The Cornerstone Investment Commentary: 2nd Quarter 2025

This Spring’s U.S. tariff announcement and almost-immediate ‘pause’ allowed both domestic and foreign
stock markets to recover from sharp April declines and reach new highs by late June. Despite this turmoil,
U.S. Treasury bonds also produced strong returns.

The impressive rise in international equities (up ~18% in 2025, versus just ~5.5% for U.S. equities) has
generated many headlines. Because of the global equity diversification we employ in unconstrained client
portfolios, overall equity returns so far in 2025 have been ~8%. This is why we diversify.

It’s important to note that much – but not all – of this 2025 return difference is simply a reversal of 2024’s
Quarter 4 results when foreign equities undeservedly lagged the U.S. market by over 11%. Going back to
last October 1, the aggregate foreign stock performance advantage has been just +2% through June 30,
and both gained ~11% in the second quarter with growth stocks leading the way over value stocks.

As we wrote last quarter, evidence is growing of profit growth opportunities in foreign markets. We see
public commitments to new investments in infrastructure, defense and energy – particularly in Europe –
compared to six months ago. For these reasons, we recently increased your portfolio’s foreign equity
holdings. Unless you have placed constraints on your foreign equity allocation, this increase was by about
15% to now comprise ~30% of your total equities, up from ~25% on January 1. U.S. equities make up
the rest and still favor growth stocks over value. This brings your portfolio’s foreign equity level closer to
the 37% weight that non-U.S. equities carry in total global stock market values. With the previously
announced U.S. ‘tariff pause’ nearly over, we believe this is a prudent position given the unknowns of what
may happen next.

The bond market – especially U.S. Treasuries – has received unusual publicity lately, much via uninformed
voices. In short, Treasuries performed as we would expect of a ‘safe haven’ asset. Fluctuations were quite
modest, and at no time during this quarter’s volatility did results dip into ‘the red’ for the year. As of June
30th, our primary intermediate-term Treasury holding (Symbol SCHR) is up 4.7% in 2025 and over 6%
since last July when we increased its portion of your portfolio’s fixed income holdings.

Looking ahead, the two most likely drivers of market results are changes to U.S. interest rates and the
impact of tariffs on global economic activity. We wrote previously of our expectation that interest rates
would fall in 2025. This is already true for intermediate-term and mortgage rates, and we still expect the
Federal Reserve to lower short-term rates by year-end. This should be positive for both stocks and bonds
(because bond prices rise when rates fall). Should future tariff announcements throw further uncertainties
into global trade activity, this would be bad news for stocks (due to a likely drop in corporate profits) as
well as bonds (as likely higher inflation would delay interest rate cuts). If the turmoil were severe enough,
it would even create the risk of recession due to a pullback in consumer spending.

Of course, we will remain watchful and ready to act however events may unfold and invite your questions
or comments as they do. As always, we thank you for the continuing opportunity to work with you.