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Wrought Rebalance for February 27, 2025 Thumbnail

Wrought Rebalance for February 27, 2025

Investing

On Thursday, February 27 we rebalanced most of our model portfolios. Read on for key changes and our view of what is happening in markets and the economy.

Key changes:

  • Trim equities overweight from 4% to 3%maintaining a clear preference for stocks over bonds while adjusting the complexion of our risk-on stance
  • Increase overweight to U.S. over international developed market (“DM”) stocks - favoring large, high-quality U.S. companies with relative earnings strength while fading the recent DM rally as regional forward earnings guidance cools
  • Reduce the bet against Chinese equities - mitigating exposure to potential positive surprises from tariff negotiations and aggressive Chinese government stimulus
  • Increasing gold by 1% and introduce 1% allocation to bitcoin (to models with alternative investments) - as catalysts for global trade disruption and geopolitical conflict appear ripe


Our Take:


Dodging negative headlines


Markets dodged a series of negative headlines with remarkable poise to start 2025 - shrugging off “hot” inflation data, a more hawkish Fed, a historic single-day sell-off in AI related stocks, and a number of trade policy announcements. Despite this episodic volatility, many market participants continue to show a determined willingness to “buy the dip.” 

Still bullish but taking some chips off the table


This steadfast but increasingly erratic market behavior underpins our decision to maintain a strategic overweight to risk assets while at the same time taking some chips off the table. We expect these themes of market consternation will likely remain triggers of turbulence for some time. Our broader macro growth outlook continues to support an overweight equity stance, though we are moderating this position as markets have moved closer to pricing in our above-consensus forecasts. 

Corporate earnings delivered an impressive encore to 2024's performance, handily surpassing what were already elevated expectations, but our earnings signals based on analyst expectations for 2025 have cooled considerably. This convergence, coupled with the recent frequency of earnings downgrades over upgrades, suggests a potentially bumpier ride ahead and increased vulnerability to disappointments. 

“Tariff” has become a boardroom buzzword again (with mentions on earnings calls exceeding Trump 1.0-era levels), and our analysis suggests tariff increases could impact corporate margins and disrupt spending plans at least moderately. But we’d also note sentiment regarding tariffs (which remain highly uncertain as-is) has become excessively bearish – meaning the pain trade for any surprise could be to the upside. 

USA


Our preference for U.S. over international developed markets (DM) challenges two increasingly fashionable narratives: that leading U.S. tech stocks represent an overcrowded trade, and that DM stocks offer contrarian value. A closer look at fund positioning and manager survey data reveals the opposite: mega-cap U.S. tech leaders are under-owned relative to historical patterns, while DM stocks have become a consensus long idea.  While international DM stocks have outperformed US stocks to start the year (benefitting from improved earnings and a lull in U.S. dollar strength), we think the relative momentum could stall out in the weeks ahead.

Our DM earnings signals have softened, and in our view the European economy remains meaningfully behind in AI infrastructure buildout and will likely continue to face challenging geopolitical issues in 2025.

Gold and Bitcoin


Scarce assets, like gold, have a tailwind right now from central bank purchases and as well as a potential tailwind from further retail purchases that haven't really kicked in yet. We’re funding our increase in the gold allocation from fixed income as gold can similarly offer protection against deflationary shocks in the economy due to 0.70 correlation to 20 year plus treasury bond index. Bitcoin is being introduced to our portfolios for the first time, funded from equities. Bitcoin exchange traded funds just came onto the scene in 2024 so there hasn't been a lot of time for this asset class to make an appearance in high net worth or affluent client portfolios in the United States. We believe that forms the basis of a flows based argument for potential upside. Additionally, an easing regulatory environment may allow for more traditional financial institutions to custody and hold bitcoin which in turns continues to bolster demand.

This information is not a solicitation for or offering of any investment, product, or service to any person in any jurisdiction or country in which such solicitation or offering would be unlawful. This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular by Wrought Advisors LLC. Only an investor and their financial professional know enough about their circumstances to make an investment decision. This material is strictly for illustrative, educational, or informational purposes and is subject to change.