Diversification – March 4, 2025

It has been a volatile start to the year, with the S&P 500 now trading down slightly year-to-date (YTD) after peaking at +4.6% on February 19. We believe the most recent decline has been driven by two main factors:

1. Analyst estimates have finally caught up to reality in some of the market’s biggest companies:
   • The days of artificial intelligence-related stocks like NVIDIA blowing the roof off estimates when they report earnings and guidance appear to be over
   • Given the relatively expensive valuation of these stocks to start the year, simply matching analyst estimates is not good enough, even if they are still showing strong growth
   • An equal-weighted “Magnificent Seven” ETF (MAGS) of AAPL, AMZN, GOOG, META, MSFT, NVDA, TSLA is down over 10% YTD. Recall that these seven companies accounted for over 35% of the gains in the S&P 500 in 2024.
2. US government policy uncertainty regarding global trade, foreign relationships, tax reform, immigration, and deregulation:
   • An environment of rapidly changing laws and regulations tends to cause businesses and consumers to hold off on large-scale investments
   • Recent US economic growth data has disappointed, while inflation forecasts have risen, with qualitative commentary citing government policy uncertainty regarding tariffs in particular ¹
   • Once there is more clarity, markets should quickly adjust to the new normal and investments should resume

The GGS portfolio solution to both of these developments can be summed up in one word: Diversification.

Our commitment to diversification not only mitigates risk but also positions your portfolio to benefit from a broader range of opportunities. We continue to hold positions in the Magnificent Seven, as we agree that these are some of the highest quality businesses in the world, but we have not let them come to dominate client portfolios as they have for many funds and even the S&P 500 Index. Having a more diversified company, industry, market cap, and geographic exposure also helps when facing an uncertain policy environment, where the magnitudes involved and companies affected can rapidly change. For tariffs in particular, we do try to estimate how recent developments will impact each company’s profitability, and we have cut our ranking or lowered the portfolio weight for those we believe are most exposed. For most, we need to wait until there is more policy clarity before changing our estimates, but we have already started to think through the possibilities.

We strongly encourage clients to maintain a long-term perspective. Market volatility and policy uncertainty are not new phenomena, and history demonstrates that remaining invested through such periods has been the correct course of action. We are confident that our active management and diversified approach will help navigate these challenges and keep you on track toward your financial goals. We understand that market fluctuations can be concerning, and we are committed to helping you understand how these developments can affect your specific financial situation. Please do not hesitate to contact your GGS advisor to discuss your portfolio, address any concerns, and ensure your investment strategy remains aligned with your long-term objectives.