Depending on your personal portfolio composition, the just closed first quarter 2025 might show an entirely different performance. While scrolling through twitter it reads almost like a hefty crash with big losses is behind us, the reality is on an aggregate level not much has happened so far. Even more contradictory, the current correction only involved certain sectors and individual stocks. This is the sector rotation I have written about in the past several times. What to draw out from it for our portfolios?
Summary and key takeaways from today’s Weekly
– The first quarter has seen a negative performance on an index basis.
– On a sector basis, most sectors are even UP, not down, though. Primarily the once highly celebrated and over-crowded tech stocks have seen a disproportionately strong correction so far.
– My strategy for this ongoing sector rotation remains the same: look for ideas where others don’t.
Admittedly, as it is almost a recognized professional disease among fundamental investors and analysts, I was too early with my call for the obvious coming sector rotation, leaving some money on the table myself through gains I did not make (see my Weekly on this topic here).
No worries, I’ve found value elsewhere. However, I didn’t participate in the tech rally.
Fundamentally driven as I am, I could not justify to chase the tech train that already had left the station. My gut was heavily holding me back to avoid sleepless nights. It is neither my style nor my strategy to jump onto trends that seemingly everybody is not only well aware of, but where the trees seem to be growing into the sky.
Does anyone remember the calls for Nvidia (ISIN: US67066G1040, Ticker: NVDA) soon to be a 10 tr. USD company? It was just a matter of time they told us? Instead, the stock is down about 30% from its high.
I think you get it.
Such dumb euphoria which has lost completely its footing sooner or later – often unfortunately later – leads to a rude awakening. Not necessarily feeling Schadenfreude, but the market rewards certain investors, while others have go through painful lessons. Some learn from them, others throw in the towel. In my outlook (see here), I warned not to assume a walk-in-the-park year 2025.
With this, the kick-off of the second “business-friendly” Trump presidency is not playing out as many had hoped, even almost taken for granted. Instead of an effortless from-bottom-left-to-the-top-right we have experienced a sharp rise in volatility, i.e. wild swings back and forth. The first quarter of 2025 is history now.
Time to take a look back and to separate the wheat from the chaff.
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both as per 2 April 2025 market close – since August 2022
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The crash many stocks don’t participate in
I am using the word “crash” on purpose, as it is a powerful and emotional word.
In contrast to a “bear market”, a crash is an event that happens quickly. Quick and dirty. At times also shocking. Think of suddenly being left speechless. A bear market on the other hand is more a stretched out period of slowly growing pain, unnerving wrongly positioned participants until they throw in the towel.
Emotions are exactly what is driving around many investors at the moment.
I have seen many posts on twitter where people wrote things like “investing does not make fun right now”. As if investing performance were to be measured by a few weeks… But sure, those who bought close to the tops of certain stocks, aggressively ignoring risk and reward, likely are not having much fun right now.
Isn’t it truly amazing to see sentiment having taken a big hit?
Even though I am not seeing it for the first time, it amazes me, at least a bit. In February, not even two full months ago, everything was still alright. Now, there’s confusion. The broader market correction is primarily attributed to weak consumer sentiment, sticky inflation and now of course the tariff uncertainty (including yesterday’s announcement), “supported” by extreme valuations.
It depends on the perspective, though – and the portfolio composition.
We’ll discuss sectors and some ideas in more detail soon. For my part, I am not confused. At least regarding what’s happening and to see especially tech stocks taking a nose-dive. Timing-wise I was off. Directionally right, though.
I am confused about something else.
What I haven’t seen for a certain time, are the posts where people show screenshots of their stock portfolios. Total figures and sometimes also either the entire or at least the top holdings – which often were the big tech stocks. It must be many of these folks have gone on early Easter vacations and have no time for updates.
But turning serious again, we are seeing a bifurcated market.
Depending on whether one has heard of and thought about (and positioned for) sector rotations, it is even possible that a thoughtfully structured portfolio has not even taken notice of any market correction. Which of course doesn’t mean a self-enforced sell-off will spare these names from going through a correction, too.
If you were to take home just one idea of today’s Weekly, then please let it be this one.
Looking first at the US indices, there’s already a noticeable divergence, even though not as prominent as is the case a layer below on the sector level. The three-month period obviously is also pretty short to draw a final conclusion, but there’s already a subtle hint, if one has some background understanding.
Why is the Dow holding up better?
The answer is crystal-clear. Due to being an old-school index it is often criticized for. You read correctly. A headwind turned into a tailwind. Tech exposure is the lowest.
The lower you go on the performance ladder (chart above), the more influence the big tech stocks have. As the Dow’s weighting is determined by individual stock prices, not market capitalizations, the negative impact was almost negligible. As ballpark figures, think of Apple (ISIN: US0378331005, Ticker: AAPL) stock trading at 200 USD, Nvidia at 100 USD. Apple’s weighting in the Dow thus is 2x that of Nvidia.
Debatable whether that makes sense or not. But it is what it is.
What’s not in this chart is that the Dow’s constituents are having much higher dividend yields as is often the case with more mature companies, especially from non-tech sectors. Thus, the total return has even a higher spread between it and the S&P 500 and the Nasdaq.
Interestingly in this context, in November when Nvidia had joined the Dow, I wrote this could be the top for it (see here) – so far this seems indeed to be the case.
With this, let’s take a birds-eye view on the sectors of the S&P 500 as it is a broad cross section through what’s happening under the hood.
Many of my longer-time readers will know this overview from FinViz.
The bigger a field, the higher its market cap. The rest is self-explanatory. Red fields represent a negative performance, green a positive return. Lighter shades of a color represent a higher intensity (lighter red = more negative, lighter green = more up). Numbers are YTD as of writing.
What immediately comes to my mind when looking at this graphic is that there are a few really big red fields, strongly weighted to the center-top and top-left. But the majority seems to be green when speaking about the quantity. Measured by eye, it is split about evenly (you can also look here).
Think of half of the S&P’s stocks are down year-to-date while the other half is up.
This might be a little bit surprising, given the news and headlines we are confronted with. The S&P 500 index itself is down by 4.2% as of writing due to the high weighting of predominantly tech stocks. It is weighted by market caps, thus some bigger green fields like Berkshire (ISIN: US0846707026, Ticker: BRK.B) or Eli Lilly (ISIN: US5324571083, Ticker: LLY) represent a counter force.
Even though some candidates like Amazon (ISIN: US0231351067, Ticker: AMZN), Tesla (ISIN: US88160R1014, Ticker: TSLA) or Meta (ISIN: US30303M1027, Ticker: META) are categorized as consumer cyclicals or communication services and not technology directly, everyone knows they’re seen as tech stocks. Meta surprisingly is holding up comparatively well against its tech companions.
But the core message is: predominantly tech stocks have pulled the index down.
On twitter, I have found another useful graphic. Forgive me that it’s dated as of 28 March, leaving out two trading days. But it doesn’t change the character of the core message from above. It even adds a new surprising element: most sectors are UP – when counting the amount of sectors, leaving out weight.
I’ve been warning not to be too optimistic about tech and cyclical consumer (discretionary) stocks like a pain in the ass.
This seems now to be what I’ve been writing about for long: the big sector rotation.
For my newer readers, I urge you to search for these two words and read my older Weeklies about this topic. It is important to understand. See it as a basic training about investing 101 for free.
In short, not only do entire markets or indices ebb and flow.
Within these, all sectors go up and down, either (of course, so do individual stocks within sectors). And not necessarily in the same direction all at once. That’s not even possible as I have explained in the past (see here). Every sector has its own trends, head- and tailwinds – the spotlight can’t be on all at once.
As a brief example, 2022 was the year for energy stocks by a wide margin while tech got slapped in the face. 2023 techs rallied hard. The same in 2024. Now, energy is starting to wake up again. Not only do energy stocks have benefitted from the drop in tech stocks on a relative basis, possibly masquerading an own weak start into the year.
They have as a group positive returns. Energy is even the leading sector in the S&P (see above again)! And this despite lower (!) oil and only flat nat gas prices.
Who’d have thought in the wake of recession and tariff fears as well as Trump’s envisioned (but unrealistic) “drill, baby, drill” to see the hated energy sector shine?
But that’s the reality.
Looking at individual names in the S&P (all up at least +20% YTD), we can see the majority in the top 20 even being not so familiar names for many.
And with Hess (ISIN: US42809H1077, Ticker: HES) – that’s maybe even the biggest surprise – just one energy (non-utility) company.
Speak of surprises!
If you think I am only bashing big US names, here are a few European darlings of the not too distant past. The pain there is even bigger. Of course, I have been an annoying rebel regarding the two names below on twitter, while everyone was happy.
It didn’t pay to pay every price possible for perceived quality.
As a reminder: What’s down by a third, needs 50% to recover. What has halved needs a double – to come back to zero!
Two of the largest European companies behaving like small-cap stocks?
Yes, indeed. It seems the time has come for sanity to gain the upper hand again. Even the best businesses, despite seeing operational tailwinds, can see their stocks flush if valuations have become unsustainable.
Speaking of unsustainable valuations, another of my favorite targets currently is Berkshire. As I’ve written not too long ago (see here and especially here), the stock has reached valuation levels where you better don’t want to be on board.
Guess where Buffett was buying back the stock?
I know, most of the time stocks / markets go up and long-term they generate positive returns. The following chart shows that nicely.
There are plenty of such examples trying to motivate especially inexperienced and highly nervous folks.
But honestly, do you really want to be down hard and being constantly reminded that “long-term” markets go up? Motivation through perseverance slogans or rather results?
As a reminder, long-term can be unnervingly long if you catch a hard bear market.
And this does not even need to be on an index basis, even though this can be hard to stomach, too. Many young investors who lived through the recent tech hype have no clue what a bear market is.
What if “buy the dip” turns into “sell the rip”?
If one sector falls out of favor hard like tech after the Dotcom bubble burst, you can be sitting there even for a decade or two before your picks recover – on a nominal basis (without factoring in purchasing power devaluation through inflation).
The goal in investing is not to do stupid things and to hope to get back to zero again.
Avoid stupid moves and you’re halfway there.
The other thing is, you need good ideas outside of the mainstream.
For those who are interested and want – I know not everyone wants, that’s okay – I am offering stock ideas for my paid-members. Especially in the more recent past, I started to search extensively for ideas that can work out almost regardless of what broader markets do, i.e. they develop an own life.
This is possible through company-specific profiles and / or catalysts like
- expected drug approvals
- investing in unloved sectors like energy
- special situations
- companies that are among the best in their sector, i.e. operational excellence
- or simply business models that even benefit from some market turmoil
I can drop you some names, yes. In one or the other public appearance, I did that.
Here or there, I mentioned picks like Vista Energy (ISIN: US92837L1098, Ticker: VIST), Liquidia (ISIN: US53635D2027, Ticker: LQDA) or my closed case of Fannie Mae Series S (ISIN: US3135867527, Ticker: FNMAS) where my Premium PLUS members netted in a nice +178.5% in about three months.
Take the case of Liquidia: the company has the potential to generate sales of a billion USD (or even more, it’s competitor with its top-drug just crossed a billion in a growing, under-served market) with its treatment of pesky lung diseases when it gets approved and catches steam. With a current market cap of just 1.25 bn. USD in a high-margin sector (biotech) and a better product than its competitor, it is not tough to see a dramatic upside here. They won’t care what Nvidia does.
I am making an offer, free of charge or commitment: just click on the screenshots and download my research reports which my paid-members received as they were fresh off the press to have a look into my work and convince yourself that this is an entirely different profile compared to what you get served on social media.
It is fine to be given a few “free tips”.
You really need to understand the cases and also constantly monitor them. Not on a daily or weekly basis, but from time to time you need to know what’s up in the respective business. That’s what I am doing.
If you want to identify the rebel inside of yourself and go against the mainstream, I urge you to become a paid-member. You’ll receive my best stock ideas and frequent updates on every case. Hard fundamental business analysis, served in an easy-to-digest way with clean and understandable investment theses (12-page reports).
You won’t care what broader markets do, you won’t care what Nvidia does and you’ll learn how to invest from the perspective of fundamental analysis – call it deal maker or business owner.
Conclusion
The first quarter has seen a negative performance on an index basis.
On a sector basis, most sectors are even UP, not down, though. Primarily the once highly celebrated and over-crowded tech stocks have seen a disproportionately strong correction so far.
My strategy for this ongoing sector rotation remains the same: look for ideas where others don’t.
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