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Investors are facing uncertainty as tariffs weigh on equity markets (^GSPC, ^IXIC, ^DJI) and volatility indicators, making it essential to focus on companies with solid balance sheets.
Penn Mutual Asset Management portfolio manager George Cipolloni joins Wealth to discuss how active management and tangible margins of safety can help investors navigate these turbulent times.
To watch more expert insights and analysis on the latest market action, check out more Wealth here.
You say investors need to find and hold on to real tangible margins of safety. So how do you identify those?
Hey Brian, great to see you again, and go birds. Um, so I think I think if we think about this period that we're in, we're all operating through this fog of tariffs, and it's pretty difficult and it can be scary at times. And so I think one of the things that, again, we're always proponents of active management, and I think it's a little bit more important in today's world because, you know, you want to find companies that have great balance sheets that can survive any kind of financial disruption. You want companies that have an operating margin structure that can defend themselves in a period of rising costs, which we which it looks like we're going to have today. And then you want great management teams. You want companies that have been through different cycles that have been through COVID and have operated through these different tough periods. I think if you the a few of those combination uh that combination of of tangible margins of safety, I think that can really help your portfolio.
And so, as we're waiting for some of the earnings results from some of these companies that make up components of the Magnificent 7, four of them are reporting this week. So, as we're continuing to kind of listen in for how they're assessing the environment, what do you expect to hear? What is the tenor that they could signal that might bring some calm to the broader markets?
That's a great question because they were so important over the past few years in terms of their performance and their contribution to the S&P and all the major indexes. I think the key thing is, you know, we're still going to look at this CAPEX number that that people have been talking about that I know I've been talking about in the past. We want to see how honestly bullish they are about whether it's data centers, or whether it's growth globally. I think I think again, the risk that we want to read into, and we're getting a lot of commentary, and I think this quarter is almost a throwaway for the actual numbers because of what's occurred since. So, again, the commentary is critically important because I think the main risk that hopefully everybody understands is that through this tariff period, there is the potential that in a trade war, the total pie shrinks. So I want to see signs that the pie is at least maintaining its size and and hopefully not shrinking.
And so with that in mind, you actually mentioned the kind of aggregate uh view and in perspective of earnings growth this season. According to some FactSet data for Q1 2025, the blended year-over-year earnings growth rate for the S&P 500 is 10.1%. Now, if 10.1% is the actual growth rate for the quarter, marks the second straight quarter of double-digit earnings growth reported by the index. But as you say, it's not about what companies did in the most recent or the past, but how they're signaling what the outlook looks like for the future here. And so, how, from your assessment, are companies trying to position their businesses and their financial performance amid some of that uncertainty?
Really tough because again, we're talking about a situation from a tariff standpoint that none of us have dealt with in our in our in our lives, and many managers haven't dealt with in in a very, very long period of time, uh at least from a US standpoint. And so, I think we're again, we're going through all the commentary. Now now it's really tough when you know you have GM or UPS or Skechers just say, hey look guys, we can't give you guidance. Well, we just can't do it. It's too difficult. So I think what we're trying to do quite frankly, there's there's a couple ways to approach it as investors. Number one, you could focus on businesses that just won't be as exposed. Uh there there's a domestic, for example, domestic uh HVAC commercial HVAC company that we own. They they they make everything in the US, and they sell in the US. That's pretty easy. They're not going to be exposed as much to the tariffs. They might actually benefit because their competitors will be. Or you know, a Norwegian ADR company that we own that that has a great dividend yield, that it's a web browsing company. Again, they're not going to be exposed to these tariffs. So I think that's the one track. You can absolutely try your best from a bottom-up basis to avoid the tariff impact. The other way is to maybe be a little bit contrarian and maybe take the optimistic view that, hey, look, this tariff thing isn't going to be forever, or the tariff deals may work out pretty positively. And again, there you'd have to take a contrarian stance and buy what's a little bit uglier today and hopes that things will get better and the news headlines will be better moving forward.
George Cipolloni, great to have you here with us today. Thanks so much for taking the time.