What to do in Times of Fear, Uncertainty, and Doubt
By consistently allocating capital to great businesses at reasonable valuations, investors can take advantage of market dislocations and strengthen the long-term return potential of their portfolios.
Dear readers,
Welcome back to the Quality Equities newsletter.
It was another action-packed week!
What’s Happening?
US equity markets delivered a mixed performance, showing signs of fatigue after a strong rally year-to-date. The S&P 500 and Nasdaq Composite hovered near record highs, buoyed by AI-driven enthusiasm and resilient mega-cap tech earnings. However, market breadth narrowed noticeably, with performance increasingly concentrated in a handful of tech giants, while smaller-cap and cyclical stocks lagged.
The Dow Jones Industrial Average slipped modestly, as investors rotated out of industrials, financials, and utilities in favor of higher-growth tech names. Overall, the mood shifted from euphoria to cautious optimism, with volatility inching higher amid growing macro and geopolitical uncertainty.
Economic data for the week was relatively light, but initial jobless claims rose to their highest level since late 2023, suggesting continued softening in the labor market. This added support to the narrative that the economy is cooling without collapsing, which is precisely what the Federal Reserve hopes to see.
However, several Fed officials reiterated a cautious tone, emphasizing the need for “more good inflation data” before cutting rates. As a result, the market has modestly tempered its expectations, now pricing in one or two cuts in the latter half of the year, most likely beginning in September or November, contingent on upcoming PCE inflation readings and employment reports.
In sector performance, energy stocks outperformed as oil prices climbed above $83 per barrel, supported by OPEC+ production discipline and rising geopolitical risk. Defense stocks also gained ground amid rising global tensions. Technology remained dominant, though profit-taking hit some of the more speculative AI names. Meanwhile, utilities, REITs, and consumer staples underperformed, reflecting reduced appetite for defensive and rate-sensitive sectors in a market still focused on growth.
A major overhang on investor sentiment came late in the week as geopolitical tensions in the Middle East escalated. Increasing hostilities between Iran and Israel, along with broader regional involvement, raised alarms about a potential large-scale conflict. The risk to global oil supply is significant (roughly 20% of the world’s oil passes through the Strait of Hormuz, a chokepoint that could be severely disrupted in a military confrontation). A broader conflict could drive oil prices well above $100 per barrel, triggering a secondary inflation wave and potentially forcing the Fed to delay or even reverse any planned rate cuts.
Markets would likely react with a sharp, risk-off move. This means equities could sell off sharply, particularly in sectors like tech, consumer discretionary, and travel, which are sensitive to inflation and economic growth expectations. Meanwhile, safe-haven assets like gold, US Treasuries, and the dollar would rally.
Historical precedents suggest that initial market reactions to war tend to be severe but may stabilize quickly if the conflict is short or contained. However, if the war drags on or draws in global powers, the effects could be longer-lasting and introduce a stagflationary environment (rising prices and slowing growth), which is particularly challenging for policymakers and equity investors alike.
Looking ahead, markets will be watching closely for upcoming PCE inflation data and additional Fed commentary.
But increasingly, the spotlight is shifting to geopolitical developments, which have the potential to reshape the macroeconomic narrative heading into the second half of 2025.
What Should You Do?
For long-term investors, periods of uncertainty (whether driven by economic data, shifting Fed policy, or geopolitical tensions) are not a reason to panic, but an opportunity to refocus on fundamentals.
Staying the course means tuning out short-term noise and remaining committed to a disciplined investment strategy. Rather than reacting emotionally to market volatility, investors should continue building positions in high-quality businesses with durable competitive advantages, strong balance sheets, and consistent free cash flow generation. These companies are best positioned to weather economic disruptions and compound value over time.
Market pullbacks, while uncomfortable in the moment, can offer attractive entry points. Long-term investors should view these dips as a chance to add to their highest conviction holdings (companies they believe will thrive over the next 5, 10, or even 20 years).
By consistently allocating capital to great businesses at reasonable valuations, investors can take advantage of market dislocations and strengthen the long-term return potential of their portfolios. Patience, quality, and discipline remain the key pillars of successful investing.