Q2 Market Review: From Partisan Politics to Proactive Planning and Portfolios
Despite continued market volatility and rising political and economic risks, New Capital portfolios remain broadly diversified and resilient. Recent policy shifts, international developments, and AI-driven innovation are influencing portfolio strategy, with tactical adjustments reflecting both caution and opportunity.
Key Points
The new OBBA tax law includes modest changes: extended tax cuts, increased estate exemptions, higher SALT caps, a bonus deduction for seniors, and expanded 529 plan usage, with minimal charitable deduction limits.
The market rebounded sharply in Q2 after a tariff-driven drop earlier in the year; the S&P 500 is now up 5% YTD, but valuations are stretched and uncertainty remains elevated.
Economic and political risks include an inverted yield curve, executive overreach, reduced federal agency oversight, intensified immigration enforcement, and potentially destabilizing tariffs.
Policies may slow economic growth by reducing labor force participation, disrupting money velocity, and increasing the federal deficit, especially as ICE’s budget and authority expand.
Tariff rates on Canadian, Mexican, and Indonesian goods are rising; meanwhile, U.S. GDP is consumption-driven, and policy missteps may threaten economic momentum.
New Capital portfolios remain broadly diversified with U.S. and international equities, fixed income, and tactical allocations. Portfolios performed well in Q2, in line with or better than many industry benchmarks, depending on client allocations.
Equity allocations are currently 55% U.S. and 45% international—10% underweight U.S. compared to benchmarks—based on valuation opportunities abroad and dollar-hedging benefits.
Some portfolios include tactical positions aligned with themes like AI innovation or digital infrastructure, subject to each client’s goals and risk tolerance.
Nvidia’s chip technology underpins nearly all leading AI models, making it a critical infrastructure holding; clients also benefit from exposure to other AI leaders through existing diversified ETFs.
Four unhedged international bond ETFs were added to reduce reliance on the U.S. dollar and potentially benefit from continued dollar depreciation.
AI exposure is already embedded throughout client portfolios via top tech holdings (e.g., Microsoft, Apple, Google, Broadcom) and sector-wide adoption; thematic AI funds are considered selectively.
Risks on the horizon include the possible dismissal of Fed Chair Powell, new tariffs starting August 1, a reemergence of inflation, and growing tension between branches of government.
In light of heightened uncertainty, clients are advised to stay globally diversified, ensure documentation is in order, support civil liberties causes if inclined, and consider residency or custody strategies.