The Market Got Mad – and Then Got Even

July 1, 2025

By Mark Oelschlager, CFA

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The 49th Academy Awards, which covered movies from 1976, is considered by some to have the greatest slate of best picture nominees in the history of film.  The candidates for the final award of the night that year included All the President’s Men, Taxi Driver, and the winner Rocky – all legendary motion pictures.  Another less-known nominee was Network, which was about a fictional television news network.  In the signature scene, news anchor Howard Beale, played by Peter Finch, goes on a long on-air tirade about all the ills of society and loudly pronounces, “I’m mad as hell, and I’m not going to take this anymore!”  He then encourages everyone across the country to open their windows and do the same.  They oblige.  The ratings bonanza this produces for the network is an ironic twist after the anchor had been told he was going to be fired for low ratings.

 

Many groups and individuals are mad as hell today.  There are regular nationwide protests about what many believe is overreach by the Executive Office, consumers are angry about inflation, countries are upset with the USA about tariffs, Iran is irate with Israel and the US, citizens are mad at Congress (as usual), fiscally prudent Americans and holders of US Treasury debt are frustrated about the nation’s ballooning debt and a declining dollar, President Trump is irked at Federal Reserve (Fed) chair Jerome Powell, Mr. Trump is also mad at Elon Musk and vice versa, and all professional golfers not named JJ Spaun are irritated at the United States Golf Association, Oakmont Country Club, and Mother Nature for how difficult the course was for the 125th US Open.

 

Despite all this, as in Network, the ratings (stock returns) lately have been outstanding.

 

After President Trump’s “Liberation Day” announcement on April 2 sent stocks down about 12% in less than a week, he reversed course, paused tariffs, and agreed to negotiate with our country’s trading partners.  As The Wall Street Journal put it, “Mr. Trump started a trade war with Adam Smith and lost.”  The President’s change of heart propelled stock prices higher throughout the quarter, with the market not only recouping the losses that followed Liberation Day but the ones from the first quarter as well.  The S&P 500’s recovery to a new high on June 27 was the fastest in history following a decline of at least 15%.  The S&P returned 11% in the quarter, its best quarter since 2023, which is incredible considering it started out by losing 12%, as we mentioned.

 

We did take advantage of the weakness in early April to add to some positions but are nonetheless struck by the magnitude of the rally.  While the shift in the President’s tone is important, there remains much uncertainty on the trade front.  Negotiations have been slow and have yielded very few firm agreements.  The US’s tariff pause is scheduled to expire on July 9, though an extension would not surprise us.  It is important to understand though that the 10% across the board tariff that was implemented earlier this year on all US imports (with some exceptions) is separate from the “reciprocal” tariffs that have been set (and currently paused) on trade with various nations.  So, the trade environment, while improved, is still significantly worse than it was at the start of the year; yet stocks are up about 6% in 2025.  The relative valuation of defensive stocks, which had risen in the first quarter, is back down near historic lows.

 

As noted earlier, President Trump is unhappy with Fed chair Jerome Powell, as Mr. Trump would like to see the Fed cutting interest rates more aggressively to spur economic growth.  Since lowering the Fed Funds rate by a total of 1 percentage point in the second half of last year, the Federal Open Market Committee has been holding short-term rates steady between 4.25% and 4.50%.  Chairman Powell, in a bit of cruel irony, has recently explained the Fed’s lack of action by pointing out the uncertainty of [the President’s] tariff policy and the potential for such duties to lead to higher prices.  We would also mention that core inflation remains well above the Fed’s 2% target, and that the dollar has lost more than 10% of its value relative to other currencies this year, its worst first half since 1973.  All of this makes it hard for the Fed to be accommodative.

 

Back to the stock market.  Artificial intelligence has been a big driver of some stocks, and perhaps the economy, in the last couple of years.  While there are some differences, the current environment is reminding us more and more of the late 1990s.  In both eras there was a technological development that promised to (and did) change the way things are done.  In the late ‘90s, the build-out of the Internet led to massive investment in networking equipment, semiconductors, and other tools.  There was little doubt that the Internet was here to stay, just as there is little doubt that AI isn’t going away.  If there is a better or more efficient way of completing a task or managing information, it is logical that it will supplant the old way of doing things.  That said, while the Internet had a bright future, the tech arms race eventually led to overinvestment, which eventually resulted in a crash in demand.  The tech stocks of that era priced in revenue and earnings growth as far as the eye could see, and even though the communication boom did largely come to fruition, the stocks fared poorly in the ensuing years as market expectations proved too great.

 

That era also saw a casino mentality emerge in some parts of the market, with retail investors – and even some institutions – bidding up the shares of unprofitable companies or ones with questionable business strategies.  In many cases back then, speculators knew the companies were overvalued but bought shares anyway, with the belief they could get out at a higher price.  This practice was rampant in the market for new IPOs.  Today, we have publicly traded companies that have abandoned their core businesses and become cryptocurrency treasuries.  Their main mission is to buy cryptocurrency and hold onto it as it rises in value.  Cryptocurrency isn’t a store of value, nor does it produce anything, and as such we would avoid it.  But to date, the public’s belief in it has been a self-perpetuating one that has driven the price higher.  We think crypto is closer to a pyramid scheme than to a sustainable currency, but it has taken longer to collapse than we expected.

 

Two recent examples of the casino mentality in parts of the market: two small corporations that declared they were becoming Ethereum treasury companies saw their stocks rise 433% and 694%, respectively, on the day of their announcements.

 

It is one thing for crypto treasury companies to bubble up.  It is yet another to see these entities valued at a large premium to their underlying crypto holdings.  The most prominent of these is MicroStrategy (MSTR), which abandoned its disappointing software business to focus solely on accumulating Bitcoin and now trades at a price about double the value of its Bitcoin holdings, even though the value of the enterprise is based solely on its stash of Bitcoin.  It doesn’t offer a product or service; it just buys Bitcoin – with the money it raises through securities offerings.  This shift in strategy from software purveyor to crypto treasury has taken the enterprise value (market capitalization + net debt) of MSTR from less than $1 billion in mid-2020 to $123 billion today, as the value of Bitcoin has skyrocketed.  It may not be a coincidence that the genesis of this run coincided with the massive fiscal stimulus by the federal government.

 

One of the differences of today versus the late ‘90s is the better profitability of many technology companies today.  While there are certainly examples of money-losing enterprises today trading at extreme valuations, many of the tech titans are quite profitable and produce ample cash flow.  In addition, their free cash flow margins are excellent.  That said, their capital spending has been growing at a rapid pace and taking up more and more of that cash flow.  For example, Microsoft’s annualized capital spending has grown from $28 billion to $61 billion in less than two years.  Much of this is going to the build-out of data centers.  What happens to the tech sector when this spending slows?

 

Semiconductor players like Nvidia, AMD and Broadcom have benefited greatly from the build-out of AI.  Because the market has recognized this and driven their market prices to great heights (and made Nvidia and Broadcom two of the most highly valued companies in the world), their free cash flow yields have fallen to a range of 1% to 2%, meaning a current shareholder is paying $100 for every $1-$2 of free cash flow (money available after expenses and capital spending) the company produces in a year.  If these companies continue to increase their sales and cash flow at incredibly high rates, the stocks should be OK.  But what will happen if/when they don’t?  In 2000, Cisco Systems, the leading purveyor of networking equipment and the bellwether of the Internet plays, had grown revenue and free cash flow at a remarkable pace for years, leading investors to drive the value of the company so high that the free cash flow yield was just over 1%, even though it was one of the largest companies in the world.  From that starting point, the stock performed quite poorly.  Time will tell if things play out similarly for the semiconductor stocks.

 

It will be interesting to watch the trade developments in the coming weeks.  Our sense is that this will drag out for a while rather than achieving clarity quickly.  The unpredictability could continue to be an economic headwind, but to date the economy has been relatively resilient, assisted by the activity around AI.

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Mark Oelschlager, CFA  

Oelschlager Investments ​​