5/5/25

Volatility in the first quarter increased dramatically ahead of President Trump’s highly anticipated tariff plan. That volatility accelerated at the start of the second quarter, as tariff announcements were significantly worse than expected. The market underestimated Trump’s determination to reshape global trade, and the market may still be underestimating the potential impact. This ongoing uncertainty will likely remain the key driver of volatility in the coming months.

Due to these developments, I strategically adjusted the portfolio to reduce potential volatility, especially in companies with significant exposure to China, a primary target of Trump’s policies. Specifically, I reduced our holdings in Apple and Intuitive Surgical by approximately one-third, bringing each position back to a 5% weighting within the portfolio. China has already blacklisted Illumina, significantly impacting its stock price. Fortunately, Illumina’s role in our portfolio is much smaller compared to Apple and Intuitive Surgical. I proactively made these reductions to mitigate the risk of waking up to news that either Apple or Intuitive Surgical had also been blacklisted, given their previously overweight positions.

During the quarter, I also reduced our Microsoft holding back to a 5% weighting. Media reports indicate Microsoft may scale back its Artificial Intelligence spending. More significantly, Microsoft’s fiscal calendar begins a new year in July, raising the possibility that it may reduce its capital expenditure plans in fiscal year 2026, potentially disappointing the market. However, the company did give better-than-feared results and solid guidance. It may have been a mistake to have lightened the position, but it will be something I will know for sure with time.

Given the substantial gains in Apple, Microsoft, and Intuitive Surgical over the past year, these adjustments will inevitably result in sizable capital gains. However, my investment strategy prioritizes managing actual gains and losses rather than potential tax consequences.

Regrettably, the reduction in Microsoft and Intuitive Surgical occurred late in March, and the adjustments in Apple did not take place until April. Consequently, we underperformed the S&P 500 total return in the first quarter, declining by 6.46% versus a decline of 4.27% for the index.

	Thru 3/31/25	5-Yr Annualized	Since Inception
MCM Thematic Growth	– 6.46%	15.38%	9.41%
S&P 500 Total Return	– 4.27%	18.59%	12.55%

President Trump has consistently discussed tariffs since the 1980s. Having watched many of his interviews dating back to his youth, his views on trade have remained remarkably consistent for nearly 40 years. Whether these views comport with current economic reality remains to be seen.

The market is likely to remain very volatile, as the true impact of tariffs has yet to be fully realized.  I believe the market underestimates the risk that President Trump will only moderately dial back his tariff plans. While the imposed tariff percentages might decrease somewhat they will certainly not fall to zero and, in most cases, will remain above the established 10% floor.

Additionally, there may be continued pressure on China. China is currently in a weakened economic state. Trump may be weaponizing these tariffs to inflict more financial hardship on the export-driven economy and slow down the Chinese military expansion.

Another challenge for markets is that earnings estimates for 2025 are declining, lowering the expected growth rate for this year for the S&P 500 to 9.5%. Although this is not a poor growth rate, considering the current P/E ratio is 20.7, earnings appear expensive when adjusted for growth, trading at more than twice the growth rate.

Lower margin expectations are driving the decline in earnings at this point, which makes sense given the current environment. But margins for 2025 were probably too high to begin with, and so the risk is that margins will compress even further, perhaps even more so than what was seen in 2024, when they were 12.5% from their current 13.1%.

With sales estimates at $1,987 per share in 2025 and gross margins at 12.5%, implied earnings would be approximately $248 per share. This suggests earnings estimates could decline an additional 4% to 5% from current levels, assuming margins remain stable at 2024 levels. However, with tariffs now in place, predicting where margins will settle in 2025 becomes increasingly challenging.

Sales estimates for 2025 are also declining, with growth now expected to be less than 5%. This adds another layer of uncertainty, as slowing economic growth due to tariff impacts could lead to margin compression as well as further declines in sales estimates, potentially pushing earnings even lower.

With all of this going on, it doesn’t appear to be an ideal setup for the stock market. The problem is that markets don’t move in a straight line; they have many twists and turns. Sometimes these twists and turns work out, and sometimes they don’t. Being cautious didn’t benefit us in 2021, but it greatly helped us in 2022, allowing us to add strong positions to our portfolio, such as Shopify, Amazon, Intuitive Surgical, and Boeing. Caution again didn’t help us in 2024, and it’s simply too early in 2025 to determine if caution will pay off this year.

In any event, I will continue to manage the portfolio actively – and with due caution – adjusting as necessary to best position us for future performance.

Until next time,

-Mike

The Thematic Growth Strategy is also made available by Interactive Advisors through a licensing arrangement with Mott Capital Management; performance may differ from the Mott Capital Thematic Growth Composite.

 

 

Annualized Performance
		YTD	1-Year	3-Year	5-Year	Since-Inception
Mott net		-6.46%	7.20%	6.71%	15.38%	9.41%
S&P 500 TR Index		-4.27%	8.25%	9.06%	18.59%	12.55%

N.A. – Information is not statistically meaningful due to an insufficient number of portfolios in the composite for the entire year.

^†  Performance reflects the non-annualized performance from 8/1/2014 to 12/31/2014.

** For periods with less than 36 months of composite performance, no 3-year ex-post standard deviation measurement is available.

Disclosure: Mott Capital Management, LLC is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendation made during the past twelve months. Past performance is not indicative of future performance.

An investment may be risky and may not be suitable for an investor’s goals, objectives and risk tolerance. Investors should be aware that an investment’s value may be volatile and any investment involves the risk that you may lose money. Investment performance of a model depends on the performance of the underlying investment options and on the proportion of the assets invested in each underlying investment option over time. The performance of the underlying investment options depends, in turn, on their investments. The performance of these investments will vary day to day in response to many factors. Asset allocation strategies are subject to the volatility of the financial markets, including that of the underlying investment options’ asset class. Diversification does not ensure a profit or guarantee against a loss. Stock markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.

Mott Capital Management, LLC, is an independent registered investment adviser. Mott Capital Management, LLC (“Mott”) claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards.  Mott has not been independently verified.  GIPS is a registered trademark of CFA Institute.  CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.

The Thematic Growth Composite is a blend strategy of different market capitalizations, which is approximately divided equally among three sectors.  The Core Growth sector includes large multi-national companies, the Growth Sector includes mid- to large-cap companies, and the Aggressive Growth sector includes small- to mid-cap companies.  The strategy is concentrated, and typically includes approximately 20 positions, and 5% cash.  The portfolio may hold fewer positions in times of market uncertainty, when raising cash as a hedge.  The strategy only invests in stocks, ADRs, and ETFs denominated in USD.  The Thematic Growth Composite was created June 2015.   The inception date of the strategy is August 1, 2014.

The S&P 500 is a free-float capitalization-weighted index of 500 large-cap common stocks actively traded in the United States.  The index is shown as a general market indicator, and may not reflect the same exposures as the composite.

The investment management fee schedule for the composite is 2% on the first $250,000, 1.5% on the next $750,000, and 1.0% on the remainder.  Actual investment advisory fees incurred by clients may vary.  Further information regarding investment advisory fees is described in Part II of the firm’s Form ADV.

Past performance is not indicative of future results.  The U.S. Dollar is the currency used to express performance.  Performance shown represents total returns that include income, realized and unrealized gains and losses.  Net of fee performance was calculated using actual fees.  Composite performance is presented net of foreign withholding taxes on dividends, interest income, and capital gains.  Withholding taxes may vary according to the investor’s domicile. 

Policies for valuing portfolios, calculating performance, and preparing GIPS reports are available upon request.

The annual composite dispersion presented is an asset-weighted standard deviation calculated using net returns of accounts in the composite the entire year.  The 3-Year Standard Deviation represents the annualized standard deviation of actual net composite and benchmark returns, using the rolling 36-months ended each year-end.

Mott Capital provides data to Interactive Advisors for use in its recommended portfolios. Interactive  Advisors, an SEC registered investment adviser. Mott Capital is not affiliated with Interactive Advisors. Interactive Advisors uses data provided by MOTT Capital to create a portfolio for its clients. Additionally:

1. Only investors matching a specific risk profile determined pursuant to Interactive Advisors’s risk questionnaire may invest in Mott Capital’s model portfolio on the Interactive Advisors platform;
2. Interactive Advisors clients that qualify for and subscribe to Mott Capital’s model portfolio on Interactive Advisors platform are clients of Interactive Advisors. They are not Mott Capital clients.
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