WHY INVEST IN THE STOCK MARKET AT ALL?
WHY uncertainty IS THE NEW NORMAL
The commentary surrounding Trump’s major economic policies in recent months has been nothing short of deafening. The media has been whipped into a frenzy, and you don’t have to read too far before finding a commentator that’s suddenly an overnight expert on tariffs, DOGE, trade wars, protectionism and their potential impacts. While some of these musings may prove to be prescient, in our view most are speculative ideas at worst and guesses at best.
There is no playbook in modern times for what we have been thrust into. And as there is no precedent in modern history to reference, there is by extension, no reliable roadmap to predict with any real certainty what comes next.
Add in sudden pivots, policy backflips, unexpected concessions, new policies announced on a whim, and the only thing that’s truly certain in this era of Trump’s “The Art of the Deal”, is that uncertainty itself is the new normal. And markets, as we all know, don’t like uncertainty.
There’s a wide range of possible outcomes from here. On the one hand, we could see a mild uptick in inflation alongside slower economic and earnings growth in the U.S., in which case it’s possible the worst of this market sell-off is already behind us. On the other hand, a deeper downturn, like a U.S. recession and broader global slowdown, would present a more serious challenge. That’s something that’s not priced in.
That said, we’re not in the business of making bold macroeconomic or tariff-related calls. It’s not where our investment edge lies, and history has shown that for most, it never has. As Paul Samuelson quipped, "the stock market has predicted nine out of the last five recessions."
Paul Samuelson quipped, "the stock market has predicted nine out of the last five recessions."
Even Goldman Sachs’ own economics team got caught in the crossfire recently, walking back a recession call just 73 minutes after making it.
It’s easy to criticize the pace and disruption of recent events and speculate on how they might unfold. But in the grand scheme, does this kind of short-term thinking really matter? Does it do anything other than stir up emotion in the moment?
It’s during times like these that we need to take a step back and let long-term, tax-effective compounding do what it does best. That’s not just a good strategy, it’s been the strategy, and not just for years, not just for decades, but consistently, across generations.
We will leave it at that and turn our attention to the heading of this section: “Why Invest in the Stock Market at All?”
Investing in the Stock Market: A True Partnership with Business
Investing in the stock market is often misunderstood. It’s commonly viewed as a short-term gamble, an attempt to predict what might happen tomorrow, next week, or next quarter. However, if we step back from the day-to-day noise, a deeper truth emerges: investing in equities is fundamentally about ownership.
When you buy shares, you're not merely chasing price movements; you're becoming a part-owner of real businesses. By diversifying broadly, as we advocate, you gain ownership in Corporate Australia and Corporate America alike.
This distinction is crucial. These companies are the backbone of our modern economy. They create jobs, innovate, and adapt to ever-changing economic conditions. As they grow, generate profits, and reinvest in their futures, shareholders benefit. Not just from rising stock prices but also from dividends and the compounding power of retained earnings over time.
Both Australia and the United States have demonstrated remarkable economic resilience over the decades. They've weathered wars, recessions, political shifts, pandemics, and financial crises. And yet, over the long term, both economies have continued to grow. This growth has translated into long-term gains for investors who remained patient and focused on the bigger picture.
By owning shares, you're participating in this progress.
When the Australian economy expands or when U.S. companies lead the world in innovation, you are part of that journey.
This isn't speculation; it's a long-term partnership in the advancement of the global economy.
Of course, the market doesn’t always move in a straight line. Volatility is an inevitable part of the process. But it’s in these unpredictable moments that long-term investors have an advantage. While short-term traders react to the noise, long-term investors stay focused on what matters: the consistent ability of productive businesses to grow earnings over time. History has shown that despite temporary setbacks, equity markets reward patience, resilience, and discipline.
Equities have also proven to be one of the most reliable ways to preserve and grow wealth in real terms. Over time, they tend to outpace inflation, which is a feat few other asset classes can claim consistently. By owning quality companies, you're not only growing your wealth; you're safeguarding it.
In a world full of noise and uncertainty, owning good businesses and holding them for the long term remains one of the most effective ways to build lasting wealth. There's no need to chase the market or predict the next big move. What truly matters is being positioned thoughtfully and patiently in the long-term growth of the economies that power our lives. And then, simply trying to add value outside of this framework when opportunities present themselves.
A Historical Example of Long-Term Wealth Creation
Let’s turn the clock back to 1926, when we ‘lucked’ into uncovering a fantastic investment. This company had all the qualities we seek, it was profitable already, had a large and growing market, diversified products and services, and a trajectory of innovations that would possibly lead the world into a new era of prosperity.
In 1926, its Earnings Per Share (EPS) was $1.24. Had we invested $10,000 at the time, purchasing shares at a price-to-earnings ratio of 15x, or $18.60 per share, we would now have 538 shares. Over the next 99 years, as a result of its strong fundamentals, its earnings power grew, and by 2025, it’s now estimated to generate $280 per share. At the same 15x, each share is now valued at approximately $4,200. That would make our initial investment worth around $2.26 million today. Impressive, right?
But luck had nothing to do with it. This is not a hypothetical example. It’s a reflection of how the stock market’s spectacular rise over the past century is driven by earnings growth, not luck. This growth mirrors the rise in collective earnings of the companies within the S&P 500, the world’s leading stock market index.
In 1926, the S&P 500 companies had an average EPS of $1.24. Today, that number is estimated to reach $280 per share by 2026. The remarkable growth in earnings, powered by a revolving list of some 500 of the largest businesses in the world, has been the primary driver of stock market returns.
And what about since we have been navigating the markets for you? Well, we would argue we have navigated one of the most significant shifts in the history of global stock markets and done so… relatively well.
The above non-hypothetical / context was to help guide you to observe what we have been analysing and writing about all these years. That is, there has been a profound shift in what drives earnings growth in the U.S. equity markets. Today, it is clearer than ever that the technology sector has emerged as the dominant engine behind the expansion of earnings in the S&P 500, more so than any other sector in the index.
But don’t take our word for it – following the earnings trends and growth (in blue, vs all others);
The contrast between the U.S. tech sector and indeed all other markets like Australia's ASX highlights the importance of sector exposure and how transformative industries can propel long-term growth.
U.S. tech stocks have not only capitalised on massive growth in cloud computing, AI, and semiconductors, but they've also benefitted from strong network effects, economies of scale, and high margins. These businesses are deeply integrated into the global economy and have become essential to almost every sector, making them resilient to economic shifts. Apple, Microsoft, NVIDIA, and Amazon's dominance has reshaped industries and expanded the scope of what investors consider valuable.
On the other hand, the ASX, being more heavily weighted towards traditional industries like banking, mining, and energy, hasn't seen the same level of growth. While those sectors can be lucrative and relatively stable, they lack the high-growth potential that U.S. tech stocks have provided. In recent years, the ASX 200's performance has lagged, reflecting the underexposure to high-growth, high-margin sectors.
Recall that share prices follow earnings, this is true both on an individual basis and on a market-wide basis. In the year 2000, the S&P 500 earnings per share (EPS) were around $60.17. Contrast this with the ASX earnings per share (EPS) share below, and where both sit today. It really is night and day.
For an investor with a diversified global outlook, it emphasizes the need to actively seek exposure to emerging technologies and the fastest-growing sectors. The Result? A $10,000 investment in the S&P 500 over the last decade, with tech exposure, is easily worth 2x to 3x more than a similar allocation to the ASX 200.
Allocating capital to structural growth trends, not just stable geographies, is critical. The gap between portfolios that embraced U.S. innovation vs. those that didn’t isn’t just a few percentage points, it’s a different wealth outcome entirely.
Looking forward, the challenge is the same: staying positioned not just where things feel comfortable, but where growth is actually happening. While other industries, such as energy, financials, and healthcare continue to play important roles, their earnings are largely cyclical and less consistent. By contrast, tech earnings have shown secular, compounding growth.
This trend has implications for portfolio construction and as we look ahead to 2026 and beyond, the influence of technology on index earnings is unlikely to diminish. If anything, innovation in AI, automation, and digital infrastructure may deepen this dominance, and with it, the overall structural case for technology leadership remains intact.
And hence, despite our recent “Trumping”, the overall S&P earnings per share growth outlook which in turn, is the ultimate driver of your returns, might go through more challenging periods tomorrow, next week, or next quarter, but having read the above, does it matter in 5 or 10 years from now?
I will leave that thought with you.
Direct Australian Equities Exposure
The March quarter is home to the February reporting season, which provides your investment team valuable insight into the financial health of corporate Australia, and more importantly, the direct investments we currently hold in our portfolios.
The Australian share market had a challenging start to the year, with the ASX 200 index falling by nearly 4% over the March quarter, noting the total return (including dividends) was -2.8%. This marked its weakest performance since the early days of the COVID-19 pandemic, driven by growing concerns about the global economy—particularly around rising trade tensions and uncertainty in the United States as team Trump kicked off their presidential campaign with the introduction of Tariffs.
This market uncertainty and volatility saw investors flock to defensive sectors such as gold miners, consumer staples (Woolworths, Coles), large cap ‘value stocks’ (Telstra) and the Big 4 Banks (CBA). These stocks performed extremely well and helped to hold the index up, despite some much larger falls in high growth stocks in consumer facing and the technology sectors. Areas that we typically follow.
The below table provides some context on just how challenging and volatile mid and small capitalisation companies have been recently. These are the broad sectors we cover and with around 70 individual constituents declining 23.4% on average from their recent highs, versus the index we are benchmarked against being largely unchanged. In light of this, we believe we have navigated the period well.
The first of your holdings to report in the quarter was ResMed (RMD), with results showing an 11% increase in revenue for 1HY25, up to $2.51bn. ResMed continued to expand their margins throughout the half, which resulted in net income growing 53% to $656m. Following the result, shares briefly eclipsed $40 per share, before broader market weakness commenced a steady downtrend. RMD shares closed -4.55% for the quarter, however we still see considerable upside in the share price from here, with our valuation sitting above $40 per share.
The first of your holdings to report in the quarter was ResMed (RMD), with results showing an 11% increase in revenue for 1HY25, up to $2.51bn. ResMed continued to expand their margins throughout the half, which resulted in net income growing 53% to $656m. Following the result, shares briefly eclipsed $40 per share, before broader market weakness commenced a steady downtrend. RMD shares closed -4.55% for the quarter, however we still see considerable upside in the share price from here, with our valuation sitting above $40 per share.
AGL Energy (AGL) announced an in-line result in February, with the expected reduction in earnings taking place throughout the first half as energy pricing increases moderated from 2024. AGL reported 1H25 revenue growth of 2%, with a 1% reduction in underlying EBITDA. Underlying NPAT came off 7% due to increased depreciation expenses resulting from continued investment in fleet assets. Management narrowed their guidance range for NPAT to $580-$710m, which is around a 2.5% increase at the midpoint. It was also stated that FY26 and FY27 forward electricity price curves remain strong giving us added conviction in the outlook for AGL.
Insurance broker network AUB Group (AUB) reported another strong set of financials for 1HY25. Revenue grew 12% to $713m, with further margin expansion resulting in a net profit increase of 13% to $79m. Management reaffirmed guidance for net profit of $190-$200m in FY25, an increase of between 11.1%-16.9% on FY24. Following a weak start to the year, shares rallied on the result and closed out the quarter virtually flat, just shy of $31 per share. We continue to see upside to AUB’s share price, despite lower insurance growth expected over the coming years. The slower top line growth is expected to be more than offset with operating efficiencies and synergies from new acquisitions which should drive margins, and profits higher.
Life360 (360) reported their results on the final day of reporting season, saving some of the best results to last. Revenue was up 34% and an extremely strong Q4 saw the business exceed full year guidance. Management provided FY25 guidance, forecasting extremely strong numbers with revenue to be up 25% and EBITDA to grow 54%. 360 was also added to the ASX200 index in March, however in line with other high growth technology stocks, 360 was hit with a wave of selling throughout March. We are extremely confident with the growth trajectory of 360, with the stock now appearing ‘cheap’ based on our forecasted growth numbers. Shares closed down 12.1% for the quarter, however we suspect it won’t be long before the shares regain momentum to trade back above $20 per share.
Finally, Funds Management business GQG Partners (GQG) reported a high quality FY24 (December year-end) result, with revenue up 47%, driven by a 48% increase in management fees and a 25% increase in performance fees. Operating expenses increased just 37% with the second half showing strong cost control. This drove operational leverage through the financials, with NPAT growing 53%. Free cash flow continues to grow, with cash accumulating on the balance sheet supporting dividend growth. Shares of GQG closed up 5.4% for the quarter.
Despite this strong earnings growth for FY24, GQG’s earnings are heavily influenced by market movements, and the businesses’ ability to not only retain investor capital, but to also continue to generate inflows to grow their funds under management (FUM). Given the broad market weakness throughout March and now the start of April, and the recent hiccup with the Adani exposure in the Emerging Companies Fund, we expect attracting new investor flows might be more challenging that it has been over the past 3 years.
We note that after a further fall to start April 2025…
for the first time in almost 2 years, we are seeing value emerging in some of the highest quality, fastest growing businesses on the ASX.
This excites us after a dearth of new ideas following on from an almost 2-year bull market. We have recently made the decision to exit GQG with a view of reallocating this capital into what we consider to be, higher quality businesses.
We continue to be extremely pleased with the way the direct positions in the portfolio have been performing despite the extremely challenging and volatile period for investing. We will continue to keep you informed with changes made to the portfolio, as we look to take new positions in high quality companies following the March/April market correction.
FINAL WORDS
A recent article in the Wall Street Journal warned that "it’s a dangerous time to be overexposed to US assets, and almost everything else," implying that investors should sell all their financial holdings. We strongly caution against such a reaction.
Historical data and behavioral studies consistently show that investors who sell during periods of market stress often lock in losses and miss the subsequent recoveries. Markets have a long history of rebounding strongly after downturns, and selling near the bottom can result in significant opportunity costs. Moreover, taxes triggered by impulsive selling further erode investment capital, capital that once diminished, loses the chance to benefit from the compounding of returns over time.
It is worth remembering that while bear markets are painful, they have always proven temporary. Bull markets, by contrast, are persistent, as demonstrated by over 200 years of financial market history.
Emotional decisions during periods of volatility often lead to selling at the wrong time, only to remain in cash as markets recover and ultimately reach new highs.
Market timing has been extensively studied for decades, and the conclusion is clear: consistently predicting market moves is virtually impossible. Numerous studies show that attempts at timing the market have historically failed to produce better results than disciplined, long-term investing.
Panic selling in a volatile environment is like wielding a double-edged sword, it cuts twice. First through realised losses and again through missed opportunities.
As always, we encourage you to focus on the fundamentals of successful investing:
Investing is a long-term endeavor. Act like an investor.
Volatility is a normal and an expected part of the journey. So… expect it.
Staying invested allows time and tax-efficient compounding to work in your favor.
Adhering to a disciplined, time-tested investment strategy is critical to achieving your goals.
We are here to guide you through times of uncertainty and help ensure that short-term volatility does not derail your long-term plans.