A.I. Enhanced Human Insight

1st Quarter 2025 Market Review and Current Outlook Executive Summary First Quarter Review: Post-election market optimism faded due to a combination of factors, including the release of DeepSeek’s cost-effective R1 AI model in January, triggering a sell-off in large tech names, though the S&P 500 briefly hit a new high in February. Rising fears that new tariff policies will lead to slowing economic growth and reaccelerated inflation prompting a new round of profit-taking in high-performing sectors and a shift to defensive assets (Consumer Staples, Health Care, Treasuries) and international markets (Europe, China) in the second half of the quarter. Strategy Performance Highlights: AIQ’s strategies faced headwinds from the sentiment shift, underperforming due to their preference for quality growth stocks and the underweight positioning in international markets. Fixed income performance was mixed as the shorter duration profile (less interest rate risk) was a headwind given the strength in U.S. Treasuries, but the more conservative positioning from a risk standpoint was a positive. Markets Are Volatile : Recent events, including the “Liberation Day” selloff, escalating trade tensions with China and the EU, rising long-term interest rates (i.e., declines in U.S. Treasury prices), wider credit spreads (i.e., signs of increased credit risk), and negative economic revisions in the U.S., have fueled increased volatility (VIX spiked) with markets often trading on headlines and social media posts. But Have Stabilized : Markets have, however, rallied off their lows after President Trump softened his tariff stance (90-day pause, exemptions) and backed off his criticism of the Fed Chairman. Subsequent dovish FOMC comments regarding a potential June rate cut added to the relief rally. Risks Remain : Early Q1 earnings reports reveal reduced business visibility, which likely foreshadows lower spending. When combined with declining consumer confidence, government spending cuts by DOGE, and retaliatory foreign tariffs, it is reasonable to assume that domestic GDP will be under pressure for at least the next few months. The tariff situation also remains very fluid with no deals actually signed as of yet and the significant details likely to take several months to settle. Given this backdrop, estimates could be at risk, which could cause further market declines, especially given still elevated valuations. Fixed Income: Interest rates remain volatile, but within our targeted range, so we maintain a conservative stance toward both interest rate and credit risk at this juncture. Risks include a potential (but highly unlikely) US debt limit breach this summer/fall, waning foreign confidence in Treasuries (20% foreign-owned, 10% of that by China), and tariff-driven inflation. Expected Fed rate cuts in June/July may steepen the yield curve with lower short-term rates and steady longer-term rates. Strategy and Conclusion: Focus on quality growth companies, increased international exposure, less correlated assets (managed futures, structured notes), and protective puts to navigate volatility and muted equity returns. Expect rates to be higher for longer due to inflation fears but lower short-term rates by year-end. Fixed income strategy prioritizes shorter duration and higher quality, with active monitoring of economic data and readiness to adapt to unforeseen developments.

AIQ Asset Management recently completed the quarterly rebalance of both AIQ and ARC AIQ managed strategies. The primary goal of the rebalance is to routinely bring portfolios back into balance with current models to ensure client accounts are in line with their stated risk profiles and to raise funds for scheduled outflows. It also gives us an opportunity to make broad allocation changes to our models as well as adjust individual securities within each. The purpose of this note is to provide an overview of our current economic and market outlook as well as to provide a broad overview of how the portfolios are positioned to take advantage of our current outlook. Key Points: Market Volatility: Volatility: The market has experienced increased volatility of late primarily due to the uncertainty regarding new policies (e.g., tariffs, government spending) from the Trump administration. S&P Decline: The S&P 500 index saw its first 10% drop since 2023 as investors took profits, moved to the sidelines (i.e., bought Treasuries), or shifted assets internationally (where Europe has been particularly strong). Equity Investments: Investment Opportunities: Despite the market drop, we believe there are opportunities to invest in strong, growing companies at lower prices. Long Term Growth Focus: The focus is on companies with long-term growth potential, even if the overall market is uncertain. Fixed Income Investments: Safe Haven: U.S. Treasury bonds have benefited from their status as a safe investment during market turmoil. Stability: Corporate bonds have been stable, but we are watching for any signs of stress associated that might come from an economic slowdown. Portfolio Positioning: With Treasury interest rates still within our targeted range and the corporate bond market steady, there was little change in portfolio positioning. Economic Outlook: Base Case: A recession is not our base case, but a slowdown in economic activity is likely. Contributing Factors: Factors contributing to this slowdown include reduced consumer spending, significant cuts to government spending, a weaker job market, and higher prices due to tariffs. Tariffs: Impact on Prices: Tariffs are taxes on imported goods, intended to protect domestic industries but often lead to higher prices for consumers. Business & Consumer Uncertainty: The recent talk of tariffs has created uncertainty, making it difficult for businesses to plan, for consumers to budget, and for investors to analyze the potential impact. Economic Slowdown Risk: Higher prices from tariffs can reduce consumer spending and slow economic growth. Delayed Decision Making: This uncertainty has likely led to delayed decision making by all stakeholders. Government Spending: Federal Spending Cuts: The Trump administration's cuts to federal spending are aimed at reducing government size but may negatively impact economic growth. Economic Impact: Government spending is a significant part of the U.S. economy, and reductions can lead to lower near-term GDP and economic activity. Sector-Specific Effects: The cuts are expected to affect various sectors, including infrastructure and social services, potentially leading to job losses and reduced consumer confidence. Risks of Growth Slowdown and Inflation: Impact on Corporate Earnings: A slowdown in economic growth can lead to lower corporate earnings and stock market performance. Inflationary Pressures: Inflation, driven by tariffs and other factors, can erode purchasing power and increase costs for businesses (i.e., lower margins) and consumers. Stagflation Risk: The combination of slower growth and higher inflation (stagflation) poses a significant risk to the economy, making it challenging for policymakers to balance growth and price stability. Investment Strategy: Expectations: We expect this uncertain environment to lead to continued volatility in the markets. Activity: AIQ is buying growth stocks and increasing international investments to deal with this uncertain environment. Diversification and Protection: We are also adding alternative investments like managed futures to diversify and protect portfolios. Risk Management: Strategy: The strategy includes measures to protect investments from potential market downturns. Long Term Investment Approach: The goal is to minimize losses and be ready to invest more when the market stabilizes.