DIARY OF A PORTFOLIO MANAGER

July 25, 2025

“Shakedown
On the speedway
Breakdown
On the speedway
Shakedown
On the speedway
Just got to, got to, got to get away”

Rough Trade, Shakedown

Good afternoon,

Rough Trade – the band. Shakedown – the song. Seem familiar? Those lyrics take a lot of imagination. Song is from 1979…

As I’ve possibly noted in some recent letters, the typically quiet nature of the summer period has been anything but. A steady stream of headlines―many trade-related―continue to command the attention of financial market participants. Meanwhile, the second-quarter U.S. earnings season is now in full swing. I continue to watch for signs of tangible tariff impacts and pay close attention to guidance for the rest of the year and into 2026.

A few items crossed my desk this week:

U.S. Business Activity Accelerated in July (Reuters): U.S. business activity accelerated in July amid front-loading of activity ahead of prospective tariffs. According to data released on Thursday, the S&P Global U.S. flash composite purchasing managers' index (PMI) rose 1.7 points to a higher-than-expected reading of 54.6 in July. Readings below 50 indicate contraction while readings above 50 indicate expansion. Activity in the services sector drove the broader increase, with the flash services PMI rising by 2.3 points to a higher-than-expected reading of 55.2, while manufacturing activity dipped into contractionary territory, with the flash manufacturing PMI falling by 3.4 points to a lower-than-expected reading of 49.5. Despite the broader pickup in activity, business sentiment remained downbeat amid tariff-based concerns and broader policy uncertainty out of the federal government. In addition, survey respondents highlighted a rise in prices paid and prices charged, an increase in new orders received by businesses, and a decline in factory-related employment prospects.

Canada’s Retail Sales Fell in May (Bloomberg): Canada’s retail sales contracted by 1.1% m/m in May, in line with advance estimates. Sales were down in three of nine subsectors, with the pullback led by auto sales, which fell by 3.6% m/m, suggesting to us that the tariff-driven front loading seen in the prior two months has reversed. The decline was led by lower new car sales, which fell for the first time since February. The Consumer Expectations survey by the BoC also showed Canadians were anticipating “significant increases” in car prices over the next 12 months. Sales weakness was broad-based, with nine provinces experiencing a decline, and Ontario seeing the largest decrease in dollar terms (-2.1% m/m). Core retail sales, which exclude auto sales and gasoline and fuel vendors, were flat in May, with food and beverage sales—the biggest contributor to core sales—declining by 1.2% m/m, though most other categories rose. Building material, garden equipment and supplies dealers led the gains, rising 1.9% m/m. Statistics Canada’s advance estimate suggests a rebound in June, with an increase of 1.6%.

If you are so inclined, here is a link to the most recent Global Insight Weekly.

Q2 Earnings

Q2 earnings season is well underway, with 112 S&P 500 companies reporting this week. At the time of writing, the results have been solid, with companies exceeding estimates at a higher clip than the long-term average, and the projected earnings growth rate trending higher.

Management commentary, on the other hand, has been mixed across sectors. A blend of themes―ranging from policy developments and geopolitics to foreign exchange moves, consumer strength, and AI-related spending― have driven sectoral divergences. Accordingly, some companies have raised their guidance while others have adopted a more cautious message.

Major U.S. banks, which reported results early, have been a key point of focus. Profits were bolstered by trading amid market volatility, and management teams cited the finalization of President Trump’s budget bill and the potential for deregulation as positive developments. However, U.S. bank executives also flagged tariffs and trade uncertainty, volatile geopolitical conditions, high fiscal deficits, and elevated asset prices as notable risks as we move through the second half of the year. Additionally, several strategists have observed that downward earnings revisions have exceeded upgrades globally, another trend to keep an eye on.

Moving Forward

As earnings season progresses, your team at DS will be watching closely for signals across several key topics. The AI investment theme remains largely intact despite earlier concerns over the sustainability of outsized capital spending, particularly following the emergence of China’s DeepSeek AI model. With “Magnificent 7” earnings results starting to flow through, management guidance on expenditures for the rest of the year and into 2026 may provide some insight into this trend. Expectations are high for these large-cap U.S. tech companies, potentially raising the stakes should signs of weakness appear.

Equally important will be management commentary on trade-related disruptions and their potential impact on profit margins. Some export-reliant companies have already cited rising tariff-related costs for downward pressure on profits. While the outlook for corporate profitability remains constructive, any further indication that U.S. trade policy is undermining business performance or consumer demand could be a source of renewed market volatility, even if temporary.

Other Developments on the Horizon

Trade policy developments remain fluid. After a series of “letters” in which President Trump threatened to unilaterally impose tariff rates by August 1st absent a deal, a flurry of agreements have begun to flow through. Japan, Indonesia, and the Philippines have negotiated their own bilateral deals in recent weeks, with another deal reportedly on the horizon with the European Union. We are monitoring the pace of dealmaking along with sector-specific tariffs closely as we near the August 1st deadline. While President Trump has stated no further extensions will be granted, the administration has so far shown a reluctance to follow through on policies that have generated adverse market reactions.

I continue to remain cognizant of elevated equity market valuations, with many major indices near record highs – though we should note that not everything is rising and those have are not based on fundamentals. Nevertheless, the initial batch of S&P 500 earnings has provided some grounds for cautious optimism.

As U.S. trade deadlines approach in August, we are monitoring both negotiations and corporate guidance for signs of how tariffs, geopolitics, and broader macro uncertainty may affect the outlook.

Should you have any questions, feel free to reach out.