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Christopher Shipley: Navigating US Equities, Tariffs, and Global Markets in 2025
00:24:58
What’s driving the curious performance of US equities in 2025—and what risks are flying under the radar? Christopher Shipley, Senior Vice President and Co-Chief Investment Officer at Fort Washington Investment Advisors, joins host Mike Wallberg,...
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- [00:00]
Mike Wahlberg
Foreign welcome to the Enterprising Investor, the flagship investment podcast for CFA Institute. I'm Mike Wahlberg and I'm joined today by Chris Shipley. Chris is a senior Vice president and co Chief investment officer of Fort Washington Investment Advisors, where he oversees about $90 billion in client assets. Prior to Fort Washington, Chris spent 23 years at Northern Trust Asset Management in Chicago, where he headed up both fundamental equities and strategy at different points along the way. He joins me from Cincinnati today to share his views on the curious case of US equities in 2025. Welcome to the show, Chris.
- [00:43]
Chris Shipley
Thanks for having me. Great to be here.
- [00:45]
Mike Wahlberg
So, Chris, my intro was a bit tongue in cheek, but it has been both a bumpy and at times confusing I say ride for US equities this year. Let's start with the tensions in the Middle east, something US Stocks have largely shrugged off. Why do you think that is?
- [01:02]
Chris Shipley
Yeah, it's a good question and one where I think we found ourselves in this position many times over the last 20 years of wondering why US equities are not reacting more to what's happened in the Middle East. But it feels like we've really been conditioned over that period of time to focus predominantly on the transmission mechanism back to the US Economy, which is oil prices. And of course, over that time, as the US Economy has become more and more services oriented, the level of the oil price has mattered less and our access to oil is far less dependent on the Middle east now that we have something much closer to energy independence. And so ultimately, when we look at what's been happening in the Middle East, I think it's fair to say that the US Market has responded rationally in recognizing that the economic implications or the implications on corporate profits are going to be relatively modest from what's been transpiring so long as it remains confined to the region. Specific to this example, I think when we look at the optionality for Iran from a response perspective to what's been transpiring, their options are limited and the concerns that they might block the Straits of Hormuz is really not on the table when you consider that something like 45% of China's oil flows through the Straits. And with China as an ally, they would really be hurting the an ally far more than they would be hurting the United States or others in the West. So ultimately, I think the market very quickly sniffed out that this would not be a significant macroeconomic event for the United States or for much of the world. And as a result, it did not have a Meaningful impact on asset prices.
- [02:35]
Mike Wahlberg
Right. And as of Today, we're at July 8th, we're recording here, we're still in ceasefire zone. How do you see that playing out? You think that ceasefire sticks or where do we go from here?
- [02:47]
Chris Shipley
Yeah, hard to say. And I won't profess to be an expert on Middle east politics or the likely outcomes there, but I do think it's fair to say that Iran really didn't have an option other than a ceasefire, given that the vast majority of their defense systems were taken down. And so it was in their best interest to call a ceasefire because anything they could do offensively was limited and anything they had defensively was largely put out of service. So the question ultimately will be whether or not they are using this as an opportunity to regroup and rebuild and rearm, or if this is a genuine ceasefire. But I think as we learn that over time, I think it's fair to say that again, the market is going to be predominantly focused on that, that transmission mechanism, which is oil prices.
- [03:28]
Mike Wahlberg
Yeah, and it's, it's interesting. I, I pulled the oil price up here just to go back a, a year or so, and it is quite remarkable. I mean, we definitely had, you know, the Israel attacked Iran June 13th and it spiked, spiked to its high just under 74 bucks June 19th. And then the US strikes on June 22nd and the 24th was the ceasefire. It bumped back down again as low as just under 65 bucks and it's sitting around $68 today. So that at those levels we're kind of in the range and actually lower than we were for most of 2024. So it really has, you know, to your point about energy independence, even the, even the oil price hasn't, doesn't really matter anymore with, with fracking in the US and the there and very little trade between us and these countries. It's quite remarkable. So another trend you, you've identified is the, the underperformance of US equities versus the rest of the world this year. What do you, what do you see as, as the key drivers there, Chris?
- [04:25]
Chris Shipley
So there, there's a few factors at play, but I think that if you go back to the immediate aftermath of this trade conflict that was initiated by the United States, it's fair to say that we had a bit of a sell America trade where you saw a weakening of equities, you saw a weakening of bonds, a weakening of the US dollar, and that's a pretty unusual situation for those things all to be happening together, particularly for a country that has the reserve currency like the United States. And so ultimately, when we look through that lens and look at what was occurring, it was not shocking necessarily to see that outcome. But when you think about the real implications of this and the other factors that were leading into this, which include the negative sentiment toward growth stocks in the wake of what was happening with the announcement out of Deep Seq on the back of two very strong years of outperformance of the US market as it relates to the MAG7 contribution and the 25% back to back gains we saw in the United States, we really had a bit of a rotation going on out of growth and into value. And it's important to remember that when you compare the United States to the rest of the world, and I'll use Europe as an example, you're really not just comparing different regional exposures, you're comparing different factor exposures, specifically growth versus value. So when you look at the United states today, it's 32% tech, whereas the MSCI Europe is more like 7%. And if you take tech and comm services together, you're north of 40% of the US market and more like 11% in Europe. And I think we could argue that the US communication services sector is much closer to Realtek than what you have in Europe. Whereas you look at the other side of the coin, you have financials industrials, which are together maybe 23% of the S&P, but over 40% of the MSCI Europe. Even the Russell 1000 value index within the US has more tech than the MSCI Europe index. And so again when you compare the S&P 500 to Europe, you're really comparing growth to value. These are all multinational companies selling products around the world, but the US is where the tech is and it's where the growth is more broadly. So when we say that the US is either outperforming or underperforming, or if we look at it on a valuation basis, and we say that the US is currently trading on a PE basis at a better than 50% premium to Europe, which is significantly above its 10 year median premium, that it carries a more like 25%, what we're really saying is that growth is expensive to value. And you can see that when you look at the Russell 1000 value, which again looks much more like Europe in terms of its sectoral composition, that index is trading at maybe a 10% premium to its long term average relative to Europe. So it's really not that the US is expensive per se as a Result of it being the US it's really the mega cap tech trade that's expensive because the Russell 1000 value isn't expensive versus its own history. Even the equal weighted S&P 500 isn't that expensive versus its own history. It's really been a story of the increasing dominance of mega cap tech within the S and P and the influence that that's had on the relative performance as growth goes in and out of favor depending on market sentiment.
- [07:28]
Mike Wahlberg
Right. And having yields backing up this year hasn't really helped help that trade. Right. I mean, you always see value outperform when yields are higher.
- [07:36]
Chris Shipley
Correct? Yeah. Because growth stocks are the long duration equities.
- [07:40]
Mike Wahlberg
Exactly. So those, those further out for the, for those on, on the, on the podcast that aren't familiar. Yeah. The further out you have to discount those cash flows back, the more expensive it becomes when, when yields are higher. So. So you take it on the chin when in the growth in these periods. And you've seen these, you know, this happen throughout various different cycles in the last, I would say the Ford last sort of 15 years, but really it's really been only happening a couple of times in the last five years really where you saw value kind of get a little bit of a run. And part of the help from that was, was from rates, rates rising on the back of inflation concerned there, which actually gives me a good segue here now that I think about it. I do want to talk about tariffs. I want to talk, I want to talk about inflation.
- [08:23]
Chris Shipley
Everybody wants to talk about tariffs.
- [08:24]
Mike Wahlberg
Yeah, let's talk about tariffs. I mean, you know, you know, Chris, I'm sitting here in Vancouver. Tariffs have been a very large and then, you know, a much less right now, knock on wood of a topic in Canada after the reversals from early April on Canadian goods or on some of them anyways. But we've seen these rapid policy changes causing some whiplash in both economist models and in the markets as well. So let's talk growth and inflation. What are you thinking about tariffs there? As you look at Fort Washington's US equities or elsewhere in the portfolio, where do you see that? How do you see that transmuting through markets in your portfolio?
- [08:59]
Chris Shipley
Yeah, sure. So it's clearly been a bit of a wild ride, as you've noted on the tariff front and obviously Liberation Day included a far more draconian set of tariffs than the market had been bracing for, which if implemented as outlined would have undoubtedly had a very material negative economic consequence on not just the US but candidly, global economies. Therefore, the degree to which we saw the market pull back in our view wasn't irrational, particularly since given the starting point of valuations where the market was even at the lows that we got to, we were still pricing in less than a 50% chance of a substantive recession. In other words, the market was applying a base case that did include a material scaling back of the tariffs versus originally articulated back on April 2, even at the market lows. Now the subsequent delayed implementation which has now been extended all the way out to August 1st and possibly beyond that, you had a dialing back of the rhetoric. You also had the courts in the U.S. questioning the president's ability to implement these broad based tariffs under the emergency authorization. And that's given the market far more confidence that again, these base case odds of a significant scaling back were improving, allowing for the beginning of a recovery in stocks. And now of course, we have had fresh all time highs here where the market has really taken even a bad case scenario off the table, let alone that worst case. But it's been interesting to watch some of the developments, including the deal with Vietnam where I think 20% was higher than I think most would have assumed, given the importance that they're likely a play in moving productive capacity away from China. And you've subsequently had the threats to Japan and South Korea of 25% beginning August 1, clearly designed to bring them to the negotiating table. But all the while you've had Treasury Secretary Bessen, which continues to speak to tariff revenue of around 300 billion annually, which is only 10% on our import run rate of just over 3 trillion. So some countries will be higher. China, apparently Vietnam, maybe Canada and Mexico end up in far better shape. But ultimately, if we're looking at this as a 10% tariff, that does seem pretty manageable and from the US perspective could actually be the sweet spot of generating substantial revenue with minimal economic consequences. When you do the math on it and you kind of play it out and you look at US GDP north of $30 trillion, you've got imports that are thus roughly 10% of GDP. So if you had a 10% trade weighted tariff, that's less than 1% of GDP, and that impact is mitigated to the end consumer if that tariff ultimately ends up being shared amongst the exporter, the importer and then ultimately the consumer. And if you take that 10%, you divide it by three and you say that each are going to take roughly 3%, that's not going to be overly consequential to Consumer spending, inflation, or even corporate margins. So in other words, I think the market has more or less sniffed this out again and become comfortable with the pathway from here. It's not to say that it's not going to be a bumpy ride for a bit, but I think that the destination at the end of that ride seems pretty manageable. The biggest concern I think I have at this point is that the court decision does weaken the bargaining position of the US and some countries may choose to wait out the legal proceedings in the US before offering major concessions sessions. And those court proceedings presumably won't be wrapped up by August 1st, suggesting that we could see higher tariffs for some, at least for some period of time, and that could spook markets and again hit corporate and consumer confidence, which are somewhat fragile just given all the volatility this year.
- [12:19]
Mike Wahlberg
Yeah, I guess that really puts the US in a bit of an impaired bargaining position, really, with that risk sort of being out there.
- [12:28]
Chris Shipley
Yeah, I think that's right. But again, I think when we look at some of the deals that have been transpiring, it does seem as if they're even coming in a bit higher than we would have expected, even from that somewhat weakened bargaining position. So we'll have to see how this plays out. But I think ultimately the market is right in assuming that this is not going to be overly consequential. But again, that presupposes that, again, that the President is not truly intent on reshaping global manufacturing and redomiciling productive capacity to the US or pushing it into friendlier hands. Because at the end of the day, relatively small tariffs or small tariff differentials between countries are unlikely to serve as a sufficient stick to really encourage a dramatic re. Re. Reorientation of one's sourcing or manufacturing. Particularly if you think that the next administration isn't going to share that philosophy or at least share it with the same enthusiasm.
- [13:19]
Mike Wahlberg
Right. So, so given this, I mean, the implications, again, sort of coming from the Canadian view and then just looking outside of the US A lot of the, the pain. There was, you know, a lot of pain in the US markets in post April 2, but the, the impact on the ground for, for the rest of the world will be different. Right. So if you have a large export like Canada or other, other big, you know, big exporters around like, like, like Vietnam, sort of, the, the implications for them are different. It's, it's a, it's a bigger impact on them, I guess, is what I'm trying to say, than kind of 10% of GDP so, so how do you think about, about that in terms of your global equity exposure? How is this reflecting, you know, being reflected in global markets at this two point? And, and, and is this affecting your, your allocation for Washington? Like how, whether, how attractive, I guess is a long way of asking how attractive is global relative to us as this sort of works its way out?
- [14:17]
Chris Shipley
Yeah, we've certainly been more heavily weighted toward the United States and I would say that the recent underperformance that we've seen only solidifies that view for us. Ultimately, I think that there's going to be a fair number of people that look at the outperformance of areas like Europe and ultimately look at what they own by shifting capital away from the United States and start to ask themselves why they're there. And candidly, when you look at the US market versus Europe, again, the US market cap is something like 5 or 6x that of Europe. And so it doesn't take a dramatic amount of capital moving out of the United States into some of these other regions to have a pretty dramatic impact on performance. And so ultimately my suspicion is that there will be a growing appreciation again for the growth opportunity in the United States, particularly as you contemplate the implications of AI and how that's going to play through in the global economy in the coming years. So we still have a positive outlook toward the United States. I would say that the point that you make on these other exporting nations and the potential challenges that they have. There was an article in the South China Morning Post talking about how Walmart and other large retailers are trying to get the exporters in China to take 50 to 50% to 2/3 of the tariff on themselves. And so the US does have a pretty strong bargaining position from that respect. So ultimately I do think that there's going to be some pain felt around the world and the US Will feel some, but I still think that the long term opportunities in the United States are better than we see in many other parts of the world.
- [15:48]
Mike Wahlberg
Yeah, fair point. I'm just looking at the, at the yields now Chris, thinking about this from yesterday. Trump announced yesterday, so July 7th was yesterday, this extension to August 1st. Some updates on trade, trade deals that he's negotiating and we saw U. S Treasuries pop kind of across the curve really with this deadline getting pushed out. Looking back to April 2, you know, many argued that the, the reversal wasn't caused by concerns around market performance, but more so around the fact that U.S. treasuries were, were, had, had really backed up something like 50 beeps at that point. These, this, the curve is up sort of 2 to 7 basis points from 2 to 30 years. How important is this do you think is a predictor of both markets and policy in your view? Do you think this, this will, the, the yield curve is going to have a material impact on, on the administration's decision making?
- [16:41]
Chris Shipley
I think to an extent. I think that there was clearly when you go back to the aftermath of, of April 2nd and the initiation of that 90 day pause, I think it's fair to say that that that decision was predominantly a result of Treasury Secretary Bess had calling the President and suggesting that things were getting uncomfortable in the treasury market and that the volatility that we were seeing there and the unusual behavior that I mentioned earlier, that that was a cause for concern and could ultimately prove to be more destabilizing and I think was probably the catalyst for that 90 day extension or that 90 day delay when it comes to the level of rates more broadly. Clearly the administration is focused on it. We certainly hear plenty out of the President in terms of his opinions on where short rates ought to be. The question ultimately is what is the implications on long term interest rates from what happens to short rates? And I think if the President was successful in bullying the Fed into lowering short term rates when it seemed like inflation wasn't fully addressed, then that could actually have the opposite effect on long term rates. And as we know, much more of the economy today in the United States is influenced by the long end of the curve than the short end of the curve as debt has tended to be termed out. And of course we have the implications on housing which are driven very much by what happens at the long end of the curve. The Wall Street Journal just this week. And perhaps the most alarming statistic that I saw in there, which is, which is not necessarily new information, but an interesting way to frame it, is that at today's prices, meaning the combination of home prices and high interest rates, that buyers need to have $127,000 in income in order to be able to afford the median priced home in this country, which is up from 79,000 in 2021. So that's a dramatic change in affordability in the United States. And if you look at the affordability statistics, they haven't been this bad since the 1980s when we started tracking the series. And so ultimately, clearly we have an affordability issue in the United States that has really blocked out first time homebuyers in particular. And interest rates are going to have to be part of the solution there at some point, or you're going to have to have a corrective mechanism and home prices coming down. But clearly something has to change over time in order to reimagine that, that affordability dynamic in the United States.
- [18:56]
Mike Wahlberg
So besides home affordability, is there, is there anything else, Chris, that's keeping you up at night these days or conversely, or both, maybe any opportunities that you're specifically excited about?
- [19:06]
Chris Shipley
Well, I think at the end of the day, when we're sitting at comfortably above 22 times forward earnings on the S&P 500, there's a low margin of safety. And so the market is susceptible to bad news. And that bad news could come from some kind of exogenous geopolitical event. It could come from Washington, it could come from what happens in the broader economy. We have done a fair amount of damage, as I mentioned earlier, to consumer and business psychology and to what degree that plays through as we look at the, as we look out over the balance of this year, we'll have to see. But we know that the bottom third of Americans are struggling economically. Now, one would argue, and perhaps many economists would, that that part of the economy is usually struggling. So this isn't necessarily new information either. But when it comes down to the, the ability of the consumer to absorb these tariffs, if they are ultimately passed along and in what form, and whether or not that leads to either substitutions or just people lessening the amount that they're spending, that does have implications economically. And it doesn't feel like the market is currently priced for a slowdown in either what happens in the employment markets or in the broader economy. So I do think that we have to be just conscious of the fact that we have a low margin of safety. We learned that earlier this year with the nearly 20% correction that we had from similar levels.
- [20:23]
Mike Wahlberg
It's a funny time to be priced for perfection, right?
- [20:26]
Chris Shipley
That's right. That's right. There seems like there's a lot going on to be to be so sanguine when it comes to the, the opportunities. I think one of the interesting things that we'll be watching very closely in the coming months and years is when we look at AI and the implications that it has. If you think about this as being orders of beneficiary, where you have the first order beneficiaries, which is the AI infrastructure, trade, like the Nvidia's of the world, then you have the second order beneficiaries, which is those that are selling access to that AI compute, which is the hyperscalers like Amazon, Microsoft, Google and then you have the third order beneficiaries which is I guess I call the application layer where you have software that's being written and then sold to exploit the benefits of AI. And then you have the fourth layer which is not yet seeing the benefits in a consequential way, but we know is on the cum is the traditional economy. Companies that are going to be putting AI to use to improve either their efficiency or create new opportunities in their existing businesses and the degree to which that transformed those businesses of which there's going to be winners and no doubt losers will be really the determinant of not only absolute gains but certainly relative gains. And I do think it's going to be interesting to watch and again I mentioned my positive view toward the United States, but to the degree that we end up commoditizing the LLMs and so forth, that maybe ultimately this fourth order beneficiary, which is going to be far more than just the US then maybe that is the next leg of growth for the market and the economy more broadly. But when we think about again the market and I mentioned earlier that the S and P on an equal weighted basis is trading roughly in line with its 10 year median valuation. There are still plenty of stocks to buy. There are still plenty of industries that you can own and not feel like you're paying exorbitant valuations. And so I do think that that provides a little bit of comfort that there's more room to be had there. The other area that I think is probably going to see some increasing attention is small capsule where small caps as a percentage of the total US equity market I don't think have ever been lower than they are right now. The valuations have certainly disconnected to the downside as have fundamentals candidly. But as we look forward and if you do think that there's going to be an interesting in an interest in broading out performance and interest in broading out portfolios, I do think that there's an opportunity there where again thinking about the size of that index, you have several names in the S&P 500 that are larger than the entire Russell 2000. So it doesn't take a lot of capital changing hands in order to have pretty dramatic influences on performance. And so we do think that there's some opportunities brewing there as well.
- [22:55]
Mike Wahlberg
So small caps and and areas outside of a big tech Sounds good. Coming to the end of our our chat today, unfortunately Chris, I've got a two parter here for you that I ask everybody, which is what was your first job in the industry? And if you could go back and take yourself for coffee on your first day, what key piece of advice would you offer yourself?
- [23:16]
Chris Shipley
Well, my first job in the industry was right out of undergrad working at Allstate in their equity investment group in Northbrook, Illinois. And I was 22 years old and I was very fortunate, I felt, in order to land a job in an equity investment group at that time. Granted, it was 1997 and, you know, even a guy like me could find a job in this business back in 1997, as those were good years. But the one thing I did then that I guess I'm very happy that I did was I really, despite my young age, I forced myself to really think outside the box from an operational perspective as to how we were running the business. And I actually taught myself how to program in Visual Basic and I automated a whole bunch of the back office processes that we use for report writing and so forth and using new technologies and really made a name for myself early on and networked very, very well in order to leverage that into One of the PMs that left there and joined my predecessor firm from here and brought me with. And so it was really that networking and not being afraid to challenge the existing status quo on why things were done a certain way, because oftentimes a fresh set of eyes can make all the difference in seeing things that have just been done a certain way, because that's just the way they were done.
- [24:29]
Mike Wahlberg
I've been speaking today with Chris Shipley, senior Vice President and co Chief Investment Officer of Port Washington Investment Advisors. Thanks for chatting with me today, Chris.
- [24:37]
Chris Shipley
Thanks for having me.
- [24:38]
Mike Wahlberg
I'm Mike Wahlberg and this is Bean, the enterprising investor.