Welcome to Something More with Chris Boyd. Chris Boyd is a certified financial planner, practitioner, and senior vice president and financial advisor at Wealth Enhancement Group, one of the nation's largest registered investment advisors. We call it Something More because we'd like to talk not only about those important dollar and cents issues, but also the quality of life issues that make the money matters matter.
Here he is, your fulfillment facilitator, your partner in prosperity, advising clients on Cape Cod and across the country. Here's your host, Jay Christopher Boyd. Welcome to Something More with Chris Boyd. I'm here with Jeff Perry and Brian Regan. All of us are with the AMR team at Wealth Enhancement, and glad to have you joining us for a segment. So glad to have you back. You each were on vacation last week. Not together. Fair enough. But I missed you both. Would it be that bad, Jeff?
I don't know, based upon- You don't have the time of your life. Maybe for the first two days. After that, it would probably be downhill. I think we both feel that way, as previously discussed. It's that time of year, a great time of year to take a vacation. So you guys picked the perfect week, I think. I billed this previously, Brian, that we were going to talk to you about, hey, where are we at at the half, and how are things going? And then I forgot you were on vacation.
So I billed it again last week for this week. So here we are. Lots to think about. So much going on in the world in terms of foreign policy issues. We've had issues with Iran that came up a month ago, maybe. We've had the looming question of what's happening with tariffs that's evolving and developing. We had this big legislation, which we'll talk about in another episode shortly. So there's so much going on. I think investors look at things and say, well, it seems like things are going well.
How should I be thinking about the second half of the year? And so I just wanted to have an opportunity for you to talk a little bit about some of this, and maybe offer some insight and guidance for our listeners as to how do we think about all that's going on in the world, and how does that play into some of the thinking people might want to give consideration to with their portfolio as we look into the latter part of the year?
So if you fell asleep on January 1st and you woke up on June 30th, you'd probably be pretty thrilled with your investment returns, or at least happy, would be my guess. Maybe not thrilled when you compare it to 2024 and 2023. The reality is, for better or for worse, we don't go into a coma for six months at a time. I'll say that's better. But year to date through July 9th, the S&P 500 was up 7.16% total returns, so that includes dividends. The aggregate bond index was up 3.64%.
So objectively, that's pretty nice. You're getting something from your fixed income. You're tracking at over 7% on your fixed income, which is much higher than the stated yields that you're going to get on investment grade fixed income right now. And you're tracking for close to 14% on the S&P 500, which is around the 10-year average. We've had a very good decade for stocks. So if you just fell asleep and woke up, that'd be nice.
Of course, we all lived through the end of the first quarter though, and a quote unquote liberation day where we had some wild tariff policy that came into effect. And I have this interesting chart from JP Morgan. If you bear with me a second, I can just take a comment. So on April 8th, the effective tax rate on imports was going to be 30%, which is basically the highest it had ever been going back to the year 1900. I'm happy to say that as of June 30th, it's down to 15%.
So we've dialed back the tariff dramatically and we've started kicking the can down the road on tariffs. The reciprocal tariffs, the deadline was July 4th. I think we all know that was a soft deadline. Now it's going to be August 1st. We'll see what happens. There's been a lot of rhetoric and a lot of threats about copper and pharmaceutical tariffs as of late, but the general trend has been a softening of the tariffs from the peak issue that we were seeing.
So there was a lot of investment considerations based on that. So we had a dramatic sell-off when the effective tariff rate was at 30%. And as we've ratcheted down to 15%, we've seen a recovery in the market. And last quarter, I said, if we have a continued tariff war with these outrageous rates, we're probably going to have a global recession. And the S&P 500 could be looking at 4,000. At the time, the S&P 500 was around 5,000. And as we've come down, we're back at all-time highs.
It begs the question, what would have happened if we didn't have this friction in the economy and these additional tariffs? Would we be having even a better year? The other consequence of this is the dollar has fallen dramatically to the tune of around 10%. This has been a direct tailwind for international stocks. If you look at international stocks on a dollar basis, you see that it's done about 18%, 19% year-to-date, much better than the S&P 500.
If you were to strip out the effects of the dollar, it's only about 8%, 9%. A little bit better than the S&P 500, but not dramatically different. So the tariffs have had a negative effect on the dollar, where less exporting of dollar or less imports are devaluing the dollar. In addition to that, the confidence in the United States has likely gone down as well because of this. So this has been a tailwind to international stocks. This is interesting because it's really been an underperformer.
International stocks have been underperforming against the S &P 500 for a very long time, as we've talked about. So if you maintained some diversification, some allocation to international stocks, you did very, very well relative to the S&P 500. So that's the good news, right? We've had a good year. International stocks have done well. If you've been diversified, you've done well.
But the tough thing is there is some friction in the economy, and we can all hope that the progress we're seeing on the tariff front continues. Now, if the progress on the tariff front does continue, I would expect some strengthening in the dollar since the tariffs were the issue for the dollar in the first place. And then you might see some reversal in leadership in the second half.
So when we think about the second half, and I've said this to my colleagues at Wealth Enhancement and our macro meeting, I would be very careful to chase international stocks because if we do have a continued reversal of this tariff policy, we could see some leadership from domestic stocks going forward. Now, if we're going to drill into, if we're going to double click or we're going to dig into whatever you want to use for your segue into domestic stocks, where do you want to be?
We have been focused on a few areas. We've been focused on utilities and semiconductors. And why? Because there's, and mega cap growth themes. Why? Because there's been an enormous investment in the AI trend. That means for power generation, queue up utilities. That also means for semiconductors because you need computers to generate all this new content. You need GPUs, you need CPUs, you need inference chips, you need everybody's working on custom chips for inferencing, for example.
So we keep seeing that spend grow. And even at faster rates from the quote unquote hyperscalers than we expected just six months ago, it keeps growing at a great, great clip. So, you know, I think that is going to lead to a competitive advantage for the mega cap growth names. It's going to be a competitive advantage for the semiconductor equipment and semiconductor design companies, most notably Nvidia and the design capabilities. And I think you've seen that.
Now, what do you, what do I think is going to suffer or where you need to be less focused on? I think discretionary and cyclicals you need to be careful with. So why do I say that? Well, Ed Bastian, the CEO of Delta was on CNBC this morning after discussing his first quarter results. And what we're seeing is the front of the cabin is up 5% in revenue and the back of the cabin is down 5% in revenue. So we do have this dichotomy of who's doing well in America and who's not doing well.
And that's one interesting data point that's top of mind, but you could find this data basically anywhere, right? Credit card spend is higher, delinquencies on autos are higher, things of that nature. You're seeing the lower part of the consumer not doing as well as the upper end. So, you know, for me, that means that you kind of want to be careful around discretionary goods. We've generally seen a decline in discretionary spend. So, you know, let's just be careful.
Let's not over-allocate there. When it comes to staples, well, to me, they're pretty expensive and you're not getting the growth. So they might be consistent, but they're not necessarily growing. You know, where am I, am I going to get any bang for my buck there? People have really liked industrials and that's basically because of the onshoring theme. That can be great, right? But there's different kinds of industrials, right?
We can have industrials that tend to be cyclical and we can have industrials that are more consistent. And, you know, I'd be careful in ETF and mutual fund portfolio, for example, allocating to the whole sector, because I think as a sector as a whole, it can act more cyclically. But I think you could definitely find individual stocks that could be consistent and growing and take advantage of that trend. I just think you need to be more discerning.
When it comes to interest rates, we just had the quote unquote big, beautiful bill passed. This is extending the previous Trump tax cuts and making them permanent, you know, permanent until we have a different government likely, but, you know, permanent for the foreseeable future. This is deficit spending, you know, it's adding to the debt. Typically that is stimulative and inflationary. So when you have stimulative and inflationary, likely you're going to have higher rates for longer.
That might be frustrating to people, including the president of the United States. But typically that is what we're going to see. One caveat to that is I think it's the debatable, it's not debatable, you know, that this is going to add four or five trillion dollars in debt over 10 years, or, you know, maybe it is in some circles, but I think generally there's some agreement on that. But what I think is interesting is how stimulative and how inflationary the bill is going to be going forward.
And the reason I say that is it's really building off of the tax rates that already existed in 2024, right? It just kind of extended them with certain caveats, right? And we can discuss that if you want. But if you're looking at the bulk of it and you're just comparing what's going to change between 2024, 2025 and 2026 based on the changes in the big beautiful bill, you're probably not going to see that big of a change.
I mean, personally, my tax return might not change that much and Jeff and Chris, I imagine your tax returns might not change that much. But for certain folks, you know, it will. But in aggregate, you know, I think we're going to see some stimulus and some inflationary effects, but nothing hugely concerning, you know, that that I think would be a huge driver of of inflation.
So, you know, all things equal, if we are a little tight right now on interest rates, maybe the big beautiful bill makes us more in equilibrium than where we previously were, and it makes it easier for the Fed to sit tight at the position they're in right now, which I think is going to be the case. At the very least, you know, there's a lot going on right now between tariffs and the new tax bill where they're likely going to want to continue to see some more data.
Finally, we had another initial claims and another continuing claims data point this week, and they were very benign. So, you know, that's a good thing. Nobody wants a recession. But what we are seeing is slowly the continuing claims tick up, while initial claims basically kind of stay around the same area. So, you know, this is basically means that people aren't quitting, people aren't getting laid off.
But it does seem like the people who do lose their jobs are having a lot of trouble finding a new one. A great analogy from Neil Dutta from Ren Mac Research, he's the macroeconomist there, he says it's like a bathtub that's dripping water. It's not a heavy flow, but it's dripping and the bathtub's filling up. So I think we do want to keep an eye on, you know, how heavy that flow is into the bathtub, which is initial claims and the water level in the bathtub, which is continuing claims.
But so far, so good. So if you put all this together, you know, interest rate related sectors, I think, are going to struggle, I think, because I think we're going to be higher for longer, at least on the short end. I think discretionary names might struggle a little bit, but we don't have a crazy unemployment problem. So we might just get, you know, a muddling along in those types of areas.
And I think we're going to have continued strength in the B2B onshoring and AI type themes in the second half of the year. So I gave you guys a lot of information there. Love to hear your thoughts or questions. And, you know, let's have an interesting conversation about this. So Brian, one area that you didn't talk about, it's implicit in all your comments, though, is earnings, corporate earnings.
There was, you know, a lot of commentary about tariffs slowing down, movement of corporations, investments in different things, and consumers maybe taking a step back. What have you seen with consumer spending and how it has related to corporate earnings? Consumer spending, it's been very hard to tell, right? So Q1, earnings were very good. The some companies withdrew guidance, some gave guidance with tariffs, some gave without tariffs, but generally speaking, it was viewed as very good.
The problem with that is it's very hard to tell how much was pulled forward. So, for example, if you're a company and you wanted to get inventory in before the tariffs hit, you might have overbought, which might have been stimulative to your vendors. If you're a consumer, you might want to get ahead of price increases or shortages, so you might have gone out and bought where you might not have otherwise, and that might have been stimulative for earnings there.
So I think, you know, in the second and third quarters, people are going to be looking for drop-offs or possible drop-offs. If there's not drop-offs, then I think we're going to be in very good shape. If there is drop-offs, I think we could definitely see some additional volatility. On a personal note, if anecdotes mean too much to you, I certainly spent forward. I bought a car, a refrigerator, a washing machine.
I went on a spending spree because I didn't want to be caught with a broken down car that I can't fix because I can't get the parts or because they're too expensive. So I remedied a situation with an old car, for example. I had an old refrigerator. I have two young kids. I need to have a working refrigerator, so I just got ahead of replacing my 20 -year-old refrigerator. So that type of activity is what I mean by pull forward. So it'll be interesting to see what happens going forward.
Now, on the biggest stocks in the market, right, if we're talking about the S&P 500, the biggest stocks in the market, they don't necessarily have to worry about pull forward too much. Microsoft, Amazon, Amazon a little bit, but a lot of their revenue comes from Amazon Web Services just as much as retailing. They're not part of this inventory good cycle, right? A lot of it is subscription-based. A lot of it is considered, Windows, for example, I think would be considered a staple, right?
It's a business-to-business type product, but it's a staple. We need it. And they're continuing to grow at a very, very rapid pace in a secular manner. So when we're talking about the overall market and we talk about concentration in the market, the concentration in the market might actually be helping us with this situation right now because those companies are less exposed to the potential effects of tariffs.
Brian, you're probably tired of me asking about this because it's something I bring up routinely. I can ask him if you want. I know your question. I could just answer it. Maybe for the listeners, you should ask, Chris. Okay. Just to put it out there, why not be worried about valuation, the market valuation? The forward PE is near 22 times at the half. That's relatively high in historical terms. Why shouldn't we be concerned about that? I think you should be concerned about valuation.
I think you should always be concerned about valuation. I want to buy good companies at good prices. I just think the PE ratio is a terrible way to measure valuation. The PE ratio on a trailing basis, if you look at a trailing PE, only takes into account companies' earnings versus the price today over the last 12 months. The forward PE ratio is arguably even worse. It only takes into account expected earnings in the next 12 months. There is a lot wrong with this.
We don't think about stocks within a one year time period. We talk about how stocks are long-term assets. The fact that that doesn't take into growth at all is a problem for me. The Mag 7 names are expected to grow at 30%, and the total S&P 500 is expected to grow at 9%. We have had historic growth for years now, and we're in a productivity boom.
If you add on growth to the historical market just there, you should expect that you would pay a higher PE ratio for better expected growth in the future. Now it's true that if that better expected growth in the future does not pan out, then the valuation is definitely a big concern because the PE ratio is too high. Right now, that's the reason why it's pricing that in. Another reason why I think it's pricing in a high PE ratio is interest rates.
We have interest rates at four and a quarter on the 10-year, which is historically very low. If we're going to look at historic PE ratios, we have to think about PE ratios in historic terms. The 10-year interest rate in the late 90s was above 6%. So when we're comparing today's PE ratio to the PE ratio of the late 90s and you're saying, hey, look, we're in a similar ballpark of the dot-com bust, I would argue we're nowhere close. Those interest rates were 50% higher than they are today.
I get comfort there as well. Finally, the economy is much different. Historically, if let's say we were around a 14, 15, 16 PE ratio going back to the 50s, capital expenditures were enormous back then because we were a bits and bytes economy. The stock market was also, I would argue, less understood. People were very concentrated on dividend yields, for example, rather than things that we have today like buybacks. They weren't necessarily concerned about growth.
Free cash flow yields were arguably lower or in future free cash flow yields were definitely lower. So this is what I call a difference between the bricks and mortar economy versus the bytes and bits economy. We have transitioned to a bytes and bits economy where we have everything is as a service. And as a service just means that it's a subscription. It's a lower cost that you can more predictably pay for.
So your cash flows are more consistent, they're more predictable, and your margins are much higher because you can deliver software that's already been written without the use of another human being, without the use of another truck, without the reuse of a lot of other things. I've learned about this in college, CDs don't exist anymore, but it costs almost nothing to stamp out another CD. But it costs a lot more to make another movie, for example, or make another widget.
So what we've seen is margins just continue to increase. And the bigger the company, the more the margins are increasing. So we have companies that are more profitable, we have companies that are more consistent, and we have companies that are growing at a much faster rate. And we have lower interest rates. You combine all those things together, and I think it's rational that we have a higher PE ratio. And if we did have a significant dip, it's likely a buying opportunity.
So that's where I come out on that. It's not that I don't worry about valuation, I absolutely do. PE is not a very good indicator of it. Brian, how much does AI play into those previous comments about future expansions, future growth, accelerated growth, however you want to frame it? Significantly. I mean, the biggest names in the market are the biggest names in the market because they're AI names. And why are they growing at 30% a year? It's because they're the AI players.
I mean, that's going to be the productivity boom of the future. There's consensus around that. I believe it to be true. I think we all use it and we're all getting better at it regularly. I don't think there's really any doubt in my mind. I do think there's overhype. I've talked about Tesla, for example, many times. I don't understand why it has a trillion dollar valuation.
The reason why it has a trillion dollar valuation is because people think they're going to be able to build humanoid robots and have driverless taxis. And basically, they just believe that Elon Musk is going to be able to do it better and faster than anybody else. I think there's reason to believe that's wrong. And that's one of the biggest things in the market. So there's certainly risks, right? We jump from being able to write our emails better to having humanoid robots like the Jetsons.
That idea- Rosie. Yeah. Rosie jumped in our head real quick inside of a year, I feel like, where I don't think people were giving Rosie too much credit. So I think there's going to be a hype cycle. But at the same time, these companies, they're not relatively inexpensive. They're not relatively expensive, right? So if you look at the dot-com as a comparison, we're companies that had zero revenue.
These are the biggest companies in the world by revenue, by profit, by margins, by every statistical financial measurement you can think of. Given what you've said about the US economy and its valuations, and this year we've seen outperformance from international companies, some of that you talked about with reference to the dollar, but what's that tell us? What's your take then?
How does that play into the consideration about foreign exposure and whether it should be cheaper valuations, but should it be an increasing part of the portfolio for people? Of course, you don't know what everyone's individual exposure is, but thematically speaking, what's your take as it relates to different kinds of economic drivers in terms of other economies? How does that play into the thoughts around foreign? So every investor has a home country bias. It's pretty interesting, right?
So if you are an American, you're likely going to hold more American stocks. If you are German, you're going to have more German or whatever, yeah. But reality is when you look at the global stock market, the United States is more than 60% of the market and Nvidia is like the size of the UK alone. So the investable universe in the United States is bigger than it is internationally. So we just start there. You're probably going to have more US stock under most circumstances with any advisor.
We've made the active decision that we always would like to have some international exposure in our portfolio. And I think there's good reason for that. I think it's helped diversify our clients this year. And I think it will in future years as well. So why have we done that? There's different types of companies in different parts of the world, right? So France, for example, is very good at luxury, much better than the United States is. LVMH has been around for hundreds of years.
Hermes has been around for hundreds of years. They're not as good at technology. They have never generated a meta. They have never generated an Nvidia where the United States tends to do this fairly regularly, it seems like. Now that doesn't mean that there's not good companies in Europe that specialize in technology. There is. There's ASML, there's SAP. They historically have had some good car manufacturers. So Volvo is one of the biggest car manufacturers in the world by revenue.
Ferrari has been a very good stock historically. So there are good stocks internationally. As an index, it hasn't done as well for what I think is cultural, structural, and structural reasons. The United States has one benefit where, it might not seem this way, but the 50 states are much more united than the countries in the European Union.
The European Union struggles to keep everybody in line with their rules, for example, which is part of the reason why we had a Greek tech crisis 12 years ago, for example. China is a huge economy. It's growing at a rapid rate, but there's good reason to be concerned about capital controls. Technically, in a lot of ways, it's illegal for foreigners to hold domestic stocks. There could be an adversary in some ways of thinking, which could bifurcate their economy and what are the impacts of that.
Generally, I think we've made a decision that we'd like to avoid that area as much as possible. But that can be painful if China spikes as it has in the last six months. But over time, I don't think we've given anything back by not being allocated in China in any significant way.
Chris, I'm not sure the answer- This relates to what you're describing there relates particularly to the AMR team strategies as differentiated from some of the other wealth enhancement strategies, just to be clear, our own discretionary accounts for our clientele.
In any case, yeah, I think that answers my question, that notion that as much as there can be opportunities in economies around the world, you still lean toward a domestic bias because of the quality of the companies and the kind of profitability that they are generating, which doesn't mean we don't want some international exposure, but it still justifies perhaps our view of why we're benefited by having an overweight U.S. relative to perhaps a benchmark or some comparative perspective.
I think it's a great way to sum it up, Chris. Thank you. All right. You summed up nicely. Well, you're the content. Well, terrific. That's great. So gives us a view of sort of where we're at, lots of possibilities. Seems I'd say fair to characterize your overall view as generally optimistic or maybe cautiously optimistic as we go into the second half of the year. Yeah, I'd say I'm neutral. I'm not pessimistic. I'm not optimistic and neutral is good, right?
When I say neutral, I mean, I think we're going to have average returns in the next 12 months. And why do I say that? Well, if you want to strap some numbers to it, that chart you showed of the PE ratio, if you were invert that and get the earnings yield, you're going to get something around 5%. I think we're going to have 2.5 % inflation. We're probably going to have some growth of 2%. We're going to have margins expand by 1%. And just there, you get the 10%.
And if we have growth in the S &P 500 beyond what I just described that we're probably going to see in the overall economy, then you could get beyond that 10%. You maybe track for the 14% that we're tracking for now. Certainly, we could get some curveballs. I mean, April 2nd was certainly a curveball. And that's why you need to be diversified into a portfolio that is reflective of the amount of volatility that you personally are willing to take and withstand.
And that's personal to most people. One thing that we have a particular client that likes to ask a lot is, what do you think is going to happen in the next six months? And I'm always reluctant to answer the question because I just don't know. It's like asking me about Einstein's theory of relativity. I'm no expert on what's going to happen in the next six months. But I can survey the landscape and say, is this way off sides, on sides? Are we going to score a goal?
Are we going to stay neutral and play the puck well? That's the kind of general thinking. And if you try to pinpoint it and you try to push your portfolio really far one way or another based on putting your finger in the air and feeling where the wind is blowing, I think you're going to get yourself in trouble. So reminders for listeners to one, be sure you have some liquidity reserves or a mechanism for the unexpected where you can get access to capital quickly.
Generally, we like to see a reserve account as opposed to a loan, a home equity line of credit or something like that. We talk about buckets, have a strategy that has graduated levels of risk. So some portions are more long-term than others. And then make sure this is all put together in the context of a financial plan that's designed around your goals, your objectives, your cashflow demands, your resources.
And get some help in that process to make sure you're thinking it through deliberately across a variety of integrated considerations. It's not just about the portfolio, though that's certainly an essential part of it, but it's also about tax planning. It's also about the cashflow design. It's also about the things that will bring you peace of mind when you put it all together. Thanks, Brian, for your take today. Until next time, everybody keeps striving for something more.
Thank you for listening to Something More with Chris Boyd. Call us for help, whether it's for financial planning or portfolio management, insurance concerns, or those quality of life issues that make the money matters matter. Whatever's on your mind, visit us at somethingmorewithchrisboyd .com or call us toll free at 866 -771-8901 or send us your questions to amr-info at wealthenhancement.com. You're listening to Something More with Chris Boyd Financial Talk Show.
Wealth Enhancement Advisory Services and Jay Christopher Boyd provide investment advice on an individual basis to clients only. Proper advice depends on a complete analysis of all facts and circumstances. The information given on this program is general financial comments and cannot be relied upon as to your specific situation. Wealth Enhancement Group cannot guarantee that using the information from this show will generate profits or ensure freedom from loss.
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