A short thirty days ago, the stock market was in complete freefall, dropping approximately 20% from its February peak. All hope appeared to be lost with escalating tariffs — primarily with China — on a daily basis. However, the past few weeks have brought a dramatic reversal, with the S&P 500 going on a nine-day winning streak, which was the longest run of consecutive daily gains since November 2004. As the weight of market stress has lessened, the question lingering is whether we are all clear and out of the woods, or just at a momentary clearing.
In January’s commentary, titled “The Defining Year of 2025,” three forces were essentially defined: The Reality of Artificial Intelligence (particularly the introduction of AI Agents), Near-Term Administration Impacts (specifically tariffs), and Wars and Rumors of Wars. All three have become increasingly relevant as the year has unfolded.
The impact of AI Agents replacing jobs was recently highlighted in a decree by a former holding of Concentrated Equity Alpha. Shopify’s CEO, Tobi Lütke, announced to all teams within the company that they must demonstrate that a role cannot be performed by artificial intelligence before hiring a human. Further, CrowdStrike disclosed laying off 5% of its workforce as it takes advantage of the benefits available from AI agents. This movement has also been echoed by IBM, British Telecom, and Duolingo, among others. Goldman Sachs estimates 300 million jobs, or around 10% of the global workforce, could be affected in the near term. By the time 2025 concludes, the trend of AI agents replacing human workers will gain meaningful momentum, and it is one that we are keeping a close eye on. While corporate productivity and profitability will rise, aggregate headcounts – jobs and consumer incomes – will consequently come under pressure. The net equation looks to accumulate increasing resources with the most powerful companies.
As it relates to tariffs, the global economic order is being reset as the United States is requiring equal trade footing with all counterparties. Much of the world has enjoyed an asymmetric trading relationship with America for generations. As an example, approximately 5,000 metric tons of Japanese rice is imported to the U.S. annually without a tariff. Conversely, the U.S. exports approximately 265,000 metric tons of rice annually to Japan at a tariff rate that ranges from 400% to 700%. The short-term pain of trade wars has been felt, and the ripple effect of recent administration decisions is yet to be seen, but the factual imbalance is apparent across nearly all of our trading relationships. This dynamic unequivocally disadvantages U.S. companies relative to foreign competitors, while it may carry less obvious nonfinancial benefits. By and large, the tariff impact hinges on our complex relationship with China and whether there is even a possible resolution between two opposing world powers. Time will tell, but the probability of returning to the status quo is not high. How this will change the face of the American workforce and their ability to afford higher-priced items is a mathematical guess, but reducing trading reliance on an adversary and resourcing manufacturing to U.S. soil appear to be the priorities.
Finally, the proliferation of wars around the world is raging on and increasing. With the unpredictability of world leaders and potency of advanced weaponry, this focal point begets the second part of the title of this letter… are we just in a momentary clearing? President Trump’s expectation of ending the Russia-Ukraine conflict in “a day” or within “100 days” was not met. Perhaps the depth of hostility was underestimated, but it does not appear that pressuring either side is bringing resolution. Russia has recruited troops and mercenaries from North Korea and China, alongside recently ordering the conscription of 160,000 additional Russian fighters. As a gradual buildup of soldiers and artillery has been accumulated on the border of Finland, a more expansive offensive — possibly into a NATO neighbor — may be in the cards.
In another bubbling conflict, threats relating to Iran’s nuclear program have not stopped the Houthi proxy military from firing missiles at ships in the Red Sea or from attacking Israel’s airport. Escalation seems to be the notion of our day. Most recently, India and Pakistan have entered into acts of war that could bring wide-ranging geopolitical impacts. While on the other side of the world, India is the world’s most populous country with over 1.4 billion people and boasts the fourth most powerful military (behind the U.S., Russia, and China). Pakistan is a country of 255 million and also has formidable fighting forces. Both, notably, are nuclear powers. In response to a Pakistani terrorist attack, India has closed dams that provide a substantial portion of Pakistan’s drinking and agricultural water. Pakistan has responded with highly inflammatory threats of “full-spectrum retaliation” that pit long-time foes in a high-pressure standoff. With China being aligned with Pakistan and India unseating China as the preferred low-cost labor global hub, this conflict could be one that quickly grows beyond the borders of India and Pakistan.
At present, U.S. markets are not yet feeling any impact of growing global conflicts, so current math does not incorporate any risk of these wars affecting America. We all hope that the projected steadiness is correct, but the world is unquestionably on edge, and this is likely the largest risk force to monitor for the remainder of this year.
As your financial advisor and investment manager, we are evaluating what is going on in the world and are dynamically making decisions to optimize your investment portfolio. Macro influences, like the three discussed, shape our decision tree, but ultimately, thematic forces and micro details relating to each stock or bond selected will drive long-term outcomes. Currently, our investment team is deploying capital across five thematic trends that influence most of our company selections: 1. Artificial Intelligence (currently 31% of holdings); 2. U.S. Infrastructure and the Reshoring of Manufacturing; 3. Software Platformization; 4. Heating, Ventilation, and Air Conditioning Supercycle 5. Aerospace Supercycle. The industry-leading companies that are selected carry structural competitive advantages, all-star management teams, strong balance sheets, increasing growth trends, and high recurring revenue.
Last month, Guidewire [GWRE] was added to Concentrated Equity Alpha. Guidewire is a provider of core systems software to property and casualty (P&C) insurers. The company is benefiting from a shift away from old, legacy software systems to new cloud-based solutions, as insurers are forced to deal with the ever-growing complexity in managing a wide range of risks. Guidewire is essentially a monopoly offering in this space with no formidable competitor. Guidewire’s software becomes the core operating system for insurance companies and is established as a subscription contract, generating very high recurring revenue. Customers typically pay GWRE based on premiums collected, so Guidewire’s revenue has grown alongside rising insurance costs.
Guidewire is the second addition in as many months that we have monitored for over a decade, and we previously held GWRE shares from 2017 through 2020. With the recent market selloff, the company’s valuation became attractive, and we have repeatedly used recent volatility to our advantage. With a deep, long-term understanding of the company, and with its unusual market dominance, we are excited to bring Guidewire back to your portfolio.
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