Looking through the Cycles

Volatility Continues, Opportunities Have Emerged

In the turmoil of global markets, what investors care about most boils down to three questions:

• How big is the current market risk?
• Can the economic fundamentals still hold up?
• Where exactly are the opportunities?

In the online sharing session on March 26, the Trunity Partners team centered around these three core questions, and based on macro data and frontline research, gave our judgment and strategy. Below is a condensed highlight of the content shared, for friends who could not attend.

🔍 Market Outlook:

• Short-term volatility will persist, mainly due to policy uncertainty and lowered corporate earnings expectations;
• The market will complete initial pricing of tariff policy after Q1 earnings season;
• Mid-term, attention still needed on U.S. 2025 economic growth and 2026 midterm election progress.

💼 Economic Fundamentals:

• U.S. household sector has low debt ratio, strong asset quality;
• Corporate financing structure is solid, interest rate pressure is controllable;
• Employment and income growth remain resilient.

🎯 Investment Strategy:

• Stick to global perspective, focus on leading players in niche tracks and “compound interest-type companies”;
• Defensive assets remain attractive;
• Seize the chance to allocate into cyclical sector leaders and high-quality tech companies with attractive valuations.

🤖 AI Sector View:

• Short-term returns may be limited, investment enthusiasm needs rationality;
• Mid-to-long term still optimistic on top companies with closed-loop commercial models and profit models.

1. U.S. Stock Market Outlook

We believe in the short term, the market will continue to fluctuate, mainly affected by:

• Uncertainty of Trump’s tariff policy and its potential impact on inflation;
• Arrival of Q1 earnings season—some listed companies have begun lowering full-year revenue and profit expectations. Though the reduction is not large, under unclear policy background, it adds pressure on market sentiment.

Overall, we expect that after the Q1 earnings season ends, the market will form a clearer pricing of tariff policy. Unless trade frictions escalate significantly, the market is likely to stabilize.

From a longer-term perspective, the U.S. will usher in midterm elections in 2026. The Republican Party will face voter evaluations of past policy performance. Current polls show that although some voters still support immigration and DOGE efficiency/cost reduction, support for tariff policy is declining, which will test Trump’s policy perseverance. We expect that in the coming year, the average tariff level will rise by about 15%, aligning with previous expectations communicated by the U.S. Treasury and the market.

In summary, tariff impacts are expected to be fully priced in by H1 2025, at which point the market will return more to fundamental-driven movements. So how are the fundamentals?

2. U.S. Economic Fundamentals

Overall performance is steady, household and corporate balance sheets are healthy, but future economic growth is expected to slow:

🔹 Employment & Income:

• Initial jobless claims stable at just over 200K; continuing claims slightly up (current unemployment rate 4.1%), still within reasonable range;
• Job openings remain above 7 million, showing employment demand remains strong;
• Since the pandemic, cumulative inflation is about 24%, while average weekly wages have risen about 25%, meaning real household income is stable.

🔹 Assets & Wealth Accumulation:

• Stocks and real estate have significantly outperformed inflation:
  S&P 500 index up 57.6%, U.S. home prices up 46.2%.

🔹 Household Debt:

• Mortgage as share of total assets is 7%, credit loans only 2.6%, both at decade lows, indicating low household leverage.

🔹 Corporate Debt Structure:

• Debt-to-total-assets ratio is 34.6%, slightly higher than 33.8% in 2019, mainly due to 2020’s low interest rate environment;
• Average corporate debt term is 7.69 years, interest rates remain low;
• Current credit spreads are at ten-year lows; new debt interest rate rises are limited, overall funding costs are manageable.

From current public data, the U.S. economy is relatively stable overall: balance sheets of corporates and households are healthy, debt levels are low; although inflation has not fallen quickly, real wage growth is solid. Of course, over the next year, with tariff implementation, the U.S. economy will likely slow, and rate cut expectations may weaken, which will affect market performance. We do not see a recession or systemic risk, but slower growth could mean U.S. stock market returns in 2025 may not be as bright as the past two years. Of course, any Trump policy shift could bring surprises—we’ll wait and see.

3. Where Are the Investment Opportunities?

Trunity Partners always insists on searching from a global perspective for leading companies in niche sectors with long-term growth potential. We "don’t chase hype, don’t buy overvalued", but focus on investment targets with stable growth and reasonable valuation.

Current Key Allocations:

• Defensive Companies:
  Stable cash flow, inflation-resistant, with structural growth potential;
• Cyclical Sectors:
  Such as discretionary consumption, real estate, and recently corrected tech stocks with valuations returning to reason.
  We will increase allocation to cyclical leaders gradually under controlled portfolio risk—“move when the time is right.”

4️⃣ Views on AI and the “Magnificent Seven”

We significantly reduced positions related to AI and the “Magnificent Seven” in the second half of last year. The core considerations were:

• Excessive investment in AI infrastructure, dragging down short-term investment returns;
• Enterprise-level AI applications are unlikely to drive actual demand in the short term;
• Market trading is highly concentrated, increasing volatility;
• Investment enthusiasm is high, but business models are not yet clearly closed-loop.

We remain optimistic long-term about some infrastructure-leading enterprises but will wait for valuation corrections before re-entering.

🤝 Want to Engage with Trunity in Depth?

• How to find high-quality companies that can thrive through economic cycles globally;
• How to manage family asset portfolios with institutional investor perspectives;
• How to cultivate next-gen business understanding and investment literacy;
• How to apply the Trunity Hexagon Model to conduct business analysis.