Q2 2025

July 7, 2025

The second quarter of 2025 underscored both the enduring resilience and the evolving complexity of global equity markets. Despite initial volatility driven by tariff-related concerns, markets rebounded decisively, with major indices now trading near historic highs. This upward momentum has been supported by strong corporate earnings and heightened investor enthusiasm for companies operating within the artificial intelligence (Al) sector.

While these headline trends have captured considerable attention, we believe it is equally important to consider the underlying dynamics shaping investor behavior-and to assess what these patterns may signal for the road ahead.

Investors and Market Cycles

One of the more compelling illustrations this quarter (Figure 1) compares the top ten global companies by market capitalization today to those that led in past decades. What stands out is not only who is currently leading-but who no longer is. None of the dominant firms from the 1980s or 1990s remain among today's top-tier companies. Some no longer exist in recognizable form; others have undergone significant transformation.

During their peaks, firms such as AT&T in the 1980s and Exxon in the 1990s were viewed as industry stalwarts. Their eventual decline as market leaders is less a commentary on business fundamentals and more a reflection of investor psychology. Markets tend to reward innovation and momentum-often at the expense of valuation discipline. Investors, as history demonstrates, are not immune to herd behavior, particularly when new technologies or trends appear inevitable.

Al now occupies that spotlight. Eight of the ten most valuable companies globally are Al-adjacent. In contrast, none are energy firms. This is a stark departure from the 1980s, when six of the top ten were in the energy sector, reflecting investor focus on global energy security. While the narrative has shifted, the foundational importance of energy remains firmly in place.

Figure 1

Artificial Intelligence and Oil: An Unexpected Parallel

There is a compelling irony in the rise of Al: its progress is deeply dependent on a reliable, and often carbon-based, energy supply. Al infrastructure-especially large-scale data centers-requires significant power. Setting aside environmental considerations, the reality is that fossil fuels remain the dominant energy source in an environment currently resistant to rapid alternatives.

Thus, oil continues to occupy a critical place in global affairs. While no longer featured among the world's most valuable companies, it remains a lever of influence-impacting geopolitics, infrastructure, and global supply chains. Its strategic importance, reminiscent of the 1980s, persists in ways that are both timely and consequential.

Concentration Risk and Market Trends

Figure 2 illustrates the increasing concentration of market capitalization in a narrow group of companies-exceeding even the levels witnessed during the Dot-Com bubble and the Nifty Fifty era. Today's "Magnificent Seven" are highly profitable and disruptive businesses, yet many now trade at valuation multiples that challenge historical norms.

This does not imply an imminent collapse, nor does it suggest these firms are not worthy of investment. Rather, it reinforces the need for caution. Financial markets, like fashion trends, often reward what is "in vogue," but rarely without correction. Even the largest, best-in-class companies are not exempt from the effects of overvaluation. As seen in Figure 2 below, market concentration in these companies regularly leads to longer periods of negative returns.

Figure 2

Staying Strategic in a Shifting Market

Volatility is a feature, not a flaw, of long-term investing. Some degree of drawdown is inevitable-especially when a narrow group of companies dominates the market. That's why we remain committed to building balanced portfolios across industries and sectors, with risk controls designed to weather a variety of market conditions. Income generation via dividends and interest, as well as diversification across asset classes, also helps to weather unfavorable conditions. Staying invested with intention-not impulse-is what allows us to protect and grow wealth over time.

Thank you for the trust you continue to place in us. We hope you have a wonderful summer and that you will be in touch with any questions.

Sincerely,

Janet Wills

Adam Mehrer