that might participate

• Will we generally “fully” participate in the latest market trends? Very likely not. But that works both ways: we might only partially participate in a trend after other investors have given it wings; but we also are very unlikely to unduly participate in trends adverse to the greater objective of success in achieving financial goals

What’s Your Angle?

Might be that the most important lesson an investor can learn is that, barring actions using the sorts of privileged information that constitute inside information, one can have no special insight into any stock’s, any sector’s or even the market’s near-, medium- or long-term future. No manner of “analysis” is going to result in your having more knowledge about tomorrow. So, all you have is an opinion. With that in mind, it is quite likely that your opinion is shared by some non-trivial portion of the investment universe. You and those folks have made that opinion known via your trades (or lack thereof...not having an opinion and not trading on an opinion is still a trade). Since those trades will have had some manner of impact on market prices, the market already reflects your opinion, along with the opinions of every other investor. When we say “reflects,” we mean to suggest that, so long as we require that the basis for owning any stock is the claim of future income from the issuer that ownership bestows on the owner of the stock, the current price represents the current value of all that future potential income (which need not be distributed to the investor, mind you; the income can be retained by the company for further investment). But that’s not all. Implicit in that price is the potential variability of the eventual outcomes versus what is presently expected, and not just in the context of that individual stock, but in the context of all securities (e.g., government bonds, corporate bonds, etc.). In easier terms, a stock’s price reflects every investor’s present assessment of the amount and likelihood of future income and capital gain relative to similar evaluations of every other stock (and potential other investments). These assessments will be different for each security across many axes, with relative value primarily relating to the price paid for expected growth and the expected variability of that growth across all stocks.

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Why Relative Value Matters

We’ve homed in on relative value because that characteristic is core to how we should think about investing when it comes to our opinions regarding future developments. By relative value, we mean how attractive a stock’s current price is relative to its expected fundamentals and risk, compared with other investable alternatives. Stocks with low relative value reflect more aggressive expectations regarding future fundamentals. Dubbed “Growth” stocks for that reason, these stocks have captured investor interest in such a way as to raise their current prices relative to their current fundamentals to a level that “discounts” that future growth. In other words, Growth is already priced into these stocks and already incorporates consensus views regarding relative growth outcomes.

Of course, that investors believe the growth will come to pass does not mean that it will. More importantly, future returns depend not simply on whether growth occurs, but on whether the outcome is better or worse than what is already expected. Since prices of Growth stocks already reflect greater expected growth, those stocks are likely to underperform on a going-forward basis if expectations were too high. The historical tendency is such that actual growth can disappoint relative to what was priced in. So, we tend to think of Growth stocks as having low relative value. Naturally, the converse may be said of stocks with high relative value, for which investor expectations can be read as relatively low. These “Value” stocks reflect, variously, relatively weak investor confidence in the future relative improvement of their fundamentals.

Another way to look at Growth, versus Value, is that investors have assessed a lower risk that fundamentals will improve for Growth stocks, whereas they’ve adopted a “wait-and-see” approach for Value stocks. That is, they’re not called Growth stocks because they are better, they’re called Growth stocks because investors expect that they will be better. Might be that the “are better” has influenced the “will be better” bit, but it’s the latter that’ll matter most for future returns.

Importantly, theory suggests that investors aren’t making these assessments in a siloed manner. That is, one should believe that investors take all information and potential investment opportunities into consideration when making any decision. But we have the sense that theory is well removed from practice. The recent not altogether random, but at the same time mostly in our view irrational gyrations in individual stocks on account of memetic AI-related developments quickly come to mind. Even so, theory further suggests that, even if one or many individuals blindly consider one investment without regard to any other investment, other investors will trade in consideration of any resulting valuation mismatch (again, based on opinions regarding the future, which may or may not come to light).

Which brings us back to the opening of this commentary. When we understand that the current price of any market-traded security reflects all information—everyone’s observations and expectations for any individual investment, relative to all potential investments—we should be humble about assuming no one else shares our view. Otherwise, if you believe your opinion is that much different from everyone else’s, then you must also believe your expected outcome is relatively unlikely. If it were more likely, more people would share that view and the market price would more closely reflect it. In that context, you must also believe your opinion points to additional gain beyond what is already priced in. More importantly, it must also lead you to want to overweight that perceived opportunity relative to all the other opportunities you might consider.

So, for any specific bet on the future to be “correct”, it must be sufficiently distinct from what’s already priced in, while also being optimal relative to all other potential uses of capital. We find all those hurdles far too high to clear on a regular basis.

Stocks Gonna Stock

Since markets already reflect the consensus view of future fundamentals and risk, outperformance requires being right where the market is wrong—and right enough to justify the portfolio tradeoff. That is why we generally believe investors are better off letting stocks do what stocks will do. Prices will rise and fall based on factors we cannot control. So, we prefer to own at least some portion of many, many stocks, allowing us to possibly participate in future developments that are not yet priced in. That does not mean we believe investors should always take a purely passive approach, though that can be entirely appropriate. As noted in the Growth-versus-Value discussion above, we favor an approach that recognizes how differences in investor opinion can cause stocks to exhibit characteristics associated with higher expected returns. Because it can take time for those expected returns to emerge, we generally tilt portfolios toward those characteristics in a systematic, diversified way. This allows us to pursue expected return differences without relying on concentrated predictions. In our view, that design preserves more market-like return behavior while still giving the portfolio a chance to benefit from what we believe are more thoughtful equity allocations.

As we have learned first-hand over the many years we have been investing portfolios, this approach requires massive and expensive datasets, extensive analytics, thoughtful portfolio design and careful implementation. And in order to achieve the additional expected return an overweight to these observably more attractive characteristics presents, the approach must remain lean from a cost perspective. Hence, our preference for a fund-based methodology. Most importantly, the funds now available to us provide exactly the manners of investment we might otherwise directly implement ourselves. Further, the fund-based approach in practice allows for much broader (i.e., more individual stock holdings expressing favored characteristics) and much more adaptable portfolio implementation, potentially providing greater diversification, lower turnover costs, operational efficiency and tax-management advantages depending on vehicle/account type. By most metrics, then, the funds-based approach is the better one from both the mechanics and efficiency perspectives. By the way, we implement a necessarily different but methodologically consistent approach within fixed income.

More May Not Be Better

The modern finance industry is never short of shiny new things to sell. Most rely on some manner of belief that the simpler approach is suboptimal, perhaps even wrong. Even without the help of industrial finance , investors can find themselves constantly drawn to new opportunities and regularly tempted by the possibility of excess gain relative to how their portfolios are currently positioned. We admit that the instinct to seek greater gain is natural, if only because it seems possible. But that instinct can be checked with a combination of intuition and math. When we review most of these pitches and do the work required before implementation, we usually find that the shiny option compares poorly with the tried and true across the most probable range of outcomes. In the end, we have learned through such work and direct experience that there generally are rather few reasons to layer additional complexity on a portfolio over our present method (even as that method has evolved over time) in the pursuit of a more optimal path to reach client financial goals. More often than not, we end up circling back to our existing strategies. That does not mean that our approach never changes. And even within our approach, there’s a fluidity intentionally embedded in the style that’s meant to adapt to changing opportunities. Ultimately, the work that tends to curb most adventures is the same that led us to the financial planning and investment methodologies we implement today.

Most importantly, we have learned that clients have historically found greater comfort in understanding that, while there is little we can know about the future, there is much we can learn from the past. If we accept a reasonably identifiable level of uncertainty, we may find that the reward over time has been sufficient compensation for bearing it. In the meantime, we should seek to balance comfort with investment risk and the desire for investment reward in the most efficient, understandable, and practical way available.

Important Information

Signature Resources Capital Management, LLC (SRCM) is a Registered Investment Advisor. Registration of an investment adviser does not imply any specific level of skill or training. The information contained herein has been prepared solely for informational purposes. It is not intended as and should not be used to provide investment advice and is not an offer to buy or sell any security or to participate in any trading strategy. Any decision to utilize the services described herein should be made after reviewing such definitive investment management agreement and SRCM’s Form ADV Part 2A and 2Bs and conducting such due diligence as the client deems necessary and consulting the client’s own legal, accounting and tax advisors in order to make an independent determination of the suitability and consequences of SRCM services. Any portfolio with SRCM involves significant risk, including a complete loss of capital. The applicable definitive investment management agreement and Form ADV Part 2 contains a more thorough discussion of risk and conflict, which should be carefully reviewed prior to making any investment decision. All data presented herein is unaudited, subject to revision by SRCM, and is provided solely as a guide to current expectations.

Past performance is not a guarantee or reliable indicator of future results. The opinions expressed herein are those of SRCM as of the date of writing and are subject to change. The material is based on SRCM proprietary research and analysis of global markets and investing. The information and/or analysis contained in this material have been compiled, or arrived at, from sources believed to be reliable; however, SRCM does not make any representation as to their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated thereby. Any market exposures referenced may or may not be represented in portfolios of clients of SRCM or its affiliates, and do not represent all securities purchased, sold or recommended for client accounts. The reader should not assume that any investments in market exposures identified or described were or will be profitable. The information in this material may contain projections or other forward-looking statements regarding future events, targets or expectations, and are current as of the date indicated. There is no assurance that such events or targets will be achieved. Thus, potential outcomes may be significantly different. This material is not intended as and should not be used to provide investment advice and is not an offer to sell a security or a solicitation or an offer, or a recommendation, to buy a security. Investors should consult with an advisor to determine the appropriate investment vehicle.

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• Investors have reacted (in our opinion far too injudiciously) in knee-jerk fashion to each revelation on the artificial intelligence (AI) front, dumping potential losers, tenuously as that connection has been made

• That AI fear-trade has expanded to private credit, where AI infrastructure overspend and a heavy software-focus has prompted rushes to withdraw funds from generally illiquid products that have struggled to meet demand

• Each case is a reminder that investment risk comes in many forms, arises at any moment, may compound with contemporaneous risk and generally scales along with expected return (higher expected return = higher risk)

• Investors who accept these characteristics of investment markets as core to their natures may find such periods of turbulence easier to understand and endure

All Eyes on Oil

For all the geopolitical angst, we’d argue the equity market might be seen as yet lacking in comparable drama. This may be because investors have looked to history to understand that tense geopolitical moments tend to resolve with little enduring macroeconomic consequence. But increasing strains in oil markets from the expanding Iran war may well add to market jitters. Assuming the perceived timing of the end of the war is the primary driver of recent changes in assumptions, oil traders now are thinking the conflict will last a good bit longer than they did in the middle of last week. So, while oil futures markets still suggest the price of oil is expected to fall in reasonably short order once the war concludes, present expectations now foresee oil prices at higher levels for longer. Price expectations could quickly reverse (further inflate), were the war to end (escalate even further).

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Where to from Here?

Perhaps of greatest potential risk to equity markets might be an Iran left without firm leadership, a region broadly unstable, and therefore an oil shipping market left markedly riskier as a result. Supplies thus could remain strained, with the price of oil maintaining a multi-year high. As those costs flow through to other goods, concerns of persistent inflation will grow. Bond markets will struggle to balance rising prices with a still modestly growing economy that has barely lifted employment over the last year, with interest rates potentially rising on account of the need to clear a higher inflation hurdle and potentially weaker growth (which might, then, boost rates of corporate debt defaults). Stories with “stagflation” in the title referencing the 1970s will become more numerous.

Meantime, markets are likely to continue to gyrate, given the present tension and lack of clarity as to its release. As statements by President Trump and his administration remain near wholly vacant of specifics regarding the intentions of the war, methods to model its denouement remain elusive. And talk of boots on the ground over the weekend lifted the likelihood of a war measured in months.

The war with Iran comes as investors could be read as struggling (and increasingly so) to balance the promise of artificial intelligence (AI) with its budding potential boost to productivity against the actual costs of the technologies, including the radically escalating spend on AI computing infrastructure and still broadly elusive profits, at least given what one can glean from company statements.

At the same time, the AI story has cast a shadow on private credit markets, which already were suffering rising concerns that the relatively opaque debt market has grown too quickly and without commensurate safeguards/oversight and that some manner of dislocation might soon be forthcoming.

Optimists...for the Long Term

Readers will know that we generally maintain a long-term optimistic outlook. We hold that stance, generally, regardless the present market situation. And that’s because we can honestly argue that we’ve been here before. If not specifically so, then contextually so. There have been other wars, many in the Middle East, with particularly negative impacts on energy markets. And such wars have sometimes arisen amidst a relatively strong market, some participants in which may have been looking for a reason to sell.

It would be pollyannish of us to believe that the war in Iran might end with no lasting global macro consequence. We already have learned that the regime is more intractable than this administration might have thought. Until oil shipments can proceed through the Strait of Hormuz unmolested—and until such time as shippers and their insurers firmly believe that’s the case—oil prices are likely to remain well above the $55-to-$65 range of the past year. Equity investors are likely to continue to fret increased aggression as they incorporate higher inflation into their expectations (which, all other things equal, should depress current valuations). And as bond investors do the same, yields are likely to maintain an upward drift. The Federal Reserve now will be even more challenged to substantiate shifts in monetary policy, given the potentially diverging trends working against its dual mandate of stable prices and full employment. Lower rates may support employment, but potentially at the expense of higher inflation. And higher inflation may force the Fed to leave rates where they are, perhaps even lift them to provide a countervailing force on prices.

The upshot is that increased market volatility is to be expected for the near term. We hope not over the medium term, too, but we should not be surprised if that proves the case. Even so, we believe investors who have properly understood that investment markets routinely see periods of increased tumult on account of the realization of such risks, and who had already aligned their risk exposures according to their expected levels of comfort during such periods, may find some manner of relief knowing that markets generally have recovered in the fullness of time.

Important Information

Statera Asset Management is a dba of Signature Resources Capital Management, LLC (SRCM), which is a Registered Investment Advisor. Registration of an investment adviser does not imply any specific level of skill or training. The information contained herein has been prepared solely for informational purposes and is not an offer to buy or sell any security or to participate in any trading strategy. Any decision to utilize the services described herein should be made after reviewing such definitive investment management agreement and SRCM’s Form ADV Part 2A and 2Bs and conducting such due diligence as the client deems necessary and consulting the client’s own legal, accounting and tax advisors in order to make an independent determination of the suitability and consequences of SRCM services. Any portfolio with SRCM involves significant risk, including a complete loss of capital. The applicable definitive investment management agreement and Form ADV Part 2 contains a more thorough discussion of risk and conflict, which should be carefully reviewed prior to making any investment decision. Please contact your investment adviser representative to obtain a copy of Form ADV Part 2. All data presented herein is unaudited, subject to revision by SRCM, and is provided solely as a guide to current expectations.

Past performance is not a guarantee or reliable indicator of future results. The opinions expressed herein are those of SRCM as of the date of writing and are subject to change. The material is based on SRCM proprietary research and analysis of global markets and investing. The information and/or analysis contained in this material have been compiled, or arrived at, from sources believed to be reliable; however, SRCM does not make any representation as to their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated thereby. Any market exposures referenced may or may not be represented in portfolios of clients of SRCM or its affiliates, and do not represent all securities purchased, sold or recommended for client accounts. The reader should not assume that any investments in market exposures identified or described were or will be profitable. The information in this material may contain projections or other forward-looking statements regarding future events, targets or expectations, and are current as of the date indicated. There is no assurance that such events or targets will be achieved. Thus, potential outcomes may be significantly different. This material is not intended as and should not be used to provide investment advice and is not an offer to sell a security or a solicitation or an offer, or a recommendation, to buy a security. Investors should consult with an advisor to determine the appropriate investment vehicle.

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• Maintaining a factor-based approach can prove challenging at times. And latching onto a growth train may seem the easier path in periods such as the past few years

• Market history shows relative performance tends to cluster in cycles, but the beginnings and ends of those cycles are unknowable in advance. Factor exposures may be indicative of variation in longer-term outcomes, but they are weak to useless as market timing tools

• As the growth side of the ledger [opinion alert!] grows more and more irrational, though, we find the historical evidence increasingly relevant

Matter of Factors

So long as one takes a longer-term view, data backing core emphases on relative size, valuation and profitability remain cogent. In Figure 1 we show the cumulative total return of small-cap value stocks, versus large-cap value stocks. Where the area is green, the top represents the index of small-cap value, while the bottom represents the index of large-cap value (and vice versa, where grey shows large-cap value outperformance). Though both series ended the period with about the same annualized return, there were meaningful interim returns gaps between the two groups of stocks. The grand relative gains in small-cap value stocks after the Tech Bubble (2000-01), the Great Financial Crisis (2007-09) and the COVID pandemic came only after the substantial relative declines prior to each crisis. The cyclicality of the difference in relative returns reflects both the promise of factor-based investing and the risks generally to be borne in pursuing any such methodology.

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The cost of the potential near- and medium-term underperformance of a factor-based equity investment approach is the risk one must assume to achieve the potential premium that the approach may present. In Figure 2, we again use the two narrow extremes of the factor mix to support this observation. Over the past thirty years, small-cap value stocks (value stocks are those that measure less-expensive based on some ratio of price to company “fundamentals”, such as assets, earnings or revenue) have shown a tendency to underperform large-cap growth (growth is the inverse of value) stocks over shorter periods of time. But stretch the review period and a picture of more consistent—though still not pervasive—outperformance comes into focus. Where we consolidated the data in Figure 2, we show the entire detail in Figure 3 in order to convey the cyclicality of relative performance. The rolling periods expand from 1 year (indigo) to 20 years (yellow). The higher peaks and lower troughs of the 1-year rolling periods express not only the heightened short-term volatility of markets in general, but also the potentially substantial difference between the short-term performance of small-cap value stocks, versus large-cap growth stocks.

Discipline Trumps Timing

To achieve the potential gains presumably inherent to a factor-based investment strategy, though, we believe one must be systematic. That is, the definitions one uses to establish the relative weights of stocks in a portfolio must be reasonably stable and consistent. As important, we think, is to implement a multifactor approach in a manner that seeks to optimize the portfolio’s potential benefit from the targeted exposures. In the portfolios where we utilize multifactor approaches—multifactor equity investment methodologies being just one of the various investment approaches we deploy in client portfolios—we generally “tilt” exposures toward our preferred characteristics, aiming to boost expected returns without adding undue risk of underperformance relative to the market and without unnecessarily over-complicating the approach. The tilt aspect of our method reflects the notion that, while we tend to own some proportion of most stocks in a given investment universe (which in our portfolios tend to align with three quasi-regional exposures: U.S. stocks, international developed-market stocks and emerging-market stocks), we tend to maintain greater-than-market weights in stocks that express our preferred characteristics and lower-than-market weights in those that do not.

As part of that focus on efficiency, we generally seek to achieve our equity factor exposures exclusively via exchange traded funds (ETFs, and to a lesser extent these days mutual funds). The primary reason we take this stance is that ETFs allow the portfolio to evolve over time to optimize factor exposures without the undue realization of gains, either short- or long-term. The funds we choose also generally consider all factor exposures for each underlying holding (hence the multifactor moniker). One could instead choose single-factor funds (e.g., a small-cap fund or a value fund), but such a methodology generally is considered less optimal from an expected-return standpoint. The approach also adds unnecessary friction to the portfolio in that the exposures must be modulated via a rebalancing of the individual funds, a process that is largely more efficient when done within the fund itself.

Further, for most portfolios (we’d argue probably for all portfolios from a practical perspective), a fund-based approach trumps one that invests in individual stocks as well, given the far greater breadth of holdings that can be achieved in a fund—thousands of stocks, versus hundreds, perhaps even tens in an average account or household of accounts—and the potential greater efficiencies achieved by the single-portfolio scenario that a fund presents to all investors in the fund. Holding a larger number of stocks generally enables more optimal achievement of factor exposures, while the ETF construct generally enables more tax- and cost-efficient tailoring of those exposures as markets evolve over time. The costs of those funds in terms of expense ratios obviously matter, which is why we narrow our universe of multifactor funds to those at the less-expensive end of the spectrum. Present preferred multifactor funds carry expense ratios ranging from 0.12% to 0.17% for U.S.-focused funds, 0.18% to 0.23% for international developed stock funds and 0.33% to 0.39% for emerging market stock funds. These expenses ratios have changed over time, to date only becoming less expensive as the funds have matured.

Finally, we generally scale multifactor tilts in line with a portfolio’s overall risk tolerance so that higher-risk models carry more pronounced emphases on these factors. The approach aligns with observation that stronger tilts widen the potential for the performance of the portfolio to diverge from that of the broader market (in industry parlance, stronger tilts increase potential tracking error). That potential performance divergence can be in both directions (higher and lower potential returns), with the expected bias that the longer-term relative performance will be higher. The graduated tilts also acknowledge the fact that, in order to achieve the premium bit of the risk premium, one must endure the risk of near- and medium-term underperformance. As noted earlier, we seek to reduce the potential downside performance gap through tilts, rather than via an exclusive focus on stocks expressing more favorable characteristics.

FAIr Value

In summary, we think this disciplined, long-term, evidence-based approach seeks to enhance expected returns while acknowledging the inherent cyclicality and potential for periods of underperformance. As shown in Figure 3, we’re in the midst of substantial long-term small-cap value underperformance relative to large-cap growth stocks. Given the narrowness of the comparison, the gap overemphasizes the relative underperformance of multifactor-tilted portfolios, as a tilted portfolio would have maintained some exposure to the larger and growthier side of the spectrum. In recent times, actually, this underperformance mostly has been a U.S.-based phenomenon; multifactor approaches have tended to outperform in international stock markets over the past several years. The underperformance of small/value is notable, nonetheless, for its depth and duration.

So, what does that underperformance tell us about the future? Perhaps nothing. Potentially something. We’ve many reasons to be concerned about exposure to U.S. equity markets. But, then again, when ain’t that been true? We’ll leave aside the “if” for now, as any concerns about the magnitude of stock exposure may be far more easily handled via a change in allocation between equity and fixed income (feel free to reach out to an advisor to discuss). This month’s commentary discusses the “how” of equity exposure. And in that context, we continue to find that investor expectations for going-forward fundamental growth related to generative artificial intelligence (genAI)—expectations clearly reflected in the relative performance and present valuations of a host of large-cap growth stocks—greatly outpace practical medium- and perhaps even long-term potential for end-use revenue to sufficiently compensate for the rather outlandish monies being dedicated to genAI infrastructure. Said more concretely, there’s a valuation disconnect, in our minds, that may contract before a more realistic view of the potential profitability of genAI broadly takes hold.

Again, research has shown little reason to believe factor investments can be timed to market opportunities. And in our experience, the shifts in investor sentiment that have reversed trends in factor underperformance have come quickly and without immediately obvious triggers, as we show in Figure 4. Seems investor opinions may be consolidating toward a more rational view here, as small-cap value stocks are on track for their third month of outperformance relative to large-cap growth stocks. But time will tell. Meantime, we continue to find a strategy that tilts against the rising tide of genAI exuberance a sensible stance for those similarly concerned about the potential for eventual investor disappointment.

Important Information

Signature Resources Capital Management, LLC (SRCM) is a Registered Investment Advisor. Registration of an investment adviser does not imply any specific level of skill or training. The information contained herein has been prepared solely for informational purposes. It is not intended as and should not be used to provide investment advice and is not an offer to buy or sell any security or to participate in any trading strategy. Any decision to utilize the services described herein should be made after reviewing such definitive investment management agreement and SRCM’s Form ADV Part 2A and 2Bs and conducting such due diligence as the client deems necessary and consulting the client’s own legal, accounting and tax advisors in order to make an independent determination of the suitability and consequences of SRCM services. Any portfolio with SRCM involves significant risk, including a complete loss of capital. The applicable definitive investment management agreement and Form ADV Part 2 contains a more thorough discussion of risk and conflict, which should be carefully reviewed prior to making any investment decision. All data presented herein is unaudited, subject to revision by SRCM, and is provided solely as a guide to current expectations.

“Small-cap value stocks” are represented by the Bloomberg U.S. 2500 Value Total Return Index, which comprises the smaller 2,500 of the largest 3,000 U.S. companies with superior value factor scores based on their earnings yield, valuation, dividend yield and growth.

“Large-cap growth stocks” are represented by the Bloomberg 500 Growth Total Return Index, which comprises the largest 500 of the largest 3,000 U.S. companies with superior growth factor scores based on their earnings yield, valuation, dividend yield, and growth.

Past performance is not a guarantee or reliable indicator of future results. The opinions expressed herein are those of SRCM as of the date of writing and are subject to change. The material is based on SRCM proprietary research and analysis of global markets and investing. The information and/or analysis contained in this material have been compiled, or arrived at, from sources believed to be reliable; however, SRCM does not make any representation as to their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated thereby. Any market exposures referenced may or may not be represented in portfolios of clients of SRCM or its affiliates, and do not represent all securities purchased, sold or recommended for client accounts. The reader should not assume that any investments in market exposures identified or described were or will be profitable. The information in this material may contain projections or other forward-looking statements regarding future events, targets or expectations, and are current as of the date indicated. There is no assurance that such events or targets will be achieved. Thus, potential outcomes may be significantly different. This material is not intended as and should not be used to provide investment advice and is not an offer to sell a security or a solicitation or an offer, or a recommendation, to buy a security. Investors should consult with an advisor to determine the appropriate investment vehicle.

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• We think it wise to regularly invest freshly earned excess cash (e.g., a portion of each paycheck)

• But when it comes to splitting up a single sum of excess cash (e.g., a large year-end bonus or annual contribution to a retirement plan), lump-sum investing has often—but not always—come out ahead

• Even so, cautious investors may find any opportunity cost of wading into the market a small potential price for the comfort a DCAP may provide, as any missed gains may fade into the background over time

• Either way, we believe that maintaining any disciplined investment plan trumps having none at all

Generally, But Not Always Up

Obviously, investing excess cash all at once on the best day possible (meaning the lowest level of the market over any given period) would likely result in the highest gain. But such perfect timing is not possible. Investors may instead turn to a dollar cost averaging plan (DCAP)1 as means to potentially avoid investing at relatively inopportune times. As we show in Figure 1, however, spreading out the investment of some sum of excess funds, rather than investing the entire amount all at once, historically has not led to higher returns. Of course, there is always the possibility that a meaningful market decline is just around the corner, such that a DCAP might lead to a better return. And in that sense, a DCAP minimally may provide an extra layer of comfort to investors who might otherwise be fearful of increasing an allocation to stocks at any given point in time.

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But Maybe Don’t Just Sit There

Meantime, we find it important to invest the cash portion of a DCAP in very short-term, liquid cash-like securities (e.g., a money market fund) as this may help avoid missing out on potential, relatively lower-risk returns. And that’s part of a broader, more foundational message that individuals should consider being invested in some manner, as avoiding investing altogether almost guarantees a suboptimal financial outcome.

As part of finding comfort with being invested, we believe it is important that investors determine a level of exposure to equity market risk—meaning a level of potential decline—that they believe they will find manageable in the event of an actual market decline. Hypothetical declines are nothing like the actual sort, though, which is why we tend to focus so much on investment risk in our commentaries and discussions with clients. After an appropriate level of equity exposure is defined, a DCAP may provide an additional layer of comfort with potential near-term market swings. And investors may find that any gains missed through the implementation of a DCAP are unlikely to have proved meaningfully detrimental in the fullness of time.

That long-term mindset is critical, though, as stocks don’t always go up. In Figure 2 we show the percentage of time the U.S. equity market2 saw gains over a range of rolling time periods3. And in Figure 3 we show the data underlying the averages from Figure 2. Both charts show that the propensity to have seen a gain from equity investing has grown as one increased the hypothetical “time in the market”. But they also make clear that losses over reasonably longer periods of time, while not historically common, are not improbable.

As we look forward to the new year, we wish everyone a safe and festive close to 2025 and a grand launch into 2026!

Important Information

Signature Resources Capital Management, LLC (SRCM) is a Registered Investment Advisor. Registration of an investment adviser does not imply any specific level of skill or training. The information contained herein has been prepared solely for informational purposes. It is not intended as and should not be used to provide investment advice and is not an offer to buy or sell any security or to participate in any trading strategy. Any decision to utilize the services described herein should be made after reviewing such definitive investment management agreement and SRCM’s Form ADV Part 2A and 2Bs and conducting such due diligence as the client deems necessary and consulting the client’s own legal, accounting and tax advisors in order to make an independent determination of the suitability and consequences of SRCM services. Any portfolio with SRCM involves significant risk, including a complete loss of capital. The applicable definitive investment management agreement and Form ADV Part 2 contains a more thorough discussion of risk and conflict, which should be carefully reviewed prior to making any investment decision. All data presented herein is unaudited, subject to revision by SRCM, and is provided solely as a guide to current expectations.

“U.S. stocks” are represented by the S&P 500 Index measures the performance of the large-cap segment of the U.S. equity market.

Past performance is not a guarantee or reliable indicator of future results. The opinions expressed herein are those of SRCM as of the date of writing and are subject to change. The material is based on SRCM proprietary research and analysis of global markets and investing. The information and/or analysis contained in this material have been compiled, or arrived at, from sources believed to be reliable; however, SRCM does not make any representation as to their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated thereby. Any market exposures referenced may or may not be represented in portfolios of clients of SRCM or its affiliates, and do not represent all securities purchased, sold or recommended for client accounts. The reader should not assume that any investments in market exposures identified or described were or will be profitable. The information in this material may contain projections or other forward-looking statements regarding future events, targets or expectations, and are current as of the date indicated. There is no assurance that such events or targets will be achieved. Thus, potential outcomes may be significantly different. This material is not intended as and should not be used to provide investment advice and is not an offer to sell a security or a solicitation or an offer, or a recommendation, to buy a security. Investors should consult with an advisor to determine the appropriate investment vehicle.

• Growing actual costs for building and operating AI infrastructure vastly outpace downstream AI revenue

• Parabolic ramps in expected revenue ignore the tech’s inherent flaws and are becoming more heavily dependent on presumed capabilities unlikely to materialize in the medium term from present technologies

• Enthusiasm for AI’s yet-unrealized potential arguably has boosted portions of the market well beyond reasonable valuations

• Concerned about excess investor enthusiasm for the AI theme, we think an immediate reckoning is not near

Search for Meaning

We’re kind of shocked how quickly “AI” has become a meaningless, throwaway concept, one particularly fond of which seem to be public company executives, investment strategist sorts and your average Reddit poster. Everyone’s gonna “do AI” and make loads of dough! Given time-in-the-market and technological maturity (much debate happens here, as we will discuss in as bit), though, we wonder why we’ve so little detail regarding actual services-related revenue being derived from AI technologies (excluding hardware sales and those from the folks renting out servers to do the required math). The relevance of course is that there’s no sense for the hardware to exist without those end-use dollars. For the half-trillion or more invested so far in infrastructure and considering plans for trillions more through decade end, we should have better insight into realistic top-line growth.

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All About Tomorrow

The typical response is that we should just wait and see. Thing is, we have been waiting and seeing. And for as many times as we’ve been impressed by AI tech—from the near-magical AI-generated “podcast” that discussed a commentary I wrote to the far more practical application of AI tech for searches across internal documentation—we have yet to be impressed with actual sales data.

“But wait!”, you might say, “OpenAI has secured more than a trillion dollars in deals!” That can’t be for nothing! True. But those deals—increasingly circular (seller invests in buyer of goods/services from seller) as so many of them and others like them in the AI space are—relate mostly to securing the capacity to do AI math. They mostly do not relate to any sources of reasons to do the AI math. But the latter is all we really should care about.

And here we’re certainly not the only ones with growing concerns that the tendency to provide dead-end results is an unavoidable defect of large language model-based technologies. It’s now well understood (among those who care to pay attention) that AI technologies: 1) do not “understand” the world in any manner a human might conceptualize that word, 2) do not contextualize the world in any other sense than by consolidating descriptions thereof given some manner of relevant historical example in text, picture, illustration or video, 3) provide responses to prompts that one should never presume have any factual basis beyond a potentially irrelevant contextual basis given the underlying computational method.

The phrase “stochastic parrot” is overused and probably, at this point, too trite when considering more recent advances in overlay technologies used to accommodate underlying flaws, but it’s nonetheless indicative of the core problem. I asked CoPilot to explain why, which I summarize as: stochastic means “based on probability” and refers to the fact that LLMs use statistics to predict responses. They therefore don’t in any manner have any “understanding” of their responses—much as a parrot likely doesn’t when mimicking human speech—which as a result may have no factual basis in reality.

Note the emphasis on “may”. Perhaps responses to prompts are most of the time completely accurate and on point. But we think it matters greatly that the expected hit rate is south of 100. And that’s because even in non-mission-critical situations, it matters, given the seemingly growing tendency to offload work to an LLM.

For example, I asked Microsoft’s CoPilot app to review this document for, “clarity, comprehensiveness and accuracy.” After otherwise generally praising the text, excepting sarcasm, editorialization and structure, it noted that, “The document occasionally repeats entire paragraphs, which may confuse readers or suggest editing oversights.” When asked to what it was referring, it highlighted the introduction above, stating that it both came at the beginning of the document and, “again in the early section before the ‘Tight Ropes’”. Hrm. After I noted that the paragraph is not repeated, just exists in a text box at the beginning of the document, it thanked me for the clarification and agreed.

Such clinical text reviews represent in our view the lowest bar to clear for AI tech. And, yet, in our experience it often comically fails to clear that hurdle. From queries on docs we’re creating to AI results from Internet searches, we regularly find very obvious mistakes in the results. Cure cancer? AI tech can’t even reliably cure Word files.

Seems the answer, at present at least, is to throw more money around. We would presume the zillion-dollar pay packages being reported for AI scientists/engineers/etc. are meant to solve the parrot problem. Not sure what to think about the monies being allocated to infrastructure under the presumption either that the flaw will be solved or that users won’t care to notice. Shown in Figure 1, the “hyperscalers” have spent an estimated $330 billion on capex over the 12 months ended 09.30.25 (representing ~21% of revenue and ~52% of operating cash flow) a figure expected to exceed $550 billion by the end of 2027 (~27% of revenue and ~67% of CF). Much of that spend—Perhaps half? Depends on the source of the anecdote and the location of the AI complex...but a large portion—represents revenue for Nvidia (NVDA). The chipmaker has seen its trailing revenue jump nearly 7-fold to an estimated $185 billion for the four fiscal quarters ended 10.31.2025 since 04.30.23 after revenue trailed off post crypto-mining craze, over which time its market cap soared ~14x to more than $5 trillion, now accounting for more than 7% of U.S. market cap.

Cost/Profit Chasm

Importantly, Nvidia revenue is mostly not from AI. Rather, the chipmaker generates revenue mostly from the means to “do” AI. Genuine genAI-driven revenue from user-focused products and services remains broadly under-reported, with guesstimates based on anecdotes still coming in below $100 billion on an annualized basis [a least by means of our searches the data covering those services/products that are enabled solely via the deployment of AI technology and excluding AI overlays of existing services/products and excluding revenue generate for providing the means (servers, etc.) for AI training and inference]. To be fair, though, it’s tough to gauge AI-specific revenue and revenue that’s enhanced through the addition of AI technology. For example, how does one consider Microsoft’s addition of CoPilot AI technology to its Office 365 suite? The company upped the annual fee for Microsoft 365 Personal and Microsoft 365 Family users by $3 per month to $99.99 and $129,99, respectively, but does not otherwise charge them specifically for “basic” CoPilot, use of which is limited. A Microsoft 365 Premium license for $199.99 ups CoPilot limits and users can add an unlimited version of CoPilot for $20 per month. Corporate users can add Microsoft 365 CoPilot for $30 per month, but an existing Microsoft 365 plan is required. Importantly, Microsoft is not yet breaking out revenue for CoPilot.

This quarter’s earnings season so far has brought little in the way of additional detail, so we have the sense that the mismatch between capex and revenue to pay back that investment is unlikely to improve materially over the short term. And that’s before we consider the expected ongoing capex ramp (see Figure 1), which more and more seems to us a grand exercise in blind faith. The reference to past bubbles is easy here. We still use some train tracks laid down more than a century ago. But without trains full of sold or sellable cargo, train tracks are useless. And we’ve still yet to fill the optical fiber strung a quarter-century ago. Without the paid-for data traffic to fill that fiber and busy the connectors and switches that move them all around, the whole of the optical space infrastructure otherwise would be useless.

Worse in the current context, those analogies fail to reflect the relatively delicate nature of AI infrastructure. Unlike rails and fiber optic cable, the chips used for AI “training” (building the models) and “inference” (using the models) don’t last anywhere near as long. Estimates suggest that the latest chips used in training will be useful at their current tasks for little more than three years. So, at least the semiconductor portion of the AI infrastructure cycle must be assumed to be set on a repeat cycle. Not only that, but each increment in AI capability so far has proved vastly more expensive from the required-infrastructure and time-to-completion standpoints, further exacerbating the mismatch between development/operational costs and revenue.

Meta (META) CEO Mark Zuckerberg remains unfazed by such concerns, having commented earlier in the year that his company wants to make sure it’s not underinvesting. Hard to see that happening at present. Capex for 2025 is now expected to range between $70 billion and $72 billion. On next year’s budgets, Meta CFO Susan Li stated on the call, “our current expectation is that capex dollar growth will be notably larger in 2026 than 2025 [our emphasis]. We also anticipate total expenses will grow at a significantly faster percentage rate in 2026 than 2025, with growth primarily driven by infrastructure costs, including incremental cloud expenses and depreciation.”

META shares have sunk 13.7% since the call, perhaps a hint that investors may be turning a more skeptical eye toward “more equals more” spending on AI. Part of that may be a growing realization that AI technology may be of a radically different sort when it comes to profitability dynamics. While investors have grown to expect that costs for the provision of Internet-based services tend to fall, often dramatically, as use scales, such may not be the case with AI tools. As one means to make them more accurate and/or useful, inference providers have developed “reasoning” models, which (crudely speaking) iterate over a series of answers to steer the eventual result toward factual and contextual precision. But those iterations require more compute, effectively reducing the potential margin on the request (leaving the potential revenue question aside for the moment). Same for pictures and video. For each additional complication, compute time rises, often dramatically. While we have learned from company reports that such costs are coming down via efficiencies gained from dynamic model choice and otherwise, comparison to, for example, the provision of classic search results is not a favorable one for the delivery of responses generated from inference. That is, a simple “search” request given to a classic search engine is handled in a radically different fashion when that request is entered into an AI chat, with costs (again, depending on an evolving mix of requested output and model choice) still strikingly higher for the latter.

It remains an open question as to what long-term-profitable AI product/service models will look like. And here is among the places where, for us, the “AI means nothing” truly presents. AI “agents” were meant to have been the next big thing already this year, paving the path toward expansive profits. The idea is that an agent could operate in some manner of autonomous fashion to produce desired outcomes in various situations. Often cited is an agent that could book an entire vacation for a family, not that anyone in their right mind would allow such a thing to occur. We tend to think that such agents must ultimately be more rules-based than AI and therefore are likely to prove little more than extensions of long-available algorithms. An exploration of analyst reports suggests many companies are reporting reasonably large revenue streams from “agentic” platforms. But it seems even this term is being diluted to include AI chat overlays onto existing customer service-oriented platforms (zzzzz) and, well, folks just calling it “agentic” because they know they’re supposed to.

Too Critical Too Soon?

To be clear though, while we believe we might maintain a better understanding of the inherent limitations of large language model-based artificial intelligence platforms than the average AI booster, as we said earlier, we continue to be amazed (if not as much anymore) by the inherent magic in the tech. Haven’t mentioned AI in the audio-visual space yet. Here, too, the journey from prompt to output can seem close to mystical.

And while you will never see such output on these pages or in our podcasts unless it is obviously identified as such, we admittedly are utilizing AI tools more often for querying our own content and external resources. Outside of otherwise normal (ehem...acknowledging that we remain in a relatively high inflation regime) year-on-year cost increases, though, we are not paying more for the AI add-ons. That “costs up, revenue flat” scenario we think ultimately will prevail across a wide swath of the AI space, likely leaving broad provision of such services only to the largest, most profitable of the players (who also will gobble up any minnows that manage to break the surface). But we don’t think that the provision of AI tools will radically alter tech-space profitability except for, perhaps, to the downside. Important in that consideration is our present understanding that there is little demonstrably and defensibly unique about any of the large language models or any individual company’s ability to utilize the output of LLMs for some manner of product/service provision. We suppose patents could end up allowing service providers to develop moats, but there’s little hint yet of efforts to lay sole claim to the AI tool space. So, we expect rising costs and competitive pressures to limit profitability for the near term across the AI space.

Of Course They Will

Those pressures may lead to more creative application of AI. Which brings us, of course, to the now seemingly inevitable dip-into-the-dumpster for any once fresh Internet-tangent tech: porn and ads. Just a few weeks ago, OpenAI CEO Sam Altman indirectly highlighted the intention to open its ChatGPT service to more adult-oriented fare, though he remains cagey on the topic of in-chat advertising. Meta’s Zuckerberg, on the other hand, provided a glimpse of a glorious AI future on the earnings call: “I think that these models will also improve modernization and all of the different ways that we’ve talked about so far in terms of improving engagement, improving advertising, helping advertisers engage. I mean, there’s the one opportunity that we just, we usually talk about on these calls, but hasn’t, hasn’t come up as much here is just the ability to make it so that advertisers are increasingly just going to be able to give us a business objective and give us a credit card or bank account and like have the AI system basically figure out everything else that’s necessary, including video or different types of creative that might resonate with different people that are personalized in different ways, finding who the right customers are all of the capabilities that we’re building, I think go towards improving all of these different things. So, I’m quite optimistic about that.”

Going to editorialize to the extreme here, but we can’t say we share that optimism. Indeed, much of the early hype around agents relates to helping customers buy things (read: steer them toward the highest ad bidder), an impact that remains well removed, to put it mildly, from using AI to cure cancer and nowhere close to the far dreamier “artificial general intelligence” or AGI. That terminology once meant a level of autonomous capability meeting or exceeding that of a human but has since become yet another moniker without meaning.

Case in point, productivity software and cloud services vendor Microsoft (MSFT) just reached a deal with OpenAI to restructure an earlier ownership/tech-sharing agreement. A sticking point in the deal was the definition of AGI, the achievement of which—as determined by the board of OpenAI—was meant to have enabled OpenAI to limit/terminate Microsoft’s exclusive access to OpenAI’s technology. Per reporting on the matter, OpenAI had suggested a financial benchmark—$100 million in profits—to represent the trigger. Arbitrary and irrelevant we presume Microsoft countered, wanting the restriction removed instead. The two now have agreed to have a yet-unnamed panel of experts define AGI and determine when it’s been reached. No one knows what AGI is. They think they will know when they see it. But we remain very far from the metaphorical corner around which AGI exists.

A Bubble to Burst?

In our view, the gaps between “what AI could be” and “what AI is” and between “what AI costs” and “what AI makes” are chasms unlikely to be spanned by funding alone and over a timeline approaching that which we see embedded in the AI investment theme. Placing those observations against the weight of the AI trade in the U.S. stock market and concerns that we are in some manner of bubble are both warranted and worrying.

Countering those fears, many don’t find the could-be/is now gap as stark as we do. And, of course, AI boosters have a retort. For example, further down the line, LLMs will give way to “world models”, which will (by their conjectures) greatly expand the capabilities and applications of AI tech. World models are variously thought of as digital representations of real-world scenarios that should enable AI to “think” in an environment based on “rules” rather than, as LLMs presently do, simply predicting text outputs. Seems the basis for world model projections are the great successes of mostly game-playing supercomputers that have mastered Go and chess. And meaningful progress is likely to be made in world models that incorporate physics for use in autonomous piloting in all its forms. But those “worlds” are incredibly narrow relative to the actual world—which humans navigate within a vastly wider set of set physical rules (e.g., gravity) and using ever-expanding and -evolving knowledge and experience gain through recognition, cognition, interaction and repetition. Relevant rules and contextualizations within both sets are likely too incomprehensively—and therefore potentially incompatibly—numerous, to resolve into a computer model. Given precedent, then, we won’t be surprised to find the concept of world models diluted into something vacuously narrow at some point in the future.

So, we expect that the cost/benefit chasm will remain wide for some time to come. Investor reaction to Meta’s and Microsoft’s Q3 results leave us thinking investor suspicion and scrutiny are on the rise. But a look at shares in Alphabet (GOOG/GOOGL) and Amazon (AMZN) since those two provided their calendar Q3 results leaves us skeptical that a crash is nigh. But we do expect one to come, left wondering now at the onset of and eventual pace at which an alternative reality sets in. It may be that the present opacity regarding potential revenue from AI products/services is the very thing that keeps hopes high for AI companies and their shares and that will continue to provide support for stocks over the near and even medium term. As actual revenue figures become more widely available, however, more realistic long-term outlooks will follow. And as growth expectations potentially wane, so too may the now high-flying shares in AI-adjacent companies.

And that may include shares in Nvidia (NVDA). While we might think that the chipmaker will retain its technological superiority in the dedicated chip space, perhaps forever, we remain convinced that infrastructure budgets will stabilize, perhaps even begin to drift lower next year and beyond as the pressure to show paybacks on the spending ramps. And the denouement of this chip cycle we think will have an effect on NVDA shares similar to that of the bust of the crypto mining craze. At a mere 29 times fiscal 2028 (ending 01/31/2028) full-year revenue, according to Bloomberg, the stock seems cheap, no? But that multiple presumes a 55 percent year-over-year jump in current quarter revenue, a 34 percent gain next fiscal year and another 20 percent or so the next to $322 billion. Meantime, profitability is set to at worst be flat, as earnings soar 45 percent, 43 percent and 23 percent in that same period order, to $7.04 per share. It would seem announced plans for AI infrastructure might just support those estimates. We expect, however, that many of those plans won’t come to fruition.

Still, while we may be worried about excess investor enthusiasm for AI-adjacent names we think an immediate reckoning is not upon us. And to be clear, one may never arrive. Perhaps we are totally wrong in our expectations for eventual remedy to LLM imperfections. Maybe AI-related revenue will soar from new services, existing product overlays and otherwise. AI infrastructure budgets might well grow even from here. AI-space valuations presently expect such soon to prove the case, however, and it’s not unlikely the world will turn out otherwise.

A financial crisis of any sort we yet don’t expect to see though. Given that the majority of potential excess capex so far has been bought using mega-cap Tech cash flow (not debt), we continue to believe that any negative stock reactions will come as a result of disappointment, rather than contagion. To the extent that AI infrastructure investors (including the Magnificent 7) shift further into debt (with the help of private credit providers), the potential for contagion may grow. But we think we remain well removed from any manner of financial crisis.

Whether from declining infrastructure spend, the collapse of a small player (or players) in the infrastructure space, disappointing actual AI revenue trends or a mix of the above (likely to be the case), however, a crisis of confidence may be in the cards. And that might mean a substantial decline in the U.S. equity market, given the present weight of Nvidia and the hyperscalers of just under 30% by market cap. While our strategies generally maintain exposure to the broader market, including many of the more extremely valued AI-related names, we generally are underweight those names relative to a passive exposure based on market capitalization. Any flight from AI stocks, therefore, is likely to negatively impact our portfolios, but we imagine to a lesser extent, given our generally lighter exposure to the trend. Just as was the case after the Tech Bubble, we tend to believe that funds that had been invested on-trend may shift to rather more unloved sections of the U.S. market and abroad. And that shift may find those stocks sporting characteristics we tend to appreciate gaining favor from investors increasingly weary and wary of the AI theme.

Important Information

Signature Resources Capital Management, LLC (SRCM) is a Registered Investment Advisor. Registration of an investment adviser does not imply any specific level of skill or training. The information contained herein has been prepared solely for informational purposes. It is not intended as and should not be used to provide investment advice and is not an offer to buy or sell any security or to participate in any trading strategy. Any decision to utilize the services described herein should be made after reviewing such definitive investment management agreement and SRCM’s Form ADV Part 2A and 2Bs and conducting such due diligence as the client deems necessary and consulting the client’s own legal, accounting and tax advisors in order to make an independent determination of the suitability and consequences of SRCM services. Any portfolio with SRCM involves significant risk, including a complete loss of capital. The applicable definitive investment management agreement and Form ADV Part 2 contains a more thorough discussion of risk and conflict, which should be carefully reviewed prior to making any investment decision. All data presented herein is unaudited, subject to revision by SRCM, and is provided solely as a guide to current expectations.

“U.S. stocks” are represented by the S&P 500 Index measures the performance of the large-cap segment of the U.S. equity market.

The opinions expressed herein are those of SRCM as of the date of writing and are subject to change. The material is based on SRCM proprietary research and analysis of global markets and investing. The information and/or analysis contained in this material have been compiled, or arrived at, from sources believed to be reliable; however, SRCM does not make any representation as to their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated thereby. Any market exposures referenced may or may not be represented in portfolios of clients of SRCM or its affiliates, and do not represent all securities purchased, sold or recommended for client accounts. The reader should not assume that any investments in market exposures identified or described were or will be profitable. The information in this material may contain projections or other forward-looking statements regarding future events, targets or expectations, and are current as of the date indicated. There is no assurance that such events or targets will be achieved. Thus, potential outcomes may be significantly different. This material is not intended as and should not be used to provide investment advice and is not an offer to sell a security or a solicitation or an offer, or a recommendation, to buy a security. Investors should consult with an advisor to determine the appropriate investment vehicle.

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• Neither the rate of unemployment nor the rate of inflation is immediately worrisome, though we’d agree with many that view the persistence of the latter well above the Fed’s 2% target as the greater threat

• The directions of change are rather more concerning. Even so, the presumed drivers of upticks on both fronts include factors both abnormal and potentially ephemeral so the Fed’s caution—both in executing a quarter-point cut and in not making a larger cut—seems warranted

• The Fed has said it will remain vigilant to incoming data, the bias of which prompted an “insurance cut” against an even weaker job market, a cut that otherwise may be too small to stoke inflation further

Tight Ropes

Operating under a mandate to achieve “full employment” and to maintain “price stability”, the U.S. Federal Reserve is tasked with fostering a steady environment for macroeconomic growth. Critically, for neither of those quoted items is there a law-bound reference. Maximum employment, for the Fed, is that level of employment/unemployment, “that the economy can sustain while maintaining a stable inflation rate.” Leaving aside the reference to inflation, a wide range of factors variously over time will influence domestic employment. That leaves the “maximum” bit a TBD “we’ll know it when we see it” objective through time. The theory is that tighter labor markets are reflective of a robust economy, one that might be prone to experience heightened inflation pressures. One such pressure may stem from the theory that increased demand for workers relative to the labor force may spark greater demand for higher wages. As that incremental compensation chases an unchanged supply of goods, higher prices (inflation) may result. The reverse is thought to be true as well: an oversupply of potential workers leads to static or even falling compensation, dollars for which retailers must concede pricing in order to capture. The specific levels at which a theoretical equilibrium of just-enough labor supply/demand are thought to change through time as due to shifts in demographics, required skills, the pace at which jobs become available and are found, regional availability of jobs, regulation and otherwise.

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Similarly, “price stability” has proved a moveable target over the years. Left without a specific aim prior to that time, the Fed has maintained a 2%-ish inflation target since January 2012. After realizing that target (plus or minus 0.10%) in only 17 of the 103 months thereafter, or about 17% of the time, the Fed in August 2020 shifted its stance toward its inflation target from a constant value to an average value, thereby allowing for excess inflation after periods of less-than-desired increases in prices and vice-versa. That shift came, rather ironically, just prior to the COVID-response- and Ukraine war-induced inflation spike in 2021-22. Since then, the 2% goal has remained well elusive, in this post-COVID era on account of annual price increases running far hotter than the Fed would like.

Where We are Now

As it stands, the level of unemployment remains on the tighter side of recent history, while inflation remains on the hotter side of the Fed’s target. By levels alone, one would think that the Federal Reserve should retain a reasonably restrictive stance. However, as we’ve noted so often in the past, in economics as in finance and investment, the direction and rate of change in metrics often matter more to decision makers and investors. And on those counts, the job market seems to be weakening somewhat, but the drivers of that weaking are curious and the pace of unemployment growth has been modest. Questions surround the potential impact of the reduction of the workforce based on falling immigration and the exodus of prior immigrants. Given stable demand for workers, labor markets should tighten. But hiring has slowed, with the younger generation of workers bearing the brunt of the burden. Perhaps the shift in tariff policy has dampened employer demand for labor, offsetting the loss of potential workers. Domestic manufacturers nonetheless continue to rank the building and retention of a reliable workforce among their greater challenges.

So it’s perhaps not surprising that wage growth remains robust (near 4% per year) for the average worker. As we suggested earlier, those extra funds may be putting upward pressure on prices. Changes in supply on account of tariffs could further these forces. And the tariffs themselves likely are showing up across the spectrum of goods and services. Services prices are also rising, perhaps as a result of higher wage demands as well. The upshot is that we no longer are in a state of disinflation. Even so, the change in the upward pace of inflation (the acceleration of inflation) remains tepid.

So, which is the greater concern? Which should be the greater concern? By cutting rates a quarter point earlier this month, the Fed confirmed that trends in employment were top of mind, even as the labor market remains historically tight (in the aggregate). The cut was small, however, qualified by Chairman Powell as “insurance” against greater weakness in the labor market. And by retaining what the Open Market Committee continues to believe is a modestly restrictive stance, the current rate backdrop should help to keep a lid on prices.

The decision continues to leave doors open from the remainder of the Fed meetings this year and into next. And on that front the Committee for good reasons we think can be seen as remaining more vigilant against inflation. The broader economy remains energetic: Gross Domestic Product (GDP) for the second quarter of this year was revised up to an annualized rate of 3.8% from a prior estimate of 3.3%, after a modest decline in Q1 (as suppliers bolstered inventories in advance of the revised tariff regime). Both GDP and employment are “lagging” indicators, in that they describe the past and tell us little of the future. But “coincident” and “leading” measures of the economy remain broadly healthy, if mixed. Retail sales, industrial production and personal income sit well on positive/growth side of the ledger. Manufacturing continues to struggle, but not greatly. Service providers, on the other hand, are showing broad strength, even as stubborn (and rising) prices may be crimping margins. Meantime, concerns about inflation are weighing down consumer sentiment, with trends there remaining on the negative side of recent history.

Taken together, the data express an economy that remains well on the growth side of the ledger, and not in any manner excessively so (leaving aside the bonkers growth in spending on generative artificial intelligence infrastructure, which we will address in next month’s commentary). But that strength may be based on narrow footing. Barring any dramatic break from present trend, then, we should not be surprised to find the Federal Reserve open to decisions presently divergent from current market expectations.

Important Information

Signature Resources Capital Management, LLC (SRCM) is a Registered Investment Advisor. Registration of an investment adviser does not imply any specific level of skill or training. The information contained herein has been prepared solely for informational purposes. It is not intended as and should not be used to provide investment advice and is not an offer to buy or sell any security or to participate in any trading strategy. Any decision to utilize the services described herein should be made after reviewing such definitive investment management agreement and SRCM’s Form ADV Part 2A and 2Bs and conducting such due diligence as the client deems necessary and consulting the client’s own legal, accounting and tax advisors in order to make an independent determination of the suitability and consequences of SRCM services. Any portfolio with SRCM involves significant risk, including a complete loss of capital. The applicable definitive investment management agreement and Form ADV Part 2 contains a more thorough discussion of risk and conflict, which should be carefully reviewed prior to making any investment decision. All data presented herein is unaudited, subject to revision by SRCM, and is provided solely as a guide to current expectations.

The opinions expressed herein are those of SRCM as of the date of writing and are subject to change. The material is based on SRCM proprietary research and analysis of global markets and investing. The information and/or analysis contained in this material have been compiled, or arrived at, from sources believed to be reliable; however, SRCM does not make any representation as to their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated thereby. Any market exposures referenced may or may not be represented in portfolios of clients of SRCM or its affiliates, and do not represent all securities purchased, sold or recommended for client accounts. The reader should not assume that any investments in market exposures identified or described were or will be profitable. The information in this material may contain projections or other forward-looking statements regarding future events, targets or expectations, and are current as of the date indicated. There is no assurance that such events or targets will be achieved. Thus, potential outcomes may be significantly different. This material is not intended as and should not be used to provide investment advice and is not an offer to sell a security or a solicitation or an offer, or a recommendation, to buy a security. Investors should consult with an advisor to determine the appropriate investment vehicle.

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• One can lean on diversification—across stocks and across asset classes—seeking to tune short-, medium and long-term outcomes to investor tolerance for investment risk

• Markets have tended to heal over time, regardless the starting point

• Better to modulate portfolio exposure to investment risk when markets are ebullient, rather than when sentiment has soured

Mostly Has Worked Out

During market drawdowns, we tend not to field too many calls from stressed out investors wanting to know when the tumult will end. Not that folks aren’t asking questions when stocks drop that we’re happy to answer regardless the reason. But we tend to think that the lack of broader client concern during market declines stems from the fact that we regularly offer reminders such as this one that it’s better to gauge tolerance for investment risk when times are good, rather than when market action stinks. While it may seem more...ehem...taxing to reduce equity exposure when markets are peaky, we often only need remind folks how they felt during March 2020 and March 2025 and suggest that an easing off the risk pedal might make for a more comfortable experience next go-round. Otherwise, when stocks are down, market history shows that decisions to “lock in loss” tends to lead to less-favorable longer-term outcomes.

Early Cycle or Long in Tooth?

The new S&P 500 record notwithstanding, there are a number of potential sources of shocks to the stock market narrative. As today’s back-forth demonstrates, domestic tariff policies remain undecided, their potential implications still wide-ranging. Medium-term domestic tax/spend policies, too, are yet uncertain. With the balance of proposed policies broadly set to increase the federal deficit, though, the potential impact on interest rates remains an open question. Meantime, inflation is within range of the Federal Reserve’s desired level, but progress toward that goal is halting. Tariffs may reverse that progress, perhaps only on a one-time basis, but perhaps not. Domestic macroeconomic growth remains healthy, but any of the above might curtail that strength. And we cannot forget that the wars in Ukraine, Gaza and Iran remain without visible ends or even meaningful progress toward such.

But all of these factors have been with us for more than a bit. And all have proved qualitatively volatile—meaning the potential range of answers to, “who knows where this will end up” has been in constant states of flux—and therefore prone to inducing bouts of angst and euphoria. One could argue, then, that the market has been climbing the proverbial Wall of Worry for some time now. But in many ways that’s always the case, as worries exist whether the drivers are known or unknown, existing or potential, expressed or held in silence.

Seeking to offset any concerns the above may have engendered, we offer the data in Figure 2, which show all the 20%+ drawdowns in the S&P 500 since 1949. Upon first glance, the chart seems pretty ugly. But those data are just a different way of expressing the more than 35,100% gain (8.08% annualized) in the index over that time frame through the end of May, it’s near 400% gain (8.3% annualized) over the past two decades and its 180% (10.8% annualized) gain since May 2015. Said differently, the reason we might fairly expect such generous long-term returns is that we must endure the range of risks and the market tumult those risks can create over time. The challenge is determining how much of that risk we are willing to take on such that we remain invested long enough to earn commensurate reward. Those interested in exploring potential answers to that task should reach out to an advisor.

Important Information

Signature Resources Capital Management, LLC (SRCM) is a Registered Investment Advisor. Registration of an investment adviser does not imply any specific level of skill or training. The information contained herein has been prepared solely for informational purposes. It is not intended as and should not be used to provide investment advice and is not an offer to buy or sell any security or to participate in any trading strategy. Any decision to utilize the services described herein should be made after reviewing such definitive investment management agreement and SRCM’s Form ADV Part 2A and 2Bs and conducting such due diligence as the client deems necessary and consulting the client’s own legal, accounting and tax advisors in order to make an independent determination of the suitability and consequences of SRCM services. Any portfolio with SRCM involves significant risk, including a complete loss of capital. The applicable definitive investment management agreement and Form ADV Part 2 contains a more thorough discussion of risk and conflict, which should be carefully reviewed prior to making any investment decision. All data presented herein is unaudited, subject to revision by SRCM, and is provided solely as a guide to current expectations.

“U.S. stocks” are represented by the S&P 500 Index measures the performance of the large-cap segment of the U.S. equity market.

“Non-U.S. stocks” are represented by the Bloomberg World ex US Large, Mid & Small Cap Price Return Index, which is a float market-cap-weighted equity benchmark that covers the top 99% of market cap of the measured market.

“Our preferred fixed income benchmark” is the is the Bloomberg U.S. 1-5 Year Government/Credit Bond Index, which includes investment grade, U.S. dollar-denominated fixed-rate Treasuries, government-related and corporate securities with maturities between 1 and 5 years.

The opinions expressed herein are those of SRCM as of the date of writing and are subject to change. The material is based on SRCM proprietary research and analysis of global markets and investing. The information and/or analysis contained in this material have been compiled, or arrived at, from sources believed to be reliable; however, SRCM does not make any representation as to their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated thereby. Any market exposures referenced may or may not be represented in portfolios of clients of SRCM or its affiliates, and do not represent all securities purchased, sold or recommended for client accounts. The reader should not assume that any investments in market exposures identified or described were or will be profitable. The information in this material may contain projections or other forward-looking statements regarding future events, targets or expectations, and are current as of the date indicated. There is no assurance that such events or targets will be achieved. Thus, potential outcomes may be significantly different. This material is not intended as and should not be used to provide investment advice and is not an offer to sell a security or a solicitation or an offer, or a recommendation, to buy a security. Investors should consult with an advisor to determine the appropriate investment vehicle.

• For months now, investors have been forced to quantify boldly unconventional macroeconomic statements and projections of presidential programs, with tariff policies still top-of-chart in terms of market impact

• This process of double discounting—quantifying the potential impact of a statement after one quantifies the likelihood that the statement will prove accurate—can be said to have resulted in wild swings in market mood

• Much as always in the case, we believe investors should continue to weigh tolerance for increased market volatility against short- and long-term financial plans (read: try not to make hasty decisions)

• Even so, we continue to believe that potential disruptions not unfamiliar in recent times may warrant heightened caution when reviewing potential shifts in exposures to investment risk and in determining the timing of any required distributions

Mincing Words

It’s one thing for investors to gauge potential policies of an incoming presidential administration in advance of specific pronouncements. And it’s another to estimate the impact of a particular policy or group of policies once announced. It has been far rarer in history that investors have been forced to evaluate what portion of a policy statement is indicative of direction of intent, versus actual intention, to the extent as has been the case with the current administration. With this administration, efforts to parse the directional from the definitive range from parlor game dartboarding to the serious work of capital planning and investment. Those in the latter camp seemingly have been thrown for many loops, judging by year-to-date market activity. Of particular note has been the expansion in intraday returns (charted in Figure 1); on April 9 the SPDR S&P 500 ETF Trust (SPY), which is designed to track the performance of the large-cap-focused S&P 500 Index, saw an 11.3% difference between its low and high price on April 9, the seventh widest in that fund’s history, which goes back to the beginning of 1993. That was the broadest gap since May 6, 2010, which was exceeded only by wild swings during October and November 2008 during the depths of the Great Financial Crisis. The largest intraday span was 12.7% on October 13, 2008. April 9 was the day that the president midday announced a 90-day pause on the round-the-world tariffs declared a week prior. The earlier “Liberation Day” announcement precipitated a 12% plunge in domestic shares that had brought the U.S. market within a hair of a bear before the pause pulled investors back into equities.

In early February 2024 during presidential election campaigns, press reports suggested President Trump might assess a 60% tariff on all goods coming in from China. When asked about the rumor, President Trump stated that the rate might be more than that. We recall at the time that it seemed most folks (admittedly ourselves included) figured even 60% so impossibly high that the statement was meant to be more “indicative of direction” than “actual level of intent”. Post election, however, tariffs variously levied on Chinese goods have ramped to a maximum 145%, with the first shipments of goods to which those rates will apply hitting U.S. shores this month. As for the rest of the world, President Trump had mooted at 10- to 20-percent across-the-board tariffs during the campaign. So, the actual implementation of 10 percent everywhere might not have been a surprise, were it not for the much higher-than-expected country-specific tariffs the administration announced on Liberation Day.

Markets are “Wrong”?

Investors were clearly surprised by the breadth and intensity of the tariffs. The dramatic selloff is the most suggestive fact of such. But what are folks thinking now? We’ll admit to not having done much math in this context as 1) it would be a lot of work to do only to have events evolve into an outcome altogether different than one had devised and 2) a host of organizations offer very reasonable takes. Hard to know what portion of global investors has done such math, but we’d guess it to be vanishingly few for similar reasons. But we do have a sense of global investor expectations, which we read as still suggesting that the actual tariff regime is set to come in much less onerous than the one presently implied by the administration’s policy proposals. One might argue that the fact that the market has erased the Liberation Day plunge suggests investors are taking a much, much longer-term and substantially more positive view of the potential range of outcomes related to the going-forward evolution of tariff policies. One also could argue that there’s a very long road between now and the potential scenarios in which the current price is the right one if tariffs are implemented at levels even close to current plans. More likely, we think, the present error in bias may be that markets may be overly discounting the potential for the tariff regime to quickly arrive at a place ultimately only a bit more taxing than had been the case prior to this year (resolved more quickly and with modest meaningful difference from the pre-2025 regime). We hope that proves the case and still find such an outcome both possible and probable, but we aren’t holding our breaths.

Hopefully Negotiating Down

The potential for additional trade-related disruption, then, hinges primarily on the outcomes of trade-related negotiations, which only now are beginning in earnest. Progress may well prove halting, while interim declarations variously moving investment markets.

As we noted last month, we continue to agree with the broader consensus that the immediate effects of the tariff regime (as proposed) will be to put upward pressure on prices and dampen growth. The Federal Reserve highlighted this conundrum in remarks from its May meeting: “Uncertainty about the economic outlook has increased further. The Committee is attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen.”

We’ve heard many suggest that the Federal Reserve will be more likely to support growth in the face of further upward pressure on prices. But we’re not so sure. While we think that pressure from the president to cut rates in the face of growth will be ignored, such attempts at influence won’t ease the rate decision-making process. Even so, the current target isn’t that far from the Fed’s current group expectations for “neutral”, meaning at a level that supports its dual mandate of full employment and stable inflation and that is neither expansionary (supports growth), nor contractionary (restricts growth). Notably, Chair Powell stated during his May 7 press conference that, “[Federal Reserve] policy is sort of modestly or moderately restrictive.” So, there may not be much room to the downside for rates either way.

So long as macroeconomic strength takes a serious dive, that is. Just as Fed Chair Powell said will be the case, much ultimately will depend on the evolution of the data. The longer tariff negotiations take and the less favorable—meaning, ultimately, the higher—the aggregate level of tariffs ends up being, the worse for the near- and medium-term global macroeconomic backdrop: inflation likely will prove more durable and potentially will increase, while growth may sag, even decline. On the inflation front, tariffs will flow directly through to prices, regardless of the portion that gets paid by producers and consumers. Where the former pays, profits will suffer. For the latter, higher end-prices likely will result in lower consumption. In theory, tariffs might result in a one-time step up in prices. But depending on how various participants in the supply/demand chain react, higher inflation rates could prove more durable. Trade “frictions” are on the rise, and attention has turned to U.S. ports to gauge supply chain adaptation to the highly uncertain, but likely more burdensome tariff environment. Meantime, upward price pressures will be bolstered by the impact of the overall decline in and productivity of the immigrant workforce. And the expectations component of the inflation story will remain as important to investor views as will actual readings of realized inflation.

So, it’s by no means clear that inflation will continue to fall. Growth will be pressured by increased trade frictions—regardless the short-term outcomes, it would seem—while uncertainty with regard to the macroeconomic outlook is likely to dampen spirits otherwise inclined to pursue growth. Employment will likely suffer then, a trend worsened by cuts in government spending and employment.

There’s a Dance Coming

We think the lessons of the late 70s/early 80s will remain at the fore, when the Fed was forced to resume rate increases in the face of stubborn inflation, despite sagging growth. Admittedly, inflation rates were in the teens back then, so the choice might ultimately have been a bit clearer, though that choice wasn’t obvious until it was. Where unemployment trends shift to the downside, however, Fed decisions will become far more greatly challenged. It’s therefore a good thing, as Chair Powell’s noted, that, “[Monetary policy is] 100 basis points less restrictive than it was last fall. And so, we think that leaves us in a good place to wait and see. We don't think we need to be in a hurry. We think we can be patient. We're going to be watching the data. The data may move quickly or slowly, but we do think we're in a good position where we are to let things evolve and become clearer in terms of what should be the monetary policy response.”

We think investors therefore should not be too confident that the worst of market tumult is behind us. Even so, market volatility, regardless of the source, is natural. And as we zoom out from daily throes—much as we have in Figure 2—we see that patience through such times of disruption ultimately has proved fruitful, at least prior to this latest drawdown. As always, we will invite readers to reach out to their advisors to discuss portfolio positioning and exposure to investment risk, with particular focus on any near-term needs for portfolio distributions.

Important Information

Signature Resources Capital Management, LLC (SRCM) is a Registered Investment Advisor. Registration of an investment adviser does not imply any specific level of skill or training. The information contained herein has been prepared solely for informational purposes. It is not intended as and should not be used to provide investment advice and is not an offer to buy or sell any security or to participate in any trading strategy. Any decision to utilize the services described herein should be made after reviewing such definitive investment management agreement and SRCM’s Form ADV Part 2A and 2Bs and conducting such due diligence as the client deems necessary and consulting the client’s own legal, accounting and tax advisors in order to make an independent determination of the suitability and consequences of SRCM services. Any portfolio with SRCM involves significant risk, including a complete loss of capital. The applicable definitive investment management agreement and Form ADV Part 2 contains a more thorough discussion of risk and conflict, which should be carefully reviewed prior to making any investment decision. All data presented herein is unaudited, subject to revision by SRCM, and is provided solely as a guide to current expectations.

The S&P 500 Index measures the performance of the large-cap segment of the U.S. equity market.

The opinions expressed herein are those of SRCM as of the date of writing and are subject to change. The material is based on SRCM proprietary research and analysis of global markets and investing. The information and/or analysis contained in this material have been compiled, or arrived at, from sources believed to be reliable; however, SRCM does not make any representation as to their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated thereby. Any market exposures referenced may or may not be represented in portfolios of clients of SRCM or its affiliates, and do not represent all securities purchased, sold or recommended for client accounts. The reader should not assume that any investments in market exposures identified or described were or will be profitable. The information in this material may contain projections or other forward-looking statements regarding future events, targets or expectations, and are current as of the date indicated. There is no assurance that such events or targets will be achieved. Thus, potential outcomes may be significantly different. This material is not intended as and should not be used to provide investment advice and is not an offer to sell a security or a solicitation or an offer, or a recommendation, to buy a security. Investors should consult with an advisor to determine the appropriate investment vehicle.

• Often the case during market drawdowns, intraday volatility has soared as investors react to news, with the downturn flushing out more risk-averse investors in tranches, leaving buy-the-dip risk takers to fill the void

• And that volatility can be seen in both stock and bond markets, as the latter has suffered the push/pull between the potential inflation and growth ramifications of new tariffs

• Cracks are appearing on the side of ostensible supporters, however, with congressfolk in trade-sensitive regions and business and finance executives speaking up regarding looming tariff ills

• As Monday’s 8% intraday swing suggests, the market likely will turn even on news only of a delay. A substantial shift lower in the expected aggregate weight of tariffs likely may be required, however, to establish a bottom

Headfakes...

Heading into Monday morning, we already knew what the market open would bring, as futures markets (where pre- and post-market trading reflects expected future prices) suggested stocks would gap down in early trading. That they did. That is until an errant tweet (or tweets, or headlines; the impetus seems yet to be pinned) suggested a White House adviser had said the president was considering a 90-day delay in the new tariffs. Hearsay upon hearsay aside, investors reacted to the “news” with glee, resulting in a more than 8% surge in the S&P 500. Before an hour had passed, however, the White House denied any such intentions and the market sank anew, thereafter bouncing around between down 2-ish percent and flat on the day, closing just under breakeven. Tuesday brought less drama, but more downside, after a dramatically higher open. After surging as much as 4% in the first hour of trading, stocks sank mostly through the close, to lose 1.6% on the day. Still, that -1.6% tally was much better than the near -3% decline the market touched in the final hour of trading.

...And Headaches

Investors seem as unsure about how to price bonds, with each day arguably reflecting the stronger pull of a different concern regarding future rate shifts. On the one hand, tariffs most likely will result in increased prices at some point(s) along the lines from raw materials to end goods, potentially putting upward pressure on inflation. The question then is to what extent? The price impacts of tariffs may first be thought of as a one-time event with prices rising in approximation to the tariff level less the portion of the tariff not absorbed by the seller of goods on which the tariffs are levied and less the portion of the tariff paid by the importer that it chooses not to pass along to its customers. Higher prices may compress demand, while profits may be compressed as a result of decisions to absorb the levies. The effects may result in changes in demand all along the production chain, further influencing who absorbs how much of the tariff when. Complicating projections, the one-time lift in prices might cause a series of retaliatory tariffs, a tit-for-tat that may escalate over time (we already are seeing this happen even before the new tariffs go into effect in their entirety). And that escalation may result in a change in expectations for further increases in inflation, which may result in a distinct inflationary force. Further, tariffs may result in a shift to less-efficient production, resulting in an additional boost to prices over and above the tariff itself. To counter these pressures if they arise, the Fed may slow what had been the expected path lower for the fed funds target (the federal funds rate, which serves as a reference for the rate that banks charge each other for overnight lending, and which influences lending rates economywide), may retain its current target for interest rate target longer, or may even have to raise the target were inflation to reignite. In that order, each of those scenarios represents the potential for an increasingly growth-negative set of circumstances. On the other hand, investors fear that tariffs will dampen growth. Those pressures may come from the tariffs themselves, as higher costs decrease the amount of money available for consumption, thereby reducing aggregate demand. And growing uncertainty re: all of the above—and all of the myriad other ways that our current geopolitical cum macroeconomic cycle is complicating decisions regarding capital and financial investments—may suppress growth as well. Where a slowdown in growth becomes the more pressing concern, the Fed find itself wanting to implement a more rapid series of reductions in its interest rate target to counteract increasing macroeconomic weakness. It’s impossible to know at this point which of these forces will prevail over the others, but we can be reasonably sure that all are now potentially in motion. It’s no surprise, then, that the word stagflation—meaning slower growth and rising inflation—is reentering regular discussion. What we can be sure of is that all the forces mentioned so far will begin to influence the broader economy starting tomorrow.

It’s also, again, not surprising that markets remain rather manic as investors parse incoming commentary and data. Of particular interest will be executive commentaries during the upcoming first-quarter earnings season. And investor ears will be tuned to any progress in negations regarding trade deficits and tariffs. Many will continue to wonder whether it makes sense to exit now before the market worsens. For context, we will note that, as the S&P 500 presently sits 18.9% below the all-time peak set on February 19 of this year, investors already seem to have priced in some manner of reasonably substantial slowdown that may impact earnings over the medium term. As hinted by Monday’s market gyrations, it might not take much in terms of a positive shift in sentiment to pull investors back into the market. Notably, such heightened tumult is inherent to times as unsure as these, with volatility—in both directions—tending to cluster. Quick decisions to cut and run, then, may mean a missed opportunity to capture some interim upside. Either way, we think it important to remain braced for more volatility and potential downside as the range of costs of these tariff policies are realized.

We Are Here for Your Calls

Our stating that we believe it important to remain focused on longer-term financial plans may only offer light comfort to those worried about their invested monies. Please know that we welcome your calls to discuss recent portfolio positioning and performance and help you place that performance in the fuller context of your financial plans.

Important Information

Signature Resources Capital Management, LLC (SRCM) is a Registered Investment Advisor. Registration of an investment adviser does not imply any specific level of skill or training. The information contained herein has been prepared solely for informational purposes. It is not intended as and should not be used to provide investment advice and is not an offer to buy or sell any security or to participate in any trading strategy. Any decision to utilize the services described herein should be made after reviewing such definitive investment management agreement and SRCM’s Form ADV Part 2A and 2Bs and conducting such due diligence as the client deems necessary and consulting the client’s own legal, accounting and tax advisors in order to make an independent determination of the suitability and consequences of SRCM services. Any portfolio with SRCM involves significant risk, including a complete loss of capital. The applicable definitive investment management agreement and Form ADV Part 2 contains a more thorough discussion of risk and conflict, which should be carefully reviewed prior to making any investment decision. All data presented herein is unaudited, subject to revision by SRCM, and is provided solely as a guide to current expectations.

The S&P 500 Index measures the performance of the large-cap segment of the U.S. equity market.

The opinions expressed herein are those of SRCM as of the date of writing and are subject to change. The material is based on SRCM proprietary research and analysis of global markets and investing. The information and/or analysis contained in this material have been compiled, or arrived at, from sources believed to be reliable; however, SRCM does not make any representation as to their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated thereby. Any market exposures referenced may or may not be represented in portfolios of clients of SRCM or its affiliates, and do not represent all securities purchased, sold or recommended for client accounts. The reader should not assume that any investments in market exposures identified or described were or will be profitable. The information in this material may contain projections or other forward-looking statements regarding future events, targets or expectations, and are current as of the date indicated. There is no assurance that such events or targets will be achieved. Thus, potential outcomes may be significantly different. This material is not intended as and should not be used to provide investment advice and is not an offer to sell a security or a solicitation or an offer, or a recommendation, to buy a security. Investors should consult with an advisor to determine the appropriate investment vehicle.

• Tariffs were more broadly applied at higher levels than expected. To the extent that the rates remain in place, American companies will find profits pressured, while consumers will see higher prices

• Tariffs are not based on country-specific trade-related policies; this lack of basis may confound negotiations

• Tariffs continue to be seen as ill-formulated blunt-force weapons being deployed for stated purposes otherwise more efficiently pursued by a range of other means

• Seeking safety, investors fled to bonds and yields fell sharply. The shift suggests the increased probability of an economic slowdown outweighs investor fears of resurgent upward pressure on prices

• All in, the tariff regime is likely to prove resoundingly negative for the U.S. economy in the near term and perhaps longer, with higher costs and increased uncertainty/insecurity suppressing growth

That’s the Brief

Hearkening back to the COVID-19 era, severe back-to-back declines in the U.S. stock market were its worst since June 11, 2020. The current drawdown of 17.3% in the S&P 500 Index, which began on February 19 of this year, ranks 15th-worst since 1949. The index, which is designed to reflect the performance of U.S. large-cap stocks, is still up 120% over the past five years, a period that begins just a few skips from the bottom of the COVID-19 pandemic drawdown. And that half-decade also includes the 8th-ranked 24.5% drawdown we experienced from early January 2022 to mid-December 2023. After such exceptional gains, one might have expected at some point to see an exceptional decline. But the rapidity of the drop and the folly of its impetus seemingly have stunned global investors, who are left to ponder the path forward for trade policy and investment markets.

Now What?

As we always do during market drawdowns, we’ll offer this perspective: so long as one’s financial circumstances have not changed dramatically, sticking to an existing investment strategy historically has tended to have proved the smarter decision. But we know such a quick and substantial drop can unnerve even more seasoned investors. So, we provide the data in Figure 2 with the intention to demonstrate the propensity for returns subsequent to market drawdowns to recover over the medium term. In that chart we show the range of outcomes over various future time frames after we saw a decline in the S&P 500 equal to or greater than the current 17.3%. While history has shown occasions where the market had yet to recover even three years out, the historical probability of a recovery generally has increased with time. That is, as we show in the green boxes, the prospects of a future gain after a drawdown have tended to rise with time. That doesn’t mean a full recovery from the drawdown, however, just a positive going-forward outcome.

A drawdown has three components: the prior peak, the trough (lowest point), and the eventual breakeven (a recovery above the prior peak). While we can hope that we have seen the trough this time around, we cannot be sure. We could conjecture that, as the market “rubber band” has been stretched, we are more likely to be closer to the bottom and that we should expect some manner of recovery, if not all the way back to the February 19 peak. But such optimism might be ill placed, given the events of last week. So, we will note that further losses may well be in store and that, either way, it may take some time for global markets to recover.

Speaking of global markets, on account of a fall in the value of the U.S. dollar and a shift in investor preference for what had been the broadly underperforming shares, international stocks to date have strongly outperformed U.S. stocks this year. The Bloomberg World ex U.S. Large & Mid Cap Net Return Index (which tracks, as the name suggests, stocks outside of the States) is up 1.1% in 2025 through April 4, versus the S&P 500’s 13.43% drop (both in terms of total return, which includes the reinvestment of dividends). Bonds, too, are up on the year, with our preferred measure of U.S. investment-grade bonds, the Bloomberg 1-5 Year Government/Credit Index, higher by 2.54% on a total-return basis. So, certain manners of diversification have been your friends this year so far.

And that means some folks reading this commentary may not have suffered the full extent of the U.S. market’s plunge. Nonetheless, as we already hinted, we may not be out of the woods. Perhaps even far from the nearest clearing. With market futures for the Monday-morning open well in the red, we will remind readers to reach out to their advisors where further context, data and guidance are desired.

Note from the CIO

Regular readers will know that I tend not to editorialize on these pages, meaning I generally prefer to stick to the facts of market history as context for informing optimal investment decisions. Given conversations over the past few days and wishing to ensure that our clients have a firm understanding of our preference for consensus-based theoretical and empirical assessments of macroeconomics and markets, though, I thought it important to provide my own summary of our review of the tariff policies announced last week and their potential implications for trade and investment markets.

I continue to agree with the broad consensus that the immediate effects of the tariff regime will be to put upward pressure on prices and dampen growth. Regarding inflation, some importers will at least partially pass on tariff costs to domestic consumers. And any shift in production to the States likely will result in higher-cost end goods. Meantime, supply chains are likely to buckle in response to the new levies, increasing trade frictions. On the growth front, higher costs generally suppress demand. Where demand is “elastic” meaning sensitive to pricing, consumption likely will fall. Where “inelastic”, higher prices paid will take a greater portion of consumers wallets, leaving less for other goods. As businesses choose whether to absorb the tariffs or pass them along, aggregate demand likely will be suppressed either way. Exports are likely to suffer as trade partners implement retaliatory tariffs.

Given the chaotic presentation and progress of the tariff regime so far, corporate executives are most likely to seek immediate actions to soften negative impacts (e.g., of higher costs they pay as a result of tariffs placed on the imported raw materials they utilize in production), which may include curtailing production, with potential negative implications for employment. The uncertainty of the near-term path of tariff negotiations and the broader economy likely will heighten risk aversion among business leaders. A dampening in expectations for macroeconomic growth will further challenge these more immediate decisions.

Of course, the retort is, “short-term pain for long-term gain!” Were there an actual policy plan to follow that included, for example, the macroeconomic explanations for growth-positive expectations stemming from the tariffs in addition to support for the development of domestic manufacturing capacity, we might follow along. But no such plans have been presented, and most macro explanations offered to date ignore simpler to convey realities.

For example, now that we have decided that such demand should be met with domestic production, we must answer how demand for the imports driving our bilateral trade deficits will be met from domestic production. Neither banana trees nor manufacturing sites sprout from the ground in a matter of days, months and or even years. Until the global tariff structure stabilizes, however, CEOs likely will err on the side of caution, delaying large-scale investments until future trade frictions are more clearly resolved. And over the medium and long term, even if some tariff equilibrium is found, executives are likely to hold off on larger investments for fear the fundamentals may dramatically change over the course of multi-year investment projects. Reciprocal actions may see competitors to domestic manufacturers filling the void left as importers of U.S. goods limit purchases. What a loss for our auto manufacturers, for example, were Chinese car makers to fill the gaps in supply for smaller autos in Europe and South America.

We wonder, too, the potential ramifications for the services side of the trade ledger. During the 70+ years over which the country has seen manufacturing jobs decline as a percentage of overall employment, the United States has risen to the peak of services provision (as opposed to goods production) by its unparalleled capacity for innovation. That innovation has enabled the country to run a trade surplus in services, meaning the value of the services we export exceeds that of the services we import. Comprising more than a trillion dollars annually, exported services are represented economy-wide, with concentrations in travel, financial services, intellectual property, transport and technology. It should not be surprising were tariff countermeasures to be targeted at service-oriented sectors, resulting in another potential hit to growth.

It is true that this shift to a heavier emphasis on services within an economy more dependent on goods shipped from abroad has seen the loss of manufacturing jobs in the United States. And that decline has disproportionately hit certain regions and income segments. But the drivers of those losses can be found here, too. American politicians can be faulted for their penchant for debt-funded fiscal policies as well as tax policies that generally incentivize consumption over savings. And American consumers may be scolded for their fondness for less-expensive goods, while American corporate executives should find blame for their affinity for cheaper labor. All these factors tend to expand our trade deficits in the aggregate.

Would it be great if we made more stuff here in the U.S. in order to reverse some of that decline? I tend to think so. But we are never going to be able to manufacture sneakers, for example, less expensively than can be done in Vietnam. Using humans, at least; much of the discussion in favor of onshoring production fails to acknowledge that automation may limit the number of U.S. manufacturing jobs that might be created. So, we can force production of sneakers here, but American consumers will pay more for them no matter what. Better for us to produce higher-value products—more vehicles, semiconductors and spaceships, as top-of-mind examples—than relatively low-value apparel.

I tend to focus on made-in-America for rarer purchases of more expensive goods where possible, in no small part because the choice tends to reduce my consumption, even as it raises average ticket prices, while generally leaving me with a higher-quality product. But there are only so many items I might need or want that carry a “Made in USA” label. I’m at peace with a higher-value-from-here/lower-value-from-elsewhere mix of purchases, as we simply cannot and should not make everything in America. We certainly can make more things in America, and there are many methods to engender such activity. Tariff bombs are nowhere on that list. Instead of whacking otherwise friendly allies with a tariff stick, which can strike domestic manufacturers can consumers just as hard or harder, we can offer tax and regulatory carrots to establish high-value manufacturing capacity and jobs here in the States. Such approaches are often imperfect, but they can be engineered to be jobs- and growth-positive on balance, as opposed to the everyone-loses features of blunt-force tariff tactics.

I sit on the board of a Pennsylvania-based manufacturing firm that my grandfather helped start in the 1950s. The company continues to grow—expanding our manufacturing capacity and capabilities along with the number of Americans we employ—as our customers find our unique capabilities integral to their continued growth. Experiencing this evolution firsthand is among the greater pleasures of my professional life. As rich as the country is, America should find it easier to incentivize the creation of such businesses by embracing our entrepreneurial spirit than it will by forcing consumers and businesses to pay higher prices while seeking to achieve suboptimal outcomes through brutish coercion.

Braced for More

We’re publishing this note a bit later than expected as we’ve overworked the text above, narrowing our thoughts for concision and clarity, generally summarizing those we’ve found more prevalent among others’ takes, even as we feel we may have insufficiently covered the many threads inherent to the intensely complex study that includes global trade flows and the various policies that guide them. While we’ve presented a critical take on the announcements of last week, we understand that many will disagree, perhaps finding that the only way to dismantle what is perceived to be an unfair system is to break it. It’s clear that investors in the aggregate aren’t comfortable with that approach. Here, again, we will invite readers to reach out to their advisors to discuss portfolio positioning and performance as markets further digest shifting global macroeconomic and geopolitical dynamics.

Important Information

Signature Resources Capital Management, LLC (SRCM) is a Registered Investment Advisor. Registration of an investment adviser does not imply any specific level of skill or training. The information contained herein has been prepared solely for informational purposes. It is not intended as and should not be used to provide investment advice and is not an offer to buy or sell any security or to participate in any trading strategy. Any decision to utilize the services described herein should be made after reviewing such definitive investment management agreement and SRCM’s Form ADV Part 2A and 2Bs and conducting such due diligence as the client deems necessary and consulting the client’s own legal, accounting and tax advisors in order to make an independent determination of the suitability and consequences of SRCM services. Any portfolio with SRCM involves significant risk, including a complete loss of capital. The applicable definitive investment management agreement and Form ADV Part 2 contains a more thorough discussion of risk and conflict, which should be carefully reviewed prior to making any investment decision. All data presented herein is unaudited, subject to revision by SRCM, and is provided solely as a guide to current expectations.

The S&P 500 Index measures the performance of the large-cap segment of the U.S. equity market. The Bloomberg World ex U.S. Large & Mid Cap Net Return Index is a float market-cap-weighted equity benchmark that covers the top 85% of market cap of the measured market. The Bloomberg 1-5 Year Government/Credit Index is a broad-based benchmark that measures the non-securitized component of the US Aggregate Index. It includes investment grade, U.S. dollar-denominated, fixed-rate Treasuries, government-related and corporate securities with 1 to 5 years to maturity.

The opinions expressed herein are those of SRCM as of the date of writing and are subject to change. The material is based on SRCM proprietary research and analysis of global markets and investing. The information and/or analysis contained in this material have been compiled, or arrived at, from sources believed to be reliable; however, SRCM does not make any representation as to their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated thereby. Any market exposures referenced may or may not be represented in portfolios of clients of SRCM or its affiliates, and do not represent all securities purchased, sold or recommended for client accounts. The reader should not assume that any investments in market exposures identified or described were or will be profitable. The information in this material may contain projections or other forward-looking statements regarding future events, targets or expectations, and are current as of the date indicated. There is no assurance that such events or targets will be achieved. Thus, potential outcomes may be significantly different. This material is not intended as and should not be used to provide investment advice and is not an offer to sell a security or a solicitation or an offer, or a recommendation, to buy a security. Investors should consult with an advisor to determine the appropriate investment vehicle.

• Our work to address such concerns…no different, really, than any other occasion…seeks to balance desires to avoid near- and medium-term losses against the potential costs in terms of expected longer-term return to shifting a greater portion of portfolios to fixed income

• Those feeling skittish may find comfort in reasonably stable shorter-term interest rates. While the relative cost in terms of a reduction in expected return is smaller than it was a few years ago, however, it is not zero

• But as the ever-present potential for meaningful losses remain non-zero as well, whether providing confirmation or redirection, reviewing the math can support continued progress toward financial goals

Hindsight 20/20…

Now that it’s hard to even see the horse that left the barn, we’ll offer the reminder that, regardless of one’s temperament, shoulda-woulda-coulda moments are an unavoidable part of investing. Market history is littered with occasions—perhaps like this very moment in time—when a bit more caution a few weeks ago could have saved a fair bit of downside (please see Figure 1). Of course, that same chart shows that time generally heals those wounds. Taken together, one finds that the preponderance of shoulda-woulda-coulda moments is among the core rationale for expecting any return from our investments at all. That is, the risk of interim loss is expressed in the perceived discount one pays today for assets expected to be worth more and/or provide income to us for our ownership over time.

…Blind to the Future, We Are

That doesn’t mean that everyone experiences the same level of discomfort when the stocks they own are down close to 10%. Happily, we can modulate portfolio exposure to risk in its various forms and relative heft with the intention of relieving some of the mental burden that market drawdowns present. But as risk and return can be seen as having a mostly direct relationship, there is a cost in terms of expected return to a reduction in assumed risk, just as there’s a cost in terms of relative stability that comes along with an increase in expected return.

For bonds, expected return calculations are relatively straightforward in that they arise from one or both of an increase (or decrease, in the case of bonds purchased at a premium) in the value of the bond over time and the interest income that the bond pays over time (its yield, which might be consumed or reinvested). From the time of purchase to the time of maturity, however, the price of a bond will fluctuate for reasons other than a gradual drift in its price toward face value, including changes in interest rates and in the solvency of the issuer (with U.S. Treasury bonds generally being perceived as being free of the latter). Still, so long as the issuer doesn’t default (fail to make a coupon payment or to pay the face value when the bonds mature), an investor has a pretty good sense of the return to be realized from a bond that’s held to maturity. The range of interim values, therefore, is relatively narrow, while the eventual outcome of ownership to maturity is reasonably well defined upon purchase.

Interim and eventual returns for stocks, on the other hand, are wild by comparison. That’s primarily because the only agreed-upon value for a stock price is the current one. And the price is set by ongoing demand for the stock, which can change for myriad reasons. The foremost of those is the broader appetite for equity risk. For example, while investors have been happy to take on equity risk over the past two years, the current market downturn suggests a good bit of that enthusiasm has waned. Amidst growing concerns related to geopolitics (centered on the war in Ukraine), the stability of inflation (not trending down as quickly as investors may have hoped), and the potential impacts of fiscal policy shifts (mostly regarding tariffs), the U.S. stock market has dropped more than 4% so far this year, as measured by the large-cap-focused S&P 500 Index, and is now down just under 9% from its February 19 peak.

Importantly, investors generally consider equity risk more broadly in the context of risks presented by other asset classes. Ultimately, we see changes in investor assessment of relative risk/reward potential being reflected across stocks in general, with all stocks moving more or less in the same direction for some reason. We also find stock performance to differ on a relative basis, as investors will find some portion of individual stock volatility and returns attributable to characteristics specific to that company. That’s because investors also consider the “idiosyncratic” risks a company presents—meaning those risks specific to the company—including aspects of their operations and management, as well as realized and projected fundamental growth (e.g., revenue, margins and profit), among many others. All these characteristics and assessments change over time, too.

So, while the broader U.S. equity market has sold off since February, some stocks have fallen much further. Consider shares in two market darlings of 2024: carmaker Tesla Inc. (TSLA) and Nvidia Corp. (NVDA). The former are off 54% from their 12.17.24 peak, versus a 7% decline for the S&P 500 over that same period, while the latter are down more than 28% from their 01.06.25 acme, during which time the S&P 500 fell just under 6%. The core theme for the declines in the stock prices of these two very different companies, arguably, has been a shift lower in growth expectations for both and therefore in the present value investors ascribe to the businesses.

Balance Risk We Can

The distinct potential risk/reward characteristics of stocks and bonds serve as the basis for our investment strategies, which generally focus on 1) stocks for long-term total return (capital gains plus dividends) and 2) bonds for income and portfolio stability. As we show in Figure 2 using risk-specific benchmarks for our strategies, the larger the allocation to stocks in a portfolio, generally speaking, the greater the long-term return. The greater, too, the risk, a feature reflected in Figure 3 by the larger drawdowns for riskier benchmarks. Thus, having a range of portfolios across the risk spectrum allows us to implement portfolios that are applicable to individual client aversion to investment risk, even as that aversion may change through time.

Seasons Change. People Change.

Speaking of changes in investor appetite for risk, we offer the data in Figure 4 for those wanting to better understand the potential implications of a shift lower in portfolio equity allocation. The historical results we show in Figures 2 and 3 are just that: what we’ve experienced in the past. While we continue to believe that they are indicative of potential future returns on a relative basis (e.g., stocks, versus bonds), we cannot be sure of that. Even more, we have no idea what the absolute returns of stocks will be on a going-forward basis. We do, however, have a good sense of what returns for risk-free Treasures may be when held to maturity. In Figure 4 we show expected total returns for Treasury Bills and Notes with maturities of 1, 3 and 5 years, which are all about 3.9% on an annual basis, and 3.9%, 12.1% and 21.3% on a cumulative basis if held to maturity (and assuming reinvestment of any coupons at the original yield, which is not guaranteed).

Stocks, on the other hand, have shown a simple average cumulative return across all rolling 1-, 3- and 5-year periods since 1976 of 13.2%, 44.2% and 84.3%, respectively (or 13.2%, 13.0% and 13.0% annualized, in that order). Looking beneath those averages, however, one sees a wide range of outcomes. Over all 519 rolling 5-year periods, the maximum cumulative return was 267.4% (29.7% annualized), while the minimum was a cumulative 29.1% loss (6.6% annualized). Nonetheless, as we show using the “violins” on the same chart, the bulk of returns (as expressed by the width of a violin at each level of return) lies well on the positive side of the ledger. So, while we’ve seen negative outcomes across each of the presented periods, they have appeared less often than positive ones.

So, the question becomes how much expected return—an estimation of which probably should sit within a range of outcomes both strongly negative and strongly positive—would one be willing to give up for the relative stability of and confidence in the return expected from a Treasury bill. For some, that tradeoff will make sense. For others, the potential cost may warrant retaining the existing portfolio allocation with the expectation that this downturn—as has been the case for all others before it—too, may prove temporary.

Important Information

Signature Resources Capital Management, LLC (SRCM) is a Registered Investment Advisor. Registration of an investment adviser does not imply any specific level of skill or training. The information contained herein has been prepared solely for informational purposes. It is not intended as and should not be used to provide investment advice and is not an offer to buy or sell any security or to participate in any trading strategy. Any decision to utilize the services described herein should be made after reviewing such definitive investment management agreement and SRCM’s Form ADV Part 2A and 2Bs and conducting such due diligence as the client deems necessary and consulting the client’s own legal, accounting and tax advisors in order to make an independent determination of the suitability and consequences of SRCM services. Any portfolio with SRCM involves significant risk, including a complete loss of capital. The applicable definitive investment management agreement and Form ADV Part 2 contains a more thorough discussion of risk and conflict, which should be carefully reviewed prior to making any investment decision. All data presented herein is unaudited, subject to revision by SRCM, and is provided solely as a guide to current expectations.

The S&P 500 Index measures the performance of the large-cap segment of the U.S. equity market.

The opinions expressed herein are those of SRCM as of the date of writing and are subject to change. The material is based on SRCM proprietary research and analysis of global markets and investing. The information and/or analysis contained in this material have been compiled, or arrived at, from sources believed to be reliable; however, SRCM does not make any representation as to their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated thereby. Any market exposures referenced may or may not be represented in portfolios of clients of SRCM or its affiliates, and do not represent all securities purchased, sold or recommended for client accounts. The reader should not assume that any investments in market exposures identified or described were or will be profitable. The information in this material may contain projections or other forward-looking statements regarding future events, targets or expectations, and are current as of the date indicated. There is no assurance that such events or targets will be achieved. Thus, potential outcomes may be significantly different. This material is not intended as and should not be used to provide investment advice and is not an offer to sell a security or a solicitation or an offer, or a recommendation, to buy a security. Investors should consult with an advisor to determine the appropriate investment vehicle.

• Intraday volatility normally goes unobserved by the average investor, but we think actions during the early months of this administration will keep the spotlight on market shifts during the day

• As the past few days demonstrate, though, one can argue the gyrations leave investors back where they might otherwise have been

• Which is the sort of pattern we tend to see over longer-term time horizons, such that we think the better approach is to limit attention to market moves as the administration’s intentions become clearer and, more importantly, its policies are more durably implemented

Shaking Things Up

As the headlines bounced between suggestion, expectation, revelation, refutation, implementation and suspension of the Trump administration’s tariff-oriented trade policies, so, too, did the U.S. equity market and those of the tariff-target countries, along with their respective currencies. We’d argue that the on-balance interpretation is that the market is probably unhappy with the approach, which broadly has resulted in expanded market volatility, while remaining skeptical of the likelihood of implementation at the more extreme ends of the potential policy spectrum. That is, the market is off earlier peaks, but not by too much, in the meantime having bounced around on each fresh headline. Investors may dislike the rapid-fire nature of it all, but the volatility shouldn’t be interpreted as anything abnormal.

In Context, Within Bounds

Generally not as abrupt as those we’ve experienced over the past few days, intra-year market moves can be rather large, even during a time frame over which the market generally rose. Take the last two-year period for example. In Figure 2 we show the performance of the S&P 500 since the end of 2022, over which time the index has gained 54%. But the index saw four drawdowns—interim losses from a prior peak—that exceeded 5%. U.S. large-cap stocks, which the index is built to represent, even saw a “correction” over the second half of 2023, loosely defined as a drawdown of 10% or more. For the historically above-average return of the past two years, investors have had to endure no small amount of volatility.

Right Frame of Mind

Zooming out on market history, as we do in Figure 3, one can see that the U.S. stock market has experienced a wide range of interim results over most years. Take 2016, the year prior to Donald Trump’s first term. Off a bit before the year began, not including dividends, the S&P 500 was down more than 10% by mid-February but closed the year 9.5% higher than its level at the end of 2015, up more than 22% from the February 11 bottom. And in 2018, the market was flattish on a price basis through April, up 9.6% year-to-date by late September, down on the year by more than 12% on Christmas Eve, but finished the year down only 6.2%.

We don’t suggest anyone should expect to find the next few months comfortable. But that recommendation has little to do with the sitting president. Daily, weekly, monthly and yearly ups and downs have always been part of the give-and-take of the risk-for-potential-reward trade. And we think it’s unlikely that 2025 will prove any different. Even so, we understand that investor comfort with market risk may have changed after the inauguration. While some may fear what’s to come, others may be excited by the potential policies being discussed. That in mind, we welcome discussions covering methods to adapt portfolio exposures to personal views on and individual comfort with future market risk, whatever those expectations may be.

Important Information

Signature Resources Capital Management, LLC (SRCM) is a Registered Investment Advisor. Registration of an investment adviser does not imply any specific level of skill or training. The information contained herein has been prepared solely for informational purposes. It is not intended as and should not be used to provide investment advice and is not an offer to buy or sell any security or to participate in any trading strategy. Any decision to utilize the services described herein should be made after reviewing such definitive investment management agreement and SRCM’s Form ADV Part 2A and 2Bs and conducting such due diligence as the client deems necessary and consulting the client’s own legal, accounting and tax advisors in order to make an independent determination of the suitability and consequences of SRCM services. Any portfolio with SRCM involves significant risk, including a complete loss of capital. The applicable definitive investment management agreement and Form ADV Part 2 contains a more thorough discussion of risk and conflict, which should be carefully reviewed prior to making any investment decision. All data presented herein is unaudited, subject to revision by SRCM, and is provided solely as a guide to current expectations.

The S&P 500 Index measures the performance of the large-cap segment of the U.S. equity market.

The opinions expressed herein are those of SRCM as of the date of writing and are subject to change. The material is based on SRCM proprietary research and analysis of global markets and investing. The information and/or analysis contained in this material have been compiled, or arrived at, from sources believed to be reliable; however, SRCM does not make any representation as to their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated thereby. Any market exposures referenced may or may not be represented in portfolios of clients of SRCM or its affiliates, and do not represent all securities purchased, sold or recommended for client accounts. The reader should not assume that any investments in market exposures identified or described were or will be profitable. The information in this material may contain projections or other forward-looking statements regarding future events, targets or expectations, and are current as of the date indicated. There is no assurance that such events or targets will be achieved. Thus, potential outcomes may be significantly different. This material is not intended as and should not be used to provide investment advice and is not an offer to sell a security or a solicitation or an offer, or a recommendation, to buy a security. Investors should consult with an advisor to determine the appropriate investment vehicle.