Author: cvernon

Looking Across the Capital Stack

Despite allocations to various segments of corporate capital structures, most balanced portfolios have a degree of overlap when it comes to sector exposure across equities and fixed income. Still, key differences across the sector exposures of the U.S. equity and corporate bond markets are worth detailing. The extent to which the S&P 500 Index, which serves as a representation of the domestic large-cap stock market, is exposed to the Information Technology space has been described at length, with that sector comprising roughly one-third of the benchmark. This reflects the growth-oriented nature of the equity landscape, which Information Technology and similar sectors (e.g., Communication Services) have dominated due to higher earnings growth and extremely positive sentiment. In contrast, the Bloomberg Investment Grade Corporate Bond Index maintains a 34% weight to the Financials sector, with relatively balanced exposure to spaces like Health Care (11%), Utilities (10%), and Communication Services (7%). This dynamic reflects the capital-intensive nature of these sectors, which are comprised of companies that tend to issue more debt and are considered safer from a credit perspective. Finally, the Bloomberg High Yield Corporate Bond Index is most exposed to the Consumer Discretionary (23%) and Communication Services (15%) spaces, which are more sensitive to economic cycles and, thus, typically offer higher yields to compensate for higher risk.

The varied sector exposures for these indices are reflected in historical return correlation data. On a since-inception basis, the S&P 500 Index has exhibited correlations of 0.40 and 0.63 with the Investment Grade Corporate Bond and High Yield Corporate Bond indices, respectively. These figures suggest that while equities and bonds can move together at times, the asset classes often behave differently. Importantly, these correlations are not static. Rather, they tend to rise during periods of market stress when asset classes often move in tandem due to broad risk-off sentiment. Under normal market conditions, however, the differences in the sector compositions of these indices allow for diversification benefits in a balanced portfolio.

By combining equities with both investment grade and high yield corporate bonds, investors gain exposure to a broader mix of U.S. businesses across sectors and asset classes. This dynamic can help market participants mitigate the impact of sector-specific downturns, making a balanced portfolio more resilient in varying economic environments.

2025 Halftime Market Insights

This video is a recording of a live webinar held July 17 by Marquette’s research team analyzing the first half of the year across the economy and various asset classes as well as themes we’ll be monitoring through the rest of 2025.

 

Our quarterly Market Insights series examines the primary asset classes we cover for clients including the U.S. economy, fixed income, U.S. and non-U.S. equities, hedge funds, real assets, and private markets, with commentary by our research analysts and directors.

Featuring:
Greg Leonberger, FSA, EA, MAAA, FCA, Partner, Director of Research
Frank Valle, CFA, CAIA, Associate Director of Fixed Income
James Torgerson, Senior Research Analyst
Catherine Hillier, Senior Research Analyst
David Hernandez, CFA, Director of Traditional Manager Search
Evan Frazier, CFA, CAIA, Senior Research Analyst
Dennis Yu, Research Analyst
Amy Miller, Associate Director of Private Equity
Chad Sheaffer, CFA, CAIA Senior Research Analyst

Sign up for research alerts to be invited to future webinars and notified when we publish new videos.

If you have any questions, please send our team an email.

Policy Uncertainty Blurs the Outlook

As we enter the second half of the year, Liberation Day-induced market volatility seems like a distant memory with the S&P hitting another all-time high on July 10th and non-U.S. stocks significantly outpacing their U.S. counterparts through June 30th. Meanwhile, the One Big Beautiful Bill was signed into law by President Trump on July 4th with varying expectations on its impact to growth but a consensus view that it will push the deficit higher.

In this edition:

  • Tariff and policy uncertainty
  • Risk factors and market indicators
  • Equity market drivers
  • Currency and regional trends
  • What to watch in the second half

Why Are Emerging Markets Investors Removing Their China Exposure?

Emerging markets (EM) equities have gone through cycles of performance throughout time, creating varied investor sentiment towards the asset class. Recently, discussions around excluding China from investment portfolios have become more common, spurring the growth of active EM ex-China strategies. This newsletter explores the current landscape of EM investing, examines the drivers of the EM ex-China trend, and analyzes the performance impact of removing China from an EM allocation.

Know Your Volatility

Fiduciaries, trustees, and institutional investors may be understandably puzzled by recent developments and shifts in tone from U.S. regulators and policymakers regarding digital assets. For those not following the space closely, in recent months:

  • The Department of Labor (DOL) rescinded its 2022 “extreme care” guidance and reaffirmed a neutral stance — emphasizing fiduciary process over product exclusion.2
  • Banking regulators softened their posture by withdrawing supervisory guidance, signaling a shift from structural resistance to conditional tolerance and constructive engagement.3,4,5
  • The SEC approved a diversified, multi-asset crypto ETF — marking a pivotal moment in U.S. regulatory acceptance and product offerings.6
  • At the federal legislative level, bipartisan efforts to codify dollar-backed stablecoins suggest the possibility of a broader strategy to reinforce U.S. monetary leadership in both digital finance and capital markets.7,8
  • At the state level, Texas and New Hampshire have enacted legislation to establish digital asset reserve funds or authorize their state treasurers to invest in digital assets.9

These developments may seem at odds with the long-standing perception that digital assets — particularly Bitcoin — are categorically too volatile and immature for institutional portfolios. While the immaturity label is fair and simply a function of time, the volatility story — while true on an absolute basis — loses a bit of its bite when compared to individual stocks.

The chart above illustrates this point using securities from the S&P 500 (blue) and Russell 2000 (light blue) — benchmarks that underpin equity exposures across many investment portfolios. Since 2020, more than 1,000 individual stocks (purple) included in core S&P 500 and Russell 2000 indices have, on average, exhibited annualized volatility comparable to or exceeding that of Bitcoin — including well-known names such as Tesla, Nvidia, Carvana, Hims & Hers, and JPMorgan Chase.¹ While this is not to suggest Bitcoin’s price should be expected to follow the same price movements of a traditional stock, it does start to address the long-held stereotype of its outsized volatility across market cycles. That said, the relative immaturity of Bitcoin (and all digital assets for that matter) should be considered when assessing the relative volatility versus stocks.

Ultimately, the intent here is not to advocate adoption — this is not an endorsement of digital assets. Rather, the goal is to better understand that recent regulatory, policy, and institutional shifts appear to reflect a more empirically grounded understanding of risk.

It is important to underscore that many of these developments remain provisional. Absent more binding legislation, recent guidance and positions could shift under future administrations. Accordingly, Marquette maintains a cautious approach to digital assets. Fiduciary prudence requires a holistic, portfolio-based risk assessment that considers formal legislation and regulatory frameworks, governance standards, plan-specific objectives, and long-term suitability. Fiduciaries require a durable foundation for evaluating potential portfolio inclusion of asset classes. Given the inherent uncertainty of a transient regulatory landscape — and the varied facts and circumstances across retirement plans — a measured, wait-and-see approach seems reasonable.

1 Bloomberg 260-day volatility as of May 30, 2025; 260-day historical volatility for all assets, respectively.
2 U.S. Department of Labor, Employee Benefits Security Administration. Compliance Assistance Release No. 2025-01: 401(k) Plan Investments in “Cryptocurrencies”. May 28, 2025.
3 Board of Governors of the Federal Reserve System. Federal Reserve Board Announces Withdrawal of Guidance for Banks Related to Crypto-Asset and Dollar Token Activities. Press release, April 24, 2025.
4 Federal Deposit Insurance Corporation. FDIC Clarifies Process for Banks to Engage in Crypto-Related Activities. Press release, March 28, 2025.
5 Office of the Comptroller of the Currency. OCC Clarifies Bank Authority to Engage in Crypto-Asset Custody and Execution Services. Interpretive Letter #1184, May 7, 2025.
6 U.S. Securities and Exchange Commission. Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1 Thereto, to Amend NYSE Arca Rule 8.500-E (Trust Units) and to List and Trade Shares of the Grayscale Digital Large Cap Fund LLC under Amended NYSE Arca Rule 8.500-E (Trust Units). Release No. 34-103364, July 1, 2025.
7 Reuters. U.S. Senate Passes Stablecoin Bill in Milestone for Crypto Industry. June 17, 2025.
8 Bloomberg Government. Texas Gov. Abbott Signs Bill to Create State Bitcoin Reserve. July 1, 2025.
9 New Hampshire General Court. House Bill 302: An Act Relative to Enabling the State Treasury to Invest in Precious Metals and DigitalAssets. Signed May 6, 2025. Effective May 7, 2025.

One Big Beautiful Bill Act: Excise Tax Changes Legislative Update

The One Big Beautiful Bill Act was passed by Congress and signed into law by President Donald Trump on July 4, 2025. The legislation includes significant updates to the excise tax structure on net investment income of certain educational institutions, with direct implications for private colleges and universities related to their endowments.

This legislative update addresses considerations for investors regarding:

  • Changes to the current excise tax for private colleges and universities
  • Private foundation excise tax
  • Scrutiny of tax-exempt debt issuance
  • Reinstatement of a universal charitable deduction

The One Big Beautiful Chart

Late last week, President Trump signed a sweeping tax and spending package, branded by the White House as the “One Big Beautiful Bill,” aimed at enacting major elements of his domestic agenda. Specifically, the legislation cements the substantial tax reductions introduced during the first Trump term, which were slated to sunset at the end of this year. The package also includes an increase to the cap on the state and local tax deduction, raising it from $10,000 to $40,000. Changes to the child tax credit and estate and gift tax exemption were also included in the legislation. A portion of the bill’s funding comes via reductions to programs including Medicaid and the Supplemental Nutrition Assistance Program.

Forecasts from various organizations suggest the immediate effect of these new policies on U.S. GDP growth is indeterminate. For instance, recent reports from the Tax Policy Center and Yale Budget Lab indicate that the domestic economy may see growth increase by less than 1.0% in the years ahead due to the legislation. These estimates are in stark contrast to those of the White House Council of Economic Advisers, which optimistically predicts a 4.8% boon to U.S. GDP by 2028 thanks to the package. Among the provisions contributing to the legislation’s prospects to boost growth are temporary deductions for tip income and higher defense spending. On the cost side, the legislation may increase federal deficits by $3.4 trillion over the next decade and result in millions losing health coverage according to projections by the nonpartisan Congressional Budget Office. These projections have been challenged by both Republican lawmakers and the White House. While the full economic consequences of the “One Big Beautiful Bill” will be revealed over time, the heated debate surrounding the legislation and the size of the package indicate its overall impact could be meaningful in the years ahead.

Bring Out the Big Guns

NATO has decided to take the phrase “don’t bring a knife to a gun fight” quite literally. Last week at the NATO summit in The Hague, the 32 member countries pledged to increase their defense spending as a percentage of GDP from the current 2% target share to a new 5% target share. The pledge includes spending 3.5% on defense items such as troops and weapons and 1.5% on defense-related initiatives such as critical infrastructure, cybersecurity, and resilience measures. This change comes on the heels of criticism from President Trump regarding the underspending of member nations on security, as well as his ambivalent comments on the U.S. commitment to collective defense under Article 5. Additionally, commitments to the alliance have been reinvigorated given the ongoing war in Ukraine and a desire to combat an increasingly hostile Russia.

This new commitment follows a trend of increased defense spending by NATO member states, as there are now significantly more members achieving the 2% target than in previous years. In 2021, the year prior to Russia’s invasion of Ukraine, only six member states achieved the 2% target, compared to 23 member states last year. Some members of NATO even pledged to spend 3.5% of GDP on defense prior to the rollout of the new 5% target. That said, and as this week’s chart indicates, only one NATO country (Poland) currently spends at that 3.5% level.

While the higher spending guidelines are groundbreaking, there is still significant progress that must be made for members to achieve this new level. For example, simply to meet the previously planned target of at least 3.5% of GDP, Germany would have to spend an extra €689 billion on defense through 2035. Similarly, Italy and France would each need to spend more than €400 billion. This increase in spending may provide near-term tailwinds for European equities, particularly defense stocks as detailed in a previous Chart of the Week. However, higher defense spending could add to already ballooning fiscal deficits in many member states, meaning inflation may remain elevated across Europe. While it remains to be seen if NATO members will achieve the new spending target and what the ultimate impact on financial markets will be as a result of these dynamics, one thing is certain: NATO is no longer willing to not be armed and dangerous.

Oil Markets in Focus Given Middle East Turmoil

Tensions in the Middle East spiked last week following a major escalation in the conflict between Israel and Iran, raising concerns over the stability of the global energy supply chain. To that point, the Strait of Hormuz — a vital chokepoint for global oil and gas flows that connects the Persian Gulf and the Gulf of Oman — has become increasingly fragile amid new reports of electronic interference with navigation systems and a tanker collision near the strait earlier this week. Roughly 20 million barrels of crude oil pass through the Strait of Hormuz each day, accounting for roughly 27% of the world’s maritime oil trade and 20% of total global oil consumption. Additionally, around 20% of global liquefied natural gas (LNG) is transported through the area, primarily from Qatar. Despite the heightened conflict and concerns that Iran could attempt to block the Strait of Hormuz, tanker traffic has remained relatively stable, with 111 vessels reportedly transiting through the Strait on June 15. This figure is down only slightly from 116 on June 12, and consistent with the recent daily range of 100 to 120 vessels.

Most of the material exported through the Strait of Hormuz is delivered to Asia, with roughly 84% of the crude oil and 83% of the LNG being shipped to the region last year. China, India, Japan, and South Korea accounted for approximately 69% of these flows, making Asia particularly vulnerable to supply shocks. While the U.S. has reduced its reliance on Middle East crude oil imports in recent years, with only 6% of its oil imports coming via the Strait, concerns remain for potential inflationary pressures and global GDP headwinds if regional conflicts escalate further.

In response to recent events, Brent crude oil has climbed to over $78 per barrel, and any further escalation could trigger additional volatility in energy prices and, by extension, global financial markets. Indeed, the Strait of Hormuz remains one of the most strategically significant and sensitive corridors for the global economy and investors should continue to monitor developments within the region given the potential for broader economic impacts.

The Global Economic Outlook

In a report published last week, the Organization for Economic Cooperation and Development sharply lowered its global economic growth outlook, pointing to the disruptive impact of ongoing trade tensions. Global GDP is now projected to grow by 2.9% on a year-over-year basis in 2025, down from an estimate of 3.1% in March. The United States economy is expected to grow by 1.6% this year, which represents a sharp downgrade from the March forecast of 2.2% by the OECD. Indeed, out of the countries outlined in this week’s chart, only India saw its 2025 economic growth estimates revised upward in the most recent OECD projections, with forecasts for the euro area and Japan remaining in line with where they stood in March. These assessments underscore the reality of trade disruptions as major drags on global economic momentum. Further, the OECD emphasized in its report that even a complete rollback of tariffs by the U.S. and other nations would not provide an immediate boost to the global economy due to lingering uncertainty about the direction of future policy.

In addition to trade headwinds, the OECD pointed out that domestic factors are compounding U.S. economic challenges, with immigration restrictions and a shrinking federal workforce contributing to weaker growth prospects. Additionally, despite tariff-generated revenues (which hit an all-time high last month), the U.S. budget deficit is expected to widen as slowing economic activity will likely outweigh any fiscal gains from trade barriers. Inflation in the U.S. will also rise in the near term according to OECD forecasters, which could delay substantive monetary easing by the Federal Reserve until at least 2026. The report cautions that this timeline could be pushed even further if inflation expectations become unmoored. Beyond the immediate economic implications of trade disputes, the OECD raised alarm about mounting global fiscal pressures and urged governments to streamline spending and improve revenue collection by expanding their tax bases. Clearly, policymakers around the world have much to evaluate as we prepare to enter the second half of 2025.