Economic and Market Updates
It has been an excellent first half of the year for markets. So far, we continue to see the stock price of many companies appreciate, driven by strong growth in corporate profits as seen in the chart below, with current economic growth projections continuing to be very healthy.
This strong performance is not new, however. Since our 2022 lows, we have continued to see economic growth fueling stock prices to surge higher. It is important to remember that as corporate profits grow, they drive increases in company values, which then drive stock prices higher.
The main sector driving an outstanding amount of earnings growth for the S&P 500 has been the technology sector. As our world continues to apply various forms of innovation from robotics to artificial intelligence, analysts are projecting nearly 40% profit growth over the next 12 months in this sector alone, which is remarkably high. See chart below.
As for fixed income, experts originally projected two to three rate cuts this year, and current projections are that we may not have any interest rate cuts in 2026.
Stable interest rates have made it a good year to own rate-sensitive securities such as utility stocks and fixed income bonds.
Core Group Updates
During bull markets such as this one it is important that every investor retains the appropriate mix of assets for their ability to handle short-term volatility.
With that in mind, one of the most dynamic assets that an investor could have held over the course of the last decade has been stock and stock funds in quality companies that continue to grow their businesses.
For those clients who own individual common stocks, our firm takes a “Core Group” philosophy, in which we analyze, select, and monitor a group of companies that have excellent prospects for future growth, superior leadership, and are positioned well for future innovations and technological changes.
Current Core Group:
We break down this core into three categories. First, companies that focus on high growth and expansion are featured in the Dynamic Growth category. Second, companies that offer a sizable dividend while still offering substantial projected earnings growth are featured in the Growth & Income category. And third, companies which focus primarily on high dividend payments with moderate growth projections are in the Income category.
In the short term, dynamic growth stocks tend to be most volatile, but over the long-term, often produce superior returns.
Over time, companies may be dropped from our core and others added. For instance, The Home Depot, Inc., and Thermo Fisher Scientific Inc. are currently under discussion to be dropped from our core due to projections of slow future growth.
Trading Activity
A benefit of managing a limited number of the highest quality companies in the world is that our firm can constantly monitor their performance and their management strategies. Another benefit is that we don’t have to do arbitrary trading in a portfolio, as other brokerage firms do, to be sure that we happen to hit the winners in a large universe of stocks.
As a result, as a company grows over time, we don’t simply trade it away and lose that continued future growth.
Another result is that our clients pay fewer capital gains taxes because of the lower volume of trading, which triggers the tax. Related to this, we also typically select index funds for our clients to reduce trading turnover and capital gains taxes.
A large part of our firm’s guiding philosophy can be summed up by the Warren Buffet quote, “If you aren’t confident enough to own a stock for ten years, don’t even think about owning it for ten minutes.”
As licensed fiduciaries, we take into consideration each client’s intentions with their financial plan and make purposeful trims or purchases when it is in their best interest to do so.
Often, the most appropriate choice to make with investing is not choosing to buy or trim an asset, but rather to simply hold through any market rotations and short-term fluctuations, keeping the overall portfolio strategy in mind.
Excessive trading within accounts produces unnecessary taxable gains and often decreases, not increases, long-term returns.
Magnificent Micron Corporation: Why Not in Our Core?
One of the most dynamic stories this year has been the stock in an American memory chip provider, Micron Technology Inc, which is not part of our core group.
With incredible demand from data centers which support artificial intelligence, we are now experiencing a supply shortage for these memory chips, causing it to be very expensive for these data center makers to purchase chips from Micron.
The result?
The price of their stock has roughly tripled since the beginning of the year.
While we continue to recommend quality companies which are well positioned to take advantage of AI such as Nvidia, Microsoft, and Palo Alto Networks, we do not recommend an individual holding of stock in Micron.
The memory business is highly cyclical in nature and Micron does not have a significant lead in global market share. Prior shortages have been met by the memory companies building more capacity, and then prices falling and their revenues and earnings falling drastically as well.
It is worth noting that many of our clients continue to benefit from Micron’s success through funds such as the Vanguard Information Technology Fund (VGT) and the Vanguard S&P 500 fund (VOO), which offer more diversified exposure to stocks without the same risks of holding a single stock position.
Thank you for Reading!
Moving into the second half of the year, feel free to call our office or respond to this email to set up a consultation or review of your current investment plan.
We are always here to help you achieve your financial goals, and we always look forward to hearing our client’s success stories. Keep the course.
P.S. Enjoy the Dispatch? Would you like to see a specific topic covered? Send a short response to this newsletter, we always appreciate our reader’s feedback.
Warmest regards,
Dougherty Investment Advisors
A Tradition of Excellence
4048 Deltona Blvd | Spring Hill, FL 34606
