Investment Insights

The markets seem to have a case of vertigo. After a massive sell-off following “Liberation Day” tariff announcements in early April, equities have fully rebounded and reached new highs over the summer. For the second quarter of 2025, the total return for the S&P 500 was 10.9%, while global equities also rose strongly with the MSCI World returning 11.6%. Europe, Japan, and emerging markets were higher as well. The benchmark 10-year US Treasury rate (UST10) was roughly flat in the quarter, starting at 4.21% and ending at 4.22% (up +1 bp). Looking at other indicators for the second quarter, the US dollar index (DXY) (-7.0%) and WTI oil (-8.9%) both fell substantially, while gold (XAU, +5.8%) continued to rally.

We note that despite elevated risks to corporate earnings from tariffs, U.S. equity markets continue to hold up, recently reaching new all-time highs. Several companies that suspended guidance earlier this year have now reinstated their forecasts, with impacts that have so far been manageable. As of this writing, the final level and scope of tariff policy remains in flux, with each country facing various specific tariff rates, carve-outs, and exclusions. Still, we believe that worst-case tariff impacts are clearly off-the-table, with markets taking the implemented tariff levels in stride. The dollar has rebounded slightly after a material decline in the first half, while Treasury yields remain volatile.

The Fed remained on hold at its July meeting, although Fed funds futures are still pricing in two -25 bp cuts for the year. We note that core PCE inflation has still not returned to the Fed’s 2% target, and the most recent monthly reading showed a slight uptick (2.68% for May). Given the lack of progress on inflation, the Fed could be inclined to hold rates higher for longer. On the other hand, President Trump continues to pressure the Fed to lower rates, and, at this time, we do expect the Fed to resume rate cuts beginning in the fall. Once Fed Chair Powell’s term ends in May 2026, we expect a more dovish Fed Chair to take over while at the same time noting that the new Chair must also be confirmed by the Senate, limiting President Trump’s power to appoint anyone perceived as too unorthodox in their views. Because there is only one additional vacancy on the Federal Board of Governors before 2028, we think the President’s efforts to cajole the Fed into larger rate cuts is destined to fail, unless the economic picture weakens sufficiently to justify major rate cuts.

We note the passage of the President’s tax and spending bill in July should be positive for growth, for two reasons. The first reason is that it removes uncertainty in tax and spending policy. The second reason is that, despite the initial promises of the DOGE program, the amount of actual spending cuts was far less material than promised, which should support ongoing economic activity (albeit with little-to-no material improvement in the U.S.’ long-term fiscal position). Our base case remains that the U.S. growth is likely to remain positive for 2025. We maintain our call that a recession is not the base case, and consensus estimate for a recession within the next 12 months continues to decline.

Portfolio Changes

Following the conclusion of the second quarter 2025, our investment committee shifted portfolios slightly to adapt to the changing environment. Given the less impactful implementations of tariff policy compared to the “Liberation Day” announcement, our investment committee recently revised its allocations slightly. For the Growth strategy portfolios, we have revised back up exposure to small- and mid- cap equities, while trimming dividend paying equities, reversing our more conservative tactical positioning implemented in 1Q25. For the Income portfolios, we have shifted the underlying funds slightly, to slightly increasing the distribution yield on the portfolios. As always, we will continue to monitor the advisory portfolios closely. We have continued our partnership with global investment management firm BNY Mellon for consulting services on the advisory portfolios.

Summary Market Views
In the table below, we update our Amerant Market Views, which represent our investment team’s tactical views based on investment valuations and macro trends. As a reminder, these are not client-specific recommendations, and clients should consider their financial goals and long-term objectives when determining their asset allocations. We have made some minor adjustments to our views across both equities and fixed income. For equities, we moved to overweight on small and mid-caps along with developed markets ex U.S.

We have also moved to the maximum underweight on cash. We make this call given our view that the Fed is likely to cut rates this fall, and there is an ability to invest across other opportunities within fixed income sectors to maximize income. We maintained our overweight allocations to investment grade and securitized debt, both because we favor an “up in quality” credit bias at this point in the economic cycle. We maintain a neutral position on high yield and emerging markets (EM) fixed income (in U.S. dollars). That said, we believe the attractive carry on both high yield and EM debt is important for clients that are focused on income. Therefore, we maintained our existing allocations on advisory portfolios despite the tactical moves summarized below.

This information is being provided for informational and educational purposes only to support our general market commentary. It should NOT be interpreted as investment advice regarding any specific security or investment strategy. See the disclosures at the end of this presentation for additional important information.

Worst Case Averted
In last quarter’s note, “Liberation Day” had sent markets into a quick retreat. As the summer ends, we have a more sanguine view of the economy overall and believe that the Trump administration has shown a more pragmatic approach in tariff policy. Inflation remains sticky and labor markets steady, putting the Fed in a difficult spot given the Presidential pressure to cut rates.

Through it all, the U.S. economy has remained healthy, with 2Q Advance GDP showing a rebound from contraction in 1Q25. In equities, we remain cautious on valuations in large cap growth, and have upgraded our views on cheaper pockets of the markets such as small and midcaps. In fixed income, we see risks as balanced and believe this asset class is best for investors looking for income rather than capital appreciation.

Notes: Asset class performance is in USD and refers to the following indices: Equities: US Large Caps (S&P 500), Emerging Markets (MSCI EM), Europe (MSCI Europe), Japan (MSCI Japan). Fixed Income: 10-Yr. US Treasuries (BofAML US Treasury Current 10-Yr.), Emerging Markets Sovereign (USD) (EMB ETF), Emerging Markets Sovereign (LCL) (LEMB ETF), US High Yield (BofAML US HY Master II), US Investment Grade (BarCap US Aggregate Bond). Source: Morningstar. (1) Strategy returns net of mutual fund expenses and Amerant Investments standard management fees.

On these tables, you can see index and strategy returns for the second quarter of 2025, compared to 2024 full year performance.

The second quarter of 2025 experienced strong positive returns in U.S. equities and more modestly positive fixed income returns. For the year-to-date, asset class returns are broadly positive.

For the second quarter, returns were positive across all strategies. Our current allocations are overweight U.S. value relative to European equities, which drove performance to lag somewhat. As well, all of the funds included in portfolios are hedged back to the U.S. dollar, driving underperformance relative to unhedged portfolios as the dollar fell materially. We continue to emphasize distribution income in the income portfolio, and the move wider in credit spreads during the first quarter was reversed in the second quarter. As always, we will communicate any changes in our views and positioning going forward.

⁽¹⁾Returns may vary. Past returns are no indication of future performance. Returns up to February 2020 are based on A shares, which were used on the portfolios up to that month, net of the then standard AMTI 1% management fee. Returns from March 2020 to June 2021 are based on I (or similar) shares, which have no 12b-1 fees, net of a standard AMTI 1.25% management fee. Returns starting July 2021 are based on I (or similar) shares, which have no 12b-1 fees, net of a standard AMTI 1% management fee.

⁽²⁾Monthly returns before February 2010 are those of the offshore corresponding strategies. For the Dynamic portfolio, monthly returns before November 2009 are those of the Income & Growth portfolio, which is the neutral positioning of the Dynamic portfolio. Dynamic portfolio started in November 2009.

For the one year through 1Q25, the Income Portfolio returned 6.1%, the Income & Growth Portfolio returned 7.8%, and the Growth Portfolio returned 12.4%.

The longer-term performance figures remain positive across all strategies.

As always, we take the trust you have placed in us very seriously. In our day-to-day operations, we continue to follow current events and the reactions of the markets closely, and we stand ready to adjust your portfolios accordingly.

To obtain more detailed information on our market views or the performance of your advisory portfolio, please contact your investment consultant at Amerant Investments by calling (305) 460-8599.

Sincerely,

Amerant Investments, Inc.

https://www.amerantbank.com/