Market Outlook & Investment Strategy - The firm suggests rotating into value and small-cap stocks, as they have underperformed in the first half of the year [5] - The firm is at target for large-cap stocks but overweight in small-cap and non-US equities, believing there is better value in these areas for the second half of the year [6] - The firm has been bullish on Japan for a number of years due to strong improvements in corporate governance and better returns for shareholders [7] Currency & Economic Factors - The dollar index was down 11% in the first half of the year, marking its worst performance since 1973 [7] - The firm anticipates potential dollar weakness, especially if the Federal Reserve reduces rates by 100 basis points over the next year [8][9] - A softening dollar is seen as a reason to be overweight in developed markets outside the US [10] - Fiscal stimulus in Europe, particularly in Germany, is expected to be beneficial [6] Sector Analysis - There was a rotation out of higher multiple sectors like tech and AI into lower multiple sectors like consumer discretionary [2] - Financials are favored due to the prospect of less stringent regulation and potential capital returns [15][16] - The firm believes that progrowth policies and less regulation will benefit small and mid-cap companies more significantly [13] Risk Factors - Headline risk related to tariffs, particularly with Japan and China, remains a concern [16][17][18]

Market Overview & Small Cap Performance - Russell 2000 is the only index negative year-to-date [1] - Small caps have been struggling fundamentally due to an earnings recession [3][4] - Consensus expects a significant growth pickup in the second half of the year, but estimate revisions and guidance need to turn around for confirmation [4] Interest Rate Sensitivity & Fed Policy - Small caps are increasingly sensitive to rate risk, showing a record negative correlation with longer-term treasuries [6][7] - Bank of America economists are not expecting the Fed to cut rates this year, while the market is pricing in several Fed cuts, posing a near-term risk [5] - Higher rates for longer pose a bigger risk for small caps due to high leverage and short-term/floating rate debt [7][8] Potential Positives & Long-Term Outlook - Potential positives for small caps include the US-China deal, growth-positive provisions in the bill, and a slightly more positive ISM [2][3] - Long-term, there is potential for outperformance of small caps given valuations and multi-year themes like reshoring, peak globalization, and a capex cycle in the US [8] - Near-term selectivity is crucial, with better risk-reward in midcaps; focus on areas with better revisions, stronger margins, and avoid levered companies [9][10]

Let's talk a little bit more on markets right now. Joining us is Peter Krauss. He's the chairman and CEO of Aperture Investors.And Peter, we're coming off a really strong quarter, up better than 10% for the S&P 500, the best quarter since 2023. Um there are questions about whether it can last. A lot of good things that are happening right now.Um but we saw what happened in April with tariffs being put in place that were much higher than anticipated. We're against another deadline now, July 8th and 9th, when ...