“The first rule of compounding is to never interrupt it unnecessarily.” Charlie Munger
Looking back at the first quarter, we endured a 4.3% decline in the S&P 500®, driven largely by a significant drop in the Magnificent Seven (which saw an average decline of 15.7% among the seven companies). Value stocks significantly outpaced growth shares.
As the second quarter commenced, investor uncertainty intensified following President Trump’s April 2nd Liberation Day tariff policy announcement. This unexpected move shocked markets and raised concerns that global trade, as we have known it, was being upended. Many feared the policy shift would drive inflation higher, delay the Federal Reserve’s ability to reduce interest rates, and potentially lead to a recession.
Despite reporting solid first-quarter earnings, several companies were reluctant to issue forward guidance or offered cautious outlooks, as the market tried to make sense of the daily twists and turns in the administration’s tariff strategy–ranging from off, to on, to delayed, and then modified.
At FLI, we shared the broader market’s concerns, but chose not to take any precipitous actions. Instead, consistent with our disciplined approach, we avoided reacting prematurely. We continued to evaluate the fundamentals of our investments while patiently assessing the President’s broader economic agenda, not just tariffs, but also his so-called “big beautiful tax bill” and his efforts to deregulate certain sectors of the economy (which we view as the three legs of the Trump economic stool).
This “pause” on our part, has thus far, proven to be prudent. Our investments rallied through the end of the second quarter, recovering earlier losses and delivering reasonable year-to-date gains across all of FLI’s strategies.
An index we often reference that tracks investor fear and greed in the stock market registered its worst reading in recent memory, 3 (extreme fear), on April 8th. The Dow fell a whopping 4,580 points from April 3rd through April 8th. Yet, just 83 days later, the Dow was 6,449 points higher nearing an all-time high and the Fear & Greed Index had rebounded meaningfully to 65 (greed).
Over our almost 42 years as professional investors, we have learned the importance of evaluating the shifting ground beneath us and reverting to investment fundamentals. Earnings, interest rates, cash flows, and dividend growth suggested to us that the extreme fear of April 8th seemed excessive, just as the apparent greed reflected in today’s level may now be equally unwarranted as we try and assess the future investment environment.
Inflation appears tame. Corporate earnings remain resilient. AI is disruptive and transformative. A tax bill containing incentives for corporate growth is nearing passage. The Federal Reserve is still projecting two interest rate cuts by year-end.
We have also seemingly weathered a 12-day war between Israel and Iran. The combined efforts of the U.S. and Israel appear to have pushed back Iran’s nuclear program, potentially for years. Encouragingly, this joint military action, at this point, has not resulted in a widening of the regional war. In fact, some countries, including Syria, are reportedly considering normalization with Israel, as Iran becomes increasingly isolated.
Notably, energy prices did spike but quickly returned to normal levels during this brief, yet intense, Middle Eastern war. This reflects both strong global supply and the apparent energy independence of the U.S. The relative stability of oil prices supports our belief that inflation will remain manageable.
The ongoing conflict in Europe persists and, as a result, President Trump has successfully persuaded NATO to increase its defense commitments, while the U.S. has reaffirmed its membership and commitment to Article 5, which ensures collective defense against Russian aggression.
Wow, look at what we have experienced in just three months! Both equity and bond markets have responded to this volatility with optimism as evidenced by record high equity markets and tepid bond yields. The 10-year U.S. Treasury yield hovers around 4.25%. U.S. banks just passed their “stress tests” with flying colors, prompting several of them to increase their dividends.
If the “big beautiful tax bill” passes, a major tax increase in 2026 for most U.S. families will be avoided, as the prior tax cuts are set to sunset at year-end. Businesses stand to benefit from new incentives to invest in the U.S., including the ability to expense capital investments, measures that promote productivity and innovation, especially as AI continues to transform industries.
However, serious concerns remain about the bill’s potential to increase the national debt and its broader effects on the medical system, including both care delivery and research. Many critics question the bill’s merits, especially since it uses reconciliation to achieve Senate passage with a simple majority.
Given today’s uncertainty across economic, tax, geopolitical, societal, and environmental factors, here is a brief review of key indicators from our perspective:
When considering all of these factors, we remain cautiously optimistic. The economy appears solid and not on the brink of recession. Inflationary effects from tariffs seem manageable, especially if the tax bill passes as currently proposed. The bill is designed to offset tariff impacts and, in the meantime, the government is deriving substantial revenue from tariffs.
Hopefully, all of this will help stimulate consumer confidence, which has weakened under inflation concerns and geopolitical tensions. Valuations are not cheap, suggesting this is a stock picker’s market where earnings growth, quality, and cash flows will matter most.
Employment remains reasonably strong. That said, we do not expect surprises from the Federal Reserve, such as a rate hike. We believe the Federal Reserve will reduce short-term rates by year-end, which should benefit well-located real estate, especially properties that may support the government’s push to stimulate onshore manufacturing.
At the same time, real estate is being gobbled up by hyperscalers intent on building data centers to support AI. This, in turn, should benefit companies either directly or indirectly involved in AI and data centers across the country.
We also see some opportunity in small- and mid-cap company valuations, as confirmed by our outside managers, which have not benefitted recently from a stock price perspective. We made a similar point about international domiciled companies in our Annual Thought Piece, and their share prices led the way for the first six months of the year. At least three of FLI’s strategies have international exposure and have benefitted.
We have stayed the course in advising our clients to stay put and remain invested. This approach worked well during the tumultuous second quarter, and we have since seen a resurgence in several of the Magnificent Seven with the growth index now nearly matching the performance of the value index. Our “bookend” approach of offering both value- and growth-oriented strategies continues to serve our clients well. Bonds have also provided a safe haven, delivering modest returns and less volatility than FLI’s equity-oriented strategies. I’m pleased to report that, having weathered a very volatile first six months of the year, we are achieving positive returns across every strategy.
We continue to urge our clients to stay the course (and virtually all have) rather than attempt to time the markets. In our opinion, TIME IN THE MARKETS BEATS TRYING TO TIME THE MARKETS. This is key to compounding returns, and we believe it holds true whether investing in bonds, stocks, real estate, collectibles, or even private equity.
Incurring taxes unnecessarily and trying to guess when to get back in simply does not work, as evidenced by the dramatic swings in investor sentiment during the second quarter. Uncertainty has always been the road that long-term investors have traveled. Now is no different. Prudent, diversified asset allocations can help temper volatility.
Enjoy the summer, and we look forward to reporting to you again in October. Of course, we will stay in touch and keep you informed about the progress of the “big beautiful tax bill” as some have called it. Whether it passes or not, there will be ramifications either way. We also hope to see peace expand in the Middle East, even as attention turns back to the conflict between Russia and Ukraine. In the meantime, we expect a solid U.S. economy and remain cautiously optimistic for the rest of the year.
Wishing everyone a wonderful summer!
Robert D. Rosenthal
Chairman, Chief Executive Officer and Chief Investment Officer
Organizational Announcement:
It is with mixed emotions that we announce the departure of Joseph Libretti, Investment Analyst, who has decided to pursue other opportunities. While we are sorry to see him go, we are proud of his achievements and wish him continued success in his new role.
On a positive note, we are pleased to welcome Simon Ferris as our new Junior Investment Analyst. He recently graduated from the University of Miami with a B.S. in Business Administration, majoring in Finance, and earned recognition on both the Provost’s Honor Roll and Dean’s List. Simon joins our Investment Committee with a strong analytical foundation and great enthusiasm.
Please join us in welcoming Simon to the FLI team!
Overview of the One Big Beautiful Bill Act
On July 4th, President Trump signed into legislation a comprehensive tax bill that was narrowly passed in both the House and Senate along party lines. This legislation included several provisions that may be of particular interest to our clients:
Individual Income Tax:
- The individual income tax rates have been permanently extended, notably retaining the top rate of 37%. Great news for high-income individuals!
- The deduction for the State and Local Taxes (SALT) has been increased from $10,000 to $40,000. This change will benefit many residents of high-tax states such as New York. However, for those individuals with income between $500,000 and $600,000, there will be a phaseout of the increased SALT deduction down to the existing $10,000 annual cap.
- Deductible mortgage interest for loans limit was scheduled to revert to $1 million after 2025, but this bill makes the $750,000 cap permanent.
Estate and Gift Tax:
- The lifetime exemption on federal estate and gift taxes will increase to $15,000,000 per individual or $30,000,000 per couple. These amounts will be indexed for inflation.
Business Tax:
- The Pass-Through Entity Tax (PTET) deduction remains fully available under current law—a relief for many business owners and professional service firms that rely on PTET regimes to mitigate the federal SALT deduction cap.
- Incentives for businesses to invest in manufacturing plants and other capital projects have been included and may benefit some of our client base.
Energy Tax Credits:
- There are phase-outs of clean energy credits, impacting electric vehicles and other projects, in an effort to save money and reduce the annual deficit.
This legislation is designed to promote economic growth and maintain tax benefits for many. Still, there are serious concerns that if sufficient economic growth is not achieved, the legislation could add to the annual deficit and long-term national debt. It is also possible that growing deficits will necessitate tax increases in the future. Accordingly, we recommend considering both tax and estate planning given the pros and cons of this legislation. In addition, there are some concerns relating to the future availability of Medicaid for some current recipients. This remains to be seen.
We are always available to discuss how this bill may affect you and your family.
DISCLAIMER
The views expressed herein are those of Robert D. Rosenthal or First Long Island Investors, LLC (“FLI”), are for informational purposes, and are based on facts, assumptions, and understandings as of July 24, 2025 (the “Publication Date”). This information is subject to change at any time based on market and other conditions. This communication is not an offer to sell any securities or a solicitation of an offer to purchase or sell any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Nothing herein should be construed as a recommendation to purchase any particular security. The companies and securities described herein may not be held in every (or any) FLI strategy at any given time. Investment returns will fluctuate over time, and past performance is not a guarantee of future results.
This communication may not be reproduced, distributed, or transmitted, in whole or in part, by any means, without written permission from FLI.
All performance data presented throughout this communication is net of fees, expenses, and incentive allocations through or as of June 30, 2025, as the case may be, unless otherwise noted. Past performance of FLI and its affiliates, including any strategies or funds mentioned herein, is not indicative of future results. Any forecasts included in this communication are based on the reasonable beliefs of Mr. Rosenthal or FLI as of the Publication Date and are not a guarantee of future performance. This communication may contain forward-looking statements, including observations about markets and industry and regulatory trends. Forward-looking statements may be identified by, among other things, the use of words such as “expects,” “anticipates,” “believes,” or “estimates,” or the negatives of these terms, and similar expressions. Forward-looking statements reflect the views of the author as of the Publication Date with respect to possible future events. Actual results may differ materially.
FLI believes the information contained herein to be reliable as of the Publication Date but does not warrant its accuracy or completeness. This communication is subject to modification, change, or supplement without prior notice to you. Some of the data presented in and relied upon in this document are based upon data and information provided by unaffiliated third-parties and is subject to change without notice.
NO ASSURANCE CAN BE MADE THAT PROFITS WILL BE ACHIEVED OR THAT SUBSTANTIAL LOSSES WILL NOT BE INCURRED.
Copyright © 2025 by First Long Island Investors, LLC. All rights reserved.