We are grateful for the return of summer. Here in Raleigh, we are especially excited to have the Hurricanes back in the Stanley Cup Finals for the first time since 2006, a timely reminder that patience and perseverance are always rewarded.
Markets have had a strong start to the year, with the S&P 500 up approximately 11% year to date. The past month has seen remarkable gains, particularly in the semiconductor space. Bank of America now refers to the “AI Big 10” (the Magnificent 7 plus Broadcom, AMD, and Micron), which together represent roughly 40% of the S&P 500 index. Corporate profits in Q1 were very strong, coming in well above historical norms.
That said, we believe a measure of caution is warranted. This AI-driven rally has produced elevated valuations (the S&P 500 trailing P/E stands near 29x), and market concentration in mega-cap technology companies is at levels reminiscent of the late dot-com era. A large SpaceX IPO on the horizon only adds to the excitement.
Good advice rarely changes, even as markets constantly do. History rhymes, and human nature doesn’t change. Regression to the mean is a powerful principle: periods of above-average performance are inevitably followed by below-average returns, and difficult periods inevitably set the stage for recovery. The disciplined investor learns to be skeptical of assets that have recently soared and interested in those that have fallen out of favor.
The lessons for long-term investing remain consistent. They are that a diversified portfolio is to be desired, financial strength helps to weather storms, and plans should be made based on varied conditions rather than favorable ones alone. Valuation discipline continues to be crucial both for managing risk and for generating lasting returns.
Over the course of this year, mid and large-sized companies’ stocks have become highly valued, and we have been actively harvesting gains in names such as Argan and Keysight. Conversely, we are finding compelling value in financially strong companies that have become attractively priced, including those outside of the U.S. Our latest addition, Rogers Communications, trades at approximately 11x earnings with a dividend yield of 3.8%, the kind of opportunity that disciplined valuation-focused investing uncovers.
In an environment where extreme viewpoints often dominate the headlines, our commitment remains focused on fundamentals, valuations, and careful risk management. It is a genuine privilege to serve our clients, and while it is not always easy in an ever-changing world, that effort is our highest reward. We are deeply thankful for your continued trust.
Go Canes!
