We find ourselves in the midst of an unsettling moment. While quarter-end results are typically a benchmark for reflection, they now feel distant given the dramatic movements in equity markets during the first week of April. For many investors, the emotional whiplash of these swings has been just as intense as the financial headlines. In times like these, clarity and perspective become more important than ever.

At the center of the current market instability are the newly announced tariffs that the U.S. placed on the rest of the world and their subsequent ripple effects across global trade and the world economy. While markets had hoped for clarity following the April 2nd ‘Liberation Day’ announcements, the outcome provided more uncertainty. If these tariffs remain in place, they will increase costs to corporations and consumers alike, dampen demand, and push the global economy toward recession.

Equally damaging to equity markets is the uncertainty itself. Will these tariffs be negotiated down? Will other countries retaliate? Will companies pass the added costs to consumers or absorb them at the expense of profitability? Will supply chains need to be dramatically reconfigured? These unknowns weigh heavily—because, more than anything else, markets dislike uncertainty.

What we do know is this: between Thursday and Friday, the market experienced its fifth worst two-day decline since 1950. These types of sharp drops are exceedingly rare—only five other 10%+ two-day declines have occurred in that span. The good news? In every single instance, markets were significantly higher one, three, and five years later.

On average, those forward returns were +37%, +57%, and +131%. History, it turns out, is a powerful ally.

Zooming out is difficult when we are constantly bombarded by headlines, market alerts, and noise on social media. The Fear & Greed Index—a widely respected measure of investor sentiment—is
currently in Extreme Fear. It has only registered this low twice before: during the height of the Global Financial Crisis in 2008 and at the onset of the pandemic in March 2020.

While fear is understandable, history suggests this is a time to be opportunistic. As Warren Buffet famously said, “Be fearful when others are greedy and greedy when others are fearful.”

Our Research Team remains fully immersed in these dynamic markets. With decades of combined experience, our exclusive focus is on investment management. This allows us to respond quickly, think deeply, and act decisively. We have made targeted portfolio adjustments and view this period not with alarm, but with intention.

Given the elevated market valuations earlier this year, we entered 2025 with an above-average cash position. While we have already begun putting some of that cash to work, we remain well positioned to take advantage of continued market dislocation.

In areas where we believe the forward outlook has structurally shifted, we have acted. For example, we decreased our exposure to research-focused life sciences companies earlier this year when we saw a meaningful policy shift at the US Department of Health and Human Services.

Times of dislocation also offer the best opportunities to buy great businesses at attractive prices. We have rotated into high-quality names like J.P. Morgan in our Large Cap Yield Strategy, as well as Arista Networks and Trane Technologies in our Concentrated Equity Alpha Strategy, where we see long-term value amid recent stock pullbacks.

J.P. Morgan is the largest and highest quality bank in the market. Arista is a leading provider of data center networking and switching equipment. The company has been taking share in its core markets for years and is seeing continued growth due to the acceleration in AI-related data center spend. Trane is a leading provider of commercial HVAC equipment and services. The HVAC industry continues to benefit from long-term structural demand, driven by rising global temperatures, improved indoor air quality standards, and a growing push for energy efficiency.

We continue to emphasize quality above all else. The companies that we favor have strong balance sheets, resilient business models, and solid organic growth potential. In our Concentrated Equity Alpha Strategy, every company is at or below 2x leverage, with many holding net cash positions. Leverage, defined as net debt divided by EBITDA (a measure of operating profitability), reflects a company’s reliance on debt. The higher the leverage, the more vulnerable a business may be during periods of economic stress. We intentionally focus on companies with low leverage—typically 3x or below—and believe our portfolios are well positioned in the current environment.

Periods of uncertainty are when the best companies can press their advantage, take market share, and reinvest when others are forced to pull back. They seize the day and come out stronger.

Broadly, valuations have become more attractive. The S&P 500 is trading at 18x forward Price/Earnings (P/E)—down from 22x P/E at the end of last year and is now below the 10-year average. While valuations could pull back further, excessive valuations have been wrung out of the market.

There is good news in the world of fixed income: stability remains. In the last market downturn in 2022, bond prices fell alongside equities as interest rates spiked – there was nowhere to hide. Today, with interest rates at more normalized levels and growing expectations for future Federal Reserve rate cuts, bonds are once again serving as the portfolio stabilizer they are designed to be.

Our Corporate Bond Strategy is off to a strong start this year, and the broad bond market is also positive year-to-date. With an average duration of just 2.9 years and high credit quality, we are well positioned in this environment.

It is also worth remembering the upside of owning individual bonds rather than a mutual fund or Exchange Traded Fund (ETF). You have full transparency into what you own, and you are not subject to forced selling during periods of market stress. We hold bonds to maturity, trade selectively, and maintain control—exactly how fixed income should function.

Modern equity markets have weathered the Great Depression, World War II, Black Monday, the Dot-com Bubble, 9/11, the Global Financial Crisis, and the COVID-19 pandemic. We are confident they will endure and recover from this period as well.

This is a highly fluid and rapidly evolving environment. While we cannot predict the exact path of short-term returns, we remain confident in the strength of the companies and therefore the stocks that we hold in our portfolios. We work tirelessly to adapt and stay ahead, and we continue to see long-term opportunity through the lens of our disciplined approach.

We appreciate the trust you place in us—especially in times like these. Our entire team remains fully engaged in navigating today’s challenges and uncovering tomorrow’s opportunities. We are here to guide you through uncertainty with perspective, discipline, and care. As always, your Investment Advisor is available to discuss at any time. Please do not hesitate to reach out.

Warmest regards,

Rick Ryskalczyk, CFA
Co-Managing Partner, Portfolio Manager

Disclaimer: This newsletter is for informational purposes only and does not constitute investment advice, a recommendation, or an offer to buy or sell any securities. The views expressed reflect the current opinions of Sandhill Investment Management (“Sandhill”) as of the date of publication and are subject to change without notice. Information from third-party sources is believed to be reliable, but its accuracy and completeness are not guaranteed. Sandhill is a registered investment adviser with the U.S. Securities and Exchange Commission and is independently owned and operated. References to specific securities, strategies, or market developments are for illustrative purposes only and do not represent a recommendation or guarantee of future performance. Portfolio holdings and allocations are subject to change. Any performance figures referenced are historical and should not be relied upon as indicative of future results. The Concentrated Equity Alpha Strategy invests in U.S. common stocks, American Depositary Receipts (A.D.R.s), domestic ETFs, sector ETFs, and cash across large-, mid-, and small-cap companies. The Large Cap Yield Strategy focuses on large-cap U.S. equities, A.D.R.s, and ETFs. The Corporate Bond Strategy invests in individual corporate bonds rated single B to single A, with maturities of three to nine years, and cash equivalents. The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded U.S. companies and is commonly used to represent the performance of the U.S. equity market. All investments carry risk, including the potential loss of principal. For additional information and full strategy disclosures, please contact Sandhill Investment Management at 716-852-0279.