Beyond the Headlines: Investment Opportunities in Uncertain Times

Message from Our CIO

In the first six months of 2025, the equity market was characterized by increased volatility, driven by heightened uncertainty and market sensitivity to tariff policy. Despite a quick double-digit decline in April, the S&P 500 Index subsequently fully rebounded and impressively still posted a total return of 6.2% in the first six months of the year, setting a new record high at quarter’s end.

“Many investors have been understandably concerned about increased volatility, and that has primarily driven a large discrepancy in sector performance in 2025,” says Ryan Kelley, Chief Investment Officer of Hennessy Funds.

The best-performing sectors, Industrials and Communication Services, have risen almost 13% this year as of June 30, 2025, while the worst, Consumer Discretionary, has fallen 3% over the same period. In addition, Utilities have been up over 9% this year, outpacing the S&P 500’s return by over 300 basis points. From a market capitalization standpoint, small-cap stocks have lagged significantly, with the Russell 2000 Index declining 2% in the first six months of 2025.

Interest Rates. Due to macroeconomic uncertainty, the current expectation is for two rate cuts by the end of this year with potentially three more in 2026. Many of the administration’s policies have increased expectations that inflation will rise and economic growth will slow. We believe the Fed’s actions may help by keeping inflation lower while maintaining the potential for good economic growth.

Inflation. Inflation is expected to remain elevated, largely influenced by trade tariffs, potential worldwide supply chain interruptions, domestic labor force disruption, and the potential impact from the budget reconciliation bill just passed by Congress. U.S. inflation could remain around or above 3.0% in the second half of 2025, before potentially easing to the mid-2% range in 2026. Core inflation (which excludes food and energy) is also expected to remain elevated, possibly in the 2.8% to 3.1% range for 2025. The key factor lies in the extent to which these tariffs are fully passed through to consumers and the degree of any further trade policy escalations.

At Hennessy Funds, we believe there are opportunities even with so much uncertainty. Our insights are provided below to help investors navigate the remainder of 2025.

Looking Ahead: Key Themes

Healthy Demand for Utilities and Energy. We expect elevated geopolitical risks and tariff-related concerns to keep commodity demand healthy given the positive global economic growth outlook. We believe greater trade clarity will help to increase market confidence. Notably, natural gas continues to be bright spot for energy investors. U.S. liquefied natural gas exports are growing and rising power demand needs for AI computing will likely expand the global appetite for the fuel. We think energy fundamentals are sound and will likely provide upside as U.S. companies continue to focus on providing shareholders with both healthy returns in the form of buybacks and share repurchases.

Factors Driving Financials. It appears the Fed will favor looser monetary policy moving forward, which tends to be positive for financial companies. While rates matter, we believe other Fed actions, such as changing the rules on mergers and acquisitions, capital ratios, liquidity, crypto currency, and blockchain adoption, could have a more significant impact on the financial industry. In addition, the industry appears to be entering a period of product and competitive disruption that could generate opportunity potential for long-term oriented investors.

International – Japan’s Resiliency. Japan’s economic environment remains resilient, supported by wage growth and highly desired moderate inflation. These dynamics are enhancing corporate pricing power and underpinning earnings— particularly for companies with differentiated products and strong operational capabilities. Importantly, Japan’s proactive trade diplomacy and geopolitical neutrality continue to strengthen the investment case for Japanese equities, uniquely positioning the country to navigate ongoing global trade tensions. While macro concerns remain, we maintain conviction that global competitiveness and durable business models will be the primary drivers of sustained value creation.

The Road Ahead: Navigating With Confidence

For the second half of 2025, we anticipate continued market volatility, ongoing tariff discussions, and consumer resilience. Overall, the U.S. economy appears stable, even though the effects of tariff policy, geopolitical developments, and the budget reconciliation law remain to be seen. We believe that in times of uncertainty and potentially slowing economic growth, defensive sectors such as Utilities, Healthcare, and Consumer Staples might see more investor interest due to their more predictable operating results. Value stocks could continue to outperform their growth counterparts, artificial intelligence (AI)-related tech stocks may continue to do well, and domestic and service-oriented sectors may be favored over those with heavy international exposure or reliance on complex global supply chains.

Market valuations and earnings estimates have risen, with the S&P 500’s estimated 2025 price-to-earnings (P/E) ratio at approximately 23.8x, about 15% above its 10-year average of 20.7x. The S&P 500’s consensus estimated earnings per share (EPS) growth is approximately 11% in 2025 and increasing to 12% in 2026. Comparatively, mid-cap stocks look compelling, with the Russell Midcap Index trading at 19.6x 2025 estimates versus a 10-year average of 20.5x. The Russell Midcap consensus estimated EPS growth is 7% in 2025 and 15% in 2026.

Importantly, we continue to believe investors should prioritize diversification, maintain a long-term perspective, and be prepared for potential volatility as the market digests the full implications of the new trade regime and its impact on inflation and economic growth.

Our message remains the same: We have always emphasized maintaining a long-term mindset and a diversified equity and fixed income portfolio. Our experienced management teams employ a time-tested investment approach to their high-conviction portfolios and are always mindful of downside risk.