Q2 2025 Eventide CIO Update Replay: Investing in times of high uncertainty

Good afternoon. Thank you all for joining us and welcome to the Q2 2025 CIO Call with Eventide. We are so pleased to have you all join us here on this call today. Given the unusually calm nature of the markets we've been experiencing, it is possible this will be a real short call. I'm just kidding. We have a lot to cover and we desire to serve you well and our hope is that this call will bring some clarity in the midst of these uncertain times. Next slide. Speaking of uncertain times, it is important to state that while this webinar will cover various economic and market data, these are our best efforts and there's no guarantee that these views will be accurate. Next slide. To set the table, this call will speak about the markets broadly and what we refer to as the three legs of the stool.

We will aim to equip you with insights for client conversations, but this is not about Eventide investment products. For those of you who are interested in learning more about our investment strategies and how they're positioned at this time, we do invite you to join us in two weeks for a webinar titled Resilient Strategies for Volatile Markets. This will be with our Co-CIO and Senior Portfolio Manager, Dolores Bamford. Three quick ways to register. One is to use the QR code on the screen. One is to go to eventideinvestments.com/resilient-strategies or simply email your Eventide representative and we'll be sure to get you registered. And finally, one last point before we jump in here. The most common question we get during these calls is, can I access the slides? And the answer is yes. Go to eventideinvestments.com/cio-replay to get the slides. And additionally, because we get asked so often, you'll see that this is referenced on each and every slide in the presentation. Finally, if you do have any investment related questions, please do chat them in and we will do our best to get to them at the end of the call during our Q&A. And with that, it is my pleasure to hand it off to our co-founder and Co-CIO Finny.

Hey, thanks so much Mark, and thanks everyone for joining. I know this is a very challenging time in the markets and I hope that we can shed some light on some useful concepts and principles that will help you in your practice and your investing. So I'm going to begin by just giving a high level perspective on the macro economy and the market before some thoughts on positioning. I wanted to open up with this slide here because it, I think captures as well as anything the year that we've had. This is just showing the S&P 500 and it's showing this very steep drawdown that has occurred since February with lots of volatility. It has been a very challenging time for many people, and what we want to do is help us understand the what and the why, and then the how to move forward. The way I'm going to frame our time over this webinar is to do it in terms of a bear versus a bold debate. And what I'm going to do is I'm going to do my very best to give you the best bear arguments on why the market is going to head down and why there's going to be recession. And then after that I'm going to give my best arguments about why I think there is case to be made for optimism from here. And then after that we'll put that together, put both sides of the debate together in order to make some conclusions about where we're headed and how to be best positioned. So as I said, we're going to start with bear arguments. I've got a lot of bear arguments. There's no shortage in this hour that we are in. Okay, number one is the dollar has weakened considerably year to date.

Okay, this is a very interesting phenomenon and in case you don't understand why this is going on, I want to walk through it. So you can see the dollar has pretty much been on this nice downward ramp. And what's going on is as follows, we are seeing foreign markets and foreign holders of dollar denominated assets sell those assets. So to make it a little bit easier, let's pretend this is purely hypothetical that Switzerland holds stock in Apple, and let's say they see all that's going on with tariffs, they see the volatility, they're concerned about being a long-term holder in Apple, given some of the tariff concerns. And so they decide it's all hypothetical. Let's say they're going to sell Apple, so they're going to sell their apple steak, apple trades on the nasdaq, which is of course a dollar denominated exchange. And now Switzerland is going to have lots of US dollars after they've sold their apple. Well, what can they do with those dollars? You can't spend dollars in Switzerland. That's not very useful. And so what they're going to do is they're going to exchange those dollars for Swiss francs. So what they're going to do is they're going to sell those dollars and they're going to buy Swiss francs. And what that means is when they sell those dollars, that creates selling pressure, downward pressure on the currency as more and more people are trying to unload their dollars. And so on a comparative basis, the dollar would get weaker and the Swiss Franc would get stronger. And that's exactly what we've seen thus far. We are seeing foreign holders lighten up as the year has gone on, which has hurt the dollar year to date.

A second reason to see and understand why we're in this difficult position and why this might be much worse going forward, again, I'm giving you bare arguments here, is that country leaders feel disrespected On March the 20th of this year, the new Canadian Prime Minister Mark Carney said, tariffs remain until the US shows respect. And I want you to pay attention to that word respect. The Canadians felt like we, great trade partners, great allies. Why were these punishing tariffs being put in place? There was language used around annexing Canada, Canada being the 51st state, which is also somewhat belittling if you're a Canadian. And so the whole tenor was just one in which the Canadian said, Hey, where's the respect here? It got worse. On April 8th, vice president JD Vance referred to the Chinese people as peasants on an interview. And then in a speech on April 11th, president Trump gave a fairly bold speech.

It had somewhat of a mocking tone to it saying that countries are kissing his rear in order to make a tariff deal. And he described how these leaders were just begging and begging him to make a deal with that country. And again, if you're hearing this on the other side, you're not going to feel particularly good. I don't think it's a coincidence that just five days later the Chinese say that they're open to talks if the US shows respect. So it's that same word again coming now from China that the Canadians were using. There is no doubt that many leaders, both allies and then traditionally even those with whom we have a more tense relationship are feeling disrespected. This is crucial to understand in this environment, and I actually want to make a book recommendation. If you have not read this book, crucial Conversations, it is an absolute gem of a book. It is in its third edition. You can see it sold many millions of copies at this point. And this is a book that will make you a better spouse, a better parent, a better coworker, a better church member. There are going to be times where you have difficult conversations, and this book is I think one of the truly must read books that are out there. One of the quotes from the book that I've never forgotten, I've actually read the book a couple of times over the various editions and the quote reads as follows, respect is like air as long as it's present, nobody thinks about it, but if you take it away, it's all that people can think about. The instant people perceive disrespect in a conversation, the interaction is no longer about the original purpose. It is now about defending dignity. A very true statement, a very wise statement.

And what's going on right now, particularly between the US and China is the numbers don't matter. I mean the numbers at this point are so high, it's really much more about dignity and respect than it is about specific mechanics of the tariffs and how high the levels will be in this environment where there's a lot of people who feel disrespected, that is certainly contributing to a hostile environment to equities. You can see that most starkly potentially by looking at this here. So this is looking at foreigners who are visiting the United States in 2025 and they are visiting the US less. There's no doubt about that. On the left hand side, you can see six panels of graphs looking at various geographies, and this is showing the year over year visitation. And you can see as you look at March, 2025, there's been a steep drop off in foreigners wanting to come here.

It's connected to what I mentioned before about respect. If you were to average across foreign countries, it's about a 10% decline in visiting the us and this is something that you can drill down even a little bit more. If you look on the right hand side, there's a map of Europe and it's showing March 20, 25 year over year visit to the US and you can see Germany down 28% year over year. So very steep decline there. This is of course going to have some effects on the tourism industry and it's going to have effect on people who are, for example, not wanting to purchase US goods, patronize US services, et cetera. They have done additional surveys of people asking why they don't want to come to the us. And overwhelmingly it's fear and anger over President Trump's policies. 74% of these people are saying, we want to come back to the US and we hope to come back once the administration changes. So it's not like they're anti-American or anti-American people, but people are just very frustrated at some of the recent behaviors that they've seen. This means that it could be difficult for a lot of companies depending on how much they happen to patronize to foreign and overseas clients. Next, relating to all this, some people are claiming that US exceptionalism is declining. So this is another bear argument about why times will be difficult and how the recent drawdown that we've had is not going to be some V-shaped going to have some V-shaped recovery. It's going to be much more difficult. So there was a phenomenon that I hope you paid attention to this, but it happened in early April and fear was very high. We remember the day after so-called liberation day April 2nd, people were surprised at how high the tariffs were. And what we saw was we saw investors selling the 10 year bond not buying it.

What does this say about what was traditionally a safe haven? So we have been investors here since before the great financial crisis of oh 8, 0 9, and I can remember very well in oh 8, 0 9 during covid, during the various crises that we've had over the years that people around the world, US investors as well as ex-US investors will pile into the 10 year and when they buy the 10 year, that means the price of the 10 year goes up and the yield goes down. That's what it means to be a safe haven. But what we saw during period of fear was exactly the opposite. To see the dollar go down to see bond selling off and equity selling off all at the same time, this was disturbing. This has not happened since the 1970s. And a lot of people said, whoa, something here is really different than previous crises. Other people have added to this that they believe the US is weakening in the rule of law. It's becoming more about who you know and trying to be friends with some person or donating to someone that things like due process have been weakened. And of course these have been America's traditional areas of strength. And so the bear argument goes is that if us exceptionalism deteriorates, then that means that its markets will follow.

Another cause of concern is that very few people have been persuaded by the logic of the tariff rates. Very quickly after the board was held up by President Trump, people figured out and they reverse engineered the formula and they calculated that it really wasn't about tariff rates, it was more about trade deficits. So in other words, if we were in a trade deficit with another country, that they would receive a high tariff. And this was the basic logic. It had nothing to do with the direct tariff rate. And then people also said, why put on tariffs on allies like Canada? President Trump in his first term was very happy about the US MCA and negotiated that agreement and said it was one of the best trade deals ever. Why is that all being ripped up with Australia? We have a trade surplus. Why are they getting a tariff if we're on the positive side?

And then when people think about some of the poor countries out there, so Bangladesh, which makes a lot of clothing for American citizens, Otho, which makes blue jeans that Levi's sells into American markets, of course they're going to be in a deficit because they just don't have much money. So they can't really buy our cars, our computers, things like that. And rather they're selling things to us at much lower prices. Why would they get these high tariffs? And it's going to obviously have devastating effects on those economies. The upshot of this is that critics take all of this and they conclude that President Trump is just going with his gut, even if it's unprincipled and hasty. Another bear argument is that President Trump is spending his political capital too early. So you can see these two lines here. And the lighter red line is his net approval rating of the economy over his first term.

And you can see generally speaking, he was positive over that term over those four years. However, just in his first couple of months here, you can see he's already lower than he's ever been in his first term as president and to have spent the political capital that you normally get in that honeymoon period when you first take over as president, people say, wow, he spent that way too fast in order to get the more important agenda items done, which some people would hope for more deregulation, less taxes, et cetera. Compounding. This is looking at the approval of independence. So this is just showing by group, by Democrats, independents and Republicans, which groups approve and disapprove of Trump's recent tariffs. And interestingly, when he began at his inauguration in January, independence were basically balanced. They were roughly neutral in terms of his tariffs. However, that has swung dramatically and now by roughly a two to one ratio, independents are disapproving.

And of course both Republicans and Democrats know this, they're paying attention to this and they're thinking what is around the corner with midterms? In addition, a lot of people believe that Trump hasn't thought through the implications of this and that a lot of people haven't through the implications of this about how our imports actually are serving our debt. Okay, so let me explain this here with this little cartoon that I made. So we have the United States shown as a blue oval on the left and then China as a blue, sorry, as a red oval on the right. So let's just say that there is a flow of dollars to China in exchange for goods back to the United States. So we're buying vacuum cleaners, we're buying toys, we're buying smartphones, we're buying laptops, we're buying lots of things, and then we're putting those dollars into China's pockets and then the goods come over to the United States.

Well, just like I mentioned with that example about Switzerland, you can't use dollars in China. They have a different currency, the r and b or the one. And so what are they going to do? What they do with those dollars is they send them back to the US and they buy our debt. So those dollars come back and then they buy our debt and more than 1 trillion of our debt is vested with China. And so that money actually round trips itself into investments back into our debt. And when that round trip happens, it lowers the interest rate on the debt because you have more buyers of our debt. And so without this cycle, that means that it's harder, for example, to finance the deficit. And so if we want to get to this point where this is balanced or even flowing the other way, then guess what? Our debt is going to actually go up in terms of the interest rates. Another bear argument that people have made is that US leverage and trade talks with China has overstated. I can't tell you how many times I've heard this. You've probably heard this a lot. Who has the cards? Who has the cards? And that expression has been very popular. And what you can see here is what first is China buying from the us? What are they buying from our country? So you can see they're buying things like soybeans, that's number one. And then number two is oil and gas. Those are by far the largest things that China's purchasing from us. Those are both in the category of what people call fungible. Fungible just means that there's really no difference between oil, say from the US and oil from opec. You can exchange them.

They're functionally interchangeable. Same thing about soybeans, a soybean from the US versus a soybean from Brazil. And so if for whatever reason we break trade relations, China could source its oil from OPEC or it can buy its soybeans from Brazil. This is the kind of flexibility that China has. However, when you look at what we buy from China, it's much less fungible. So it's telecommunication equipment, it's computers, it's laptops, it's electronic devices, iPhones, most iPhones come from China that can't be sourced from another place. These are much more specialized and technical purchases. And so that actually gives us less of an advantage simply because our purchases tend to be less fungible. Another bear argument is that the drivers of us outperformance, particularly over the last couple of years have been diminished. So we know that there was a lot of government spending, particularly with covid spending, and that money just sloshed around.

And when you have excess money that tends to inflate asset prices. And so now of course government spending is being curtailed with Doge and other efforts. So that takes away one of the drivers, the top 10% most wealthy were buying stocks in oh two and 2324, and now those people, they're seeing their accounts because of the recent stock market hit go down, and so they're going to be less apt to buy because they have less wealth. And then of course there's been this tremendous excitement about AI spending. These three drivers were significant contributors of the runup that we've had over the last few years. We've talked about this before on this call, how the Mag seven was a major driver of the S&P 500's outperformance, but now really all three of these are in question, or even potentially at least in this sort of digest phase, government spending is flat to down. Wealthy people aren't so excited to be buying when the markets aren't doing well, and AI is at least starting to take a pause and digest phase here. Another bear argument is that stagflation is hard for the Fed to handle, so we should all know that the Fed, of course has a dual mandate. Its mandates are to keep employment as high as they can and then also to keep inflation low IE around 2%. And so what do they do when their actions are actually at cross purposes? So for example, if you have inflation rising, you would normally think, okay, so that means the Fed should raise interest rates to contain inflation, but if unemployment is also rising, well then if they raise interest rates, that's going to make unemployment worse. So then what's the fed supposed to do? Either action they take is going to, it's going to hurt this one or the other of the dual mandates here.

And so stagflation is really kind of the worst nightmare of a central bank. Another bear argument, this is more of a long-term bear argument, is that research funding has been slashed. So some of you have heard about this direct and indirect spending and the government has decided through Trump's decisions that he wants there to be less indirect funding. It's basically when there's a grant, there is the direct cost of funding the research, but then there's the overhead costs of paying the utility bills and having the space and all of that infrastructure that's indirect. And so by cutting the indirect there, it just means there's less money all around for research, which a lot of people around here are struggling with. I'm calling you right now from Boston, and I have a good friend who leads a major department at Mass General Hospital just down the street, and he's talking about how they're all in the mode of how can we cut costs, how can we let people go because the research budget has been so severely impacted. Another bear argument, this is more of a left tail argument that there's now a heightened risk of global instability. If there is decoupling with China through this tariff war that may increase the likelihood this is a possibility. We don't know that they will want to invade Taiwan. The reason for that is that before the leverage that we would've had was, Hey, we have all this economic bilateral trade and partnership, don't invade Taiwan, otherwise we're going to boycott you and we're going to put up sanctions, et cetera. Well, if China's decoupled, then what barrier do they have to invade Taiwan? I don't think there's a lot of appetite for any country to send troops over there. And so by losing that economic partnership, there's now less leverage to keep Taiwan and dependent. Some of the tariffs are strengthening China's hand. China's trying to get more people into its orbit that increases more of the multipolar dimension to the world. And this is one that personally really saddens me. President Trump had said when he was campaigning that he would have the Ukraine, Russian War ended before he was inaugurated in the period between his election victory and his inauguration. Obviously he didn't get that done, but now frankly, I think he's so preoccupied with the tariffs over the next now a little bit less than 90 days that I think the Ukraine war is on the back burner, which is just very sad for all the innocent people whose lives continue to be ended as a result of this war. The price of oil has fallen. This is both a mixed bear and a bull argument. It is obviously good for consumers, they have to spend less at the pump. However, at these levels here you can think of 65 is roughly where breakeven is for a lot of the major oil producers.

Even the Permian is down at about $55. And so we're right near breakeven levels there. And this means that one, when the us, which is of course a net exporter of oil, is going to make a lot less money and it's going to make less money for the oil companies as well as on the tariffs on that oil. And these producers themselves are in a more precarious place. This one here is another bear argument that's especially important, and I want you to follow this slide in the next slide carefully because they can be a little bit confusing, but it's not complicated. So hang with me for this one. If we look at the share of consumers expecting rising employment, that's up five straight months and you can see it's the highest since 2009. This was during the great financial crisis. So there's this spike now where consumers are saying, we think there's going to be unemployment conditions look hard.

We're not excited about the future of the job market. So this obviously is concerning. The next chart's busy. It's by far the most complex of the whole slide deck, but track with me here what we're showing on this, and thanks to an analyst who helped make this graph with a lot of care. The black line rather is just what I showed on the previous slide. It is that consumer concern about unemployment. Okay, so that's the black line. The shaded pink bars are where there have been a recession and it doesn't take a genius to see that when there is this concern about unemployment that tends to correspond to when there's a recession. And to corroborate that, look at this line here, which is this yellow yellowish line. This line here is the unemployment and that tends to rise going into a recession. And you can see how it did here with the.com and the GFC and you can see that it's starting to rise as well. And then finally this last line here is the fed funds rate, but it's inverted, it's upside down. So when the fed is cutting, that's normally because things are slowing down and you're actually going into a recession. And that's why here you see that upward slope of the Fed funds rate going into the recession. You see that very consistently. And of course that's beginning to happen started in 2024. So you look at this and you think, man, this sure looks like a pretty clear picture that we're heading into a recession.

There are betting markets out there that are now I think very significant for many reasons. I talked a lot about betting markets when it was election season. The betting markets in general have been more accurate than even the pundits, and here is a betting market. This is one of many that is you can bet on the odds of a recession and you can see what happened once liberation day happened, the betting markets skyrocketed in the probability recession. It's now around 50 50. I will say this is roughly the consensus of where professional economists are. They're basically saying it's a coin toss roughly 50 50, whether or not there'll be a recession going sometime over the next year when the year began, the odds of recession were very low, the economy was doing fine. However, now there's a lot of concern about this, which I'm sure you've heard about.

Okay, I gave you a lot of various arguments. I know that was a lot, but I told you that I wanted to do my best to give you as honest and as full orbed a picture as I could of the case for being bearish. Now, let's flip this and let's ask how might the situation actually be bullish? And then as I said, we'll connect this to positioning. Okay? The first is that, and I think this is underplayed. I think President Trump really wants an impressive positive legacy. So much of course of the future depends on his own mind and his own decisions, which are inscrutable for us, we don't really know. So this is all speculation, but my own read of the situation is that his attempt to annex Canada to take Greenland, to build out Gaza, these are all his way to try to say, I want to leave my mark.

I want to leave my legacy on the future of the United States. He does not want his legacy to be January 6th. He wants it to be much more positive. Of course, anyone would, and he knows that he was elected with a mandate to improve affordability. He talked about that a lot. JD Vance talked about that a lot, and he also knows that recent actions are doing the opposite. He knows that very well and he knows that there is this wave coming post tariffs that are going to increase costs significantly for consumers. He's now talking a lot more about this word flexibility, and this was after the market damage post April 2nd. I think he was more shaken than maybe is obvious to the outside world, but he did change, and he did use that word. He said, oh, I saw the bond market got yippy. He wants to create a pro-business environment. He's a businessman. He wants this very much. And he knows that business leaders don't like all the uncertainty. And then people who are very close to him like Elon Musk, Elon Musk has tweeted that he thinks there shouldn't be a tariff with Europe. He's unhappy with that. Elon Musk, of course, wants to sell his Teslas to places like Europe. And so Trump feels these forces even though he may not exude it as much on camera. Next bull argument is are we at peak policy uncertainty? This is a fascinating website here where they have figured out how to take policy and graph the uncertainty there. And you can see here going out to the nineties how we generally didn't have that much uncertainty, but there was a spike that happened around the time of covid where as we all remember, there was a lot of policy uncertainty, and of course we're right now in the middle of that as well. And these peaks, as peaks often do, where it's peaks in the VIX or peaks in and just fear indices in general tend to be good buying opportunities. And so it is likely that things will get more certain with time, not less certain. I know it's very scary right now, everybody feels it, but this is I think at least a reasonable guess or a reasonable speculation. President Trump knows that the clock is ticking, midterms are not that far away, and he himself declared there's going to be this 90 day period where he has basically created urgency for him to get deals done. I think he wants to show that this was all worth it to say like, Hey, I got this deal with this country and this deal with the eu, et cetera, and somehow declare victory. He knows that this is not something to dilly dally with and I think he fears his legacy being tarnished.

Another bullish argument is that it seems like Scott Besant is taking control. It was a little unclear in the beginning. We had Peter Navarro speaking a lot, Howard Lutnick speaking, Scott Besant, and they were saying different things even about the tariffs. Are they permanent? Are they negotiable? What have you? It seems like there has been this growing ascendancy of cent over the other two, and I think that's good for financial markets, good for investors. He understands markets very well. He's a very bright individual, and I think this is something that more and more people reading the tea leaves, as they say, are discerning that. He's the one who's exerting increasing influence in the White House. Also the 10 year yield, and I mentioned before there was this day that people were quite alarmed or this couple of days where people were quite alarmed where the 10 year yield went up because people were selling bonds.

Again, remember the price of bonds and the yield go in opposite direction. So when the yield goes up, that means that people are getting rid of their bonds. And I think Bessant saw this and said, if we let this get too far out of hand, if this goes say north of five, we could be skirting with real issues here and this could be something that causes true damage to the plumbing of the financial world here. And so there may or may not be a Trump put or a best put here, but I think it's likely. I don't think it's so much on the equity market. I think it's probably more on the 10 year yield where they're saying they both really want to see the 10 year yield come down. Trump has talked about this a lot. Besson has talked about this a lot. They know that housing affordability, business financing so much hinges on the 10 year.

And so it could well be the case that if this keeps going up, we're going to see more dramatic policy measures here. As happened post the Liberation Day market meltdown inflation has come down. It is at the point now where it's, yes, it's gradual, but it has been slowly but surely gliding down into that two handle space. This is the Fed's preferred measure of inflation, the PCE, and I think you would agree with me here that it's stable to slowly declining here. That is good news. Of course, we had so much fear about inflation last year, it seems like a long time ago, but we had a lot of fears about inflation last year that I think are generally ameliorated or it not for the tariff situation.

This here is a very, very important chart here. I have spent time on this on previous CIO calls. I hope you can go back and listen to those if you don't understand what the break even rate is. But basically the break even rate is what the bond market is saying inflation is going to be. And what you can see here over the next five years, and what you can see is as you look at what the bond market is saying, and I made this chart yesterday, so it's very current, this is, it's showing there's not high inflation ahead. The bond market does not see that. And the bond market in general has been quite accurate. Bond markets are very disciplined people. There's a lot less emotion there, certainly compared to equities. And you can see there's a very reasonable amount of inflation in that mid two range that it's seeing not runaway inflation due to tariffs.

What the market is saying is that there's going to be approximately four rate cuts in 2025. So the market is saying that it is more worried about demand weakening than it is about runaway inflation. And because it's more worried about demand weakening, that would then liberate the Fed to do rate cuts. And so I think this is a reasonable conjecture. Of course, this is very hard to put much stock in, but this is at least what the bond market is telling us is that there's going to be rate cuts. And of course we all know the saying, hopefully all know the saying, don't fight the fed when the fed is cutting. That tends to be a very good time to be investing in equities, especially in small cap in value. There's certain segments that can do really well. Growth as well, does really well. This is another really interesting and in my opinion, underappreciated bull argument, which is looking at who owns Chinese companies. Okay, so there are these so-called eight shares that stands for Hong Kong. So there's eight shares which are mainland shares, there's eight shares, H as in Hong Kong, and then there are ADRs, which are basically things that trade in the us. And what can see as you look at this is companies like Alibaba, Baidu have huge institutional ownership by US funds. And if there were a hard decoupling there and let's say US investors were forced or for whatever reason weren't investing in those companies, that would be very detrimental to the Chinese markets and that is certainly not what the Chinese want. There are more bull arguments, and I'm going to wrap these in our normal framework, which is the three legs of the stool. This is the framework that you can reliably come to these calls and get. And the three legs of the stool are sentiment, leading indicators and valuation.

And let's walk through each of these starting with sentiment. I wish this were taken after April 2nd. Unfortunately this was taken just before April 1st, and so it's really not reflective of all the drama that we've had just in the last couple of weeks. It was neutral before April 2nd, but I'm not going to put too much stock in this because I really wanted to see if it had moved down. But like I said, it was done too early. However we can compensate for that because there has since been a survey. This is a very famous survey which is done by Bank of America Merrill Lynch. It's called the FMS or the fund manager survey. And they ask the same questions every time, and what you can see is now post April 2nd, fund managers now believe that a recession is likely, this is the fourth highest reading in 20 years that this indicator has gotten.

Now this is actually a contrarian positive. If you had invested in March oh nine, you would've done really well. That was the market bottom. If you had invested in April, 2020, this was the covid bottom, you would've done really well. So this is classically how markets go when people are very afraid about a recession. That's actually when you want to be a contrarian buyer here. So this is bullish. They have another question. I didn't put the chart up here just looking at overall allocations to US equity, it's the fifth lowest reading in 25 years. I mean, it is bearish out there. People are really not excited about equities and not US equities valuation. Let's walk quickly through that. This is a similar story. This is also numbers just before the April 2nd date or before the April 2nd date that we had with liberation date. The S&P looks expensive.

I'm not going to spend as much time on this as I normally do, but this is basically just a way to look at equity valuation across a range of metrics as well as looking at fixed income relative to stocks. And the upshot of all this is the S&P's valuation is expensive relative to its own trading pattern. And so this is one of the reasons why I think the S&P did give up as much as it did as quickly as it did the definitions of those terms. Small cap in distinction is now below all metrics except for price to sales and EV to free cash flow. And so here we are seeing a bunch of negative signs. That means small caps are cheap relative to their own history. Small caps have really taken it on the chin. This is something I've also shown in the past. If you just compare the relative valuation of small to large, when this graph is up high, it means that large is more expensive, sorry, that small is more expensive relative to large, and when it is low, it means that small is cheap relative to large. And so what you can see is that small caps are comparatively cheap relative to large caps.

However, this does not tell the whole story. There are areas of the market that have been absolutely dropped. I mean just beaten to a pulp. So this is an ETF that tracks the pre-commercial biotech companies. So these are companies that are still running clinical trials. They're not making any money yet because they don't have an FDA approval. And what you can see is just since November, this has been cut in half from a little over 30 to just under 15. This is an all time low. This has been just a brutal experience for many CEOs. I just came out of a meeting with a CEO of a biopharma company and it is extraordinary. I mean, this has been just an extremely difficult time here as people have said, let's just shoot now, ask questions later, even though biotech is not really vulnerable, hardly at all to tariffs as well.

See, there's another reason why these companies have struggled. Another way of looking at the same phenomenon is looking at the XBI, which is the S&P biotech index. And you can see here a partitioning. Here's the red line, which is just the XBI, the commercial stage blue or doing quite a bit better than the clinical stage or pre-commercial which are in black. You can see what a stark division there is here between the two. And that just means that people are concerned that the development process and getting through the FDA and all that, they're just not sure. They're not sure what's going on. We could spend a long time here, which we won't. Talking about what's going on with RFK and all the firing that's happened at HHS Health and Human Services and FDA, there's been a lot of firing. There's just a lot of people who are very confused and unsure about what's going to be happening with these companies that don't yet have FDA approval.

I just want to show one slide very quickly on tariffs and the impact on biopharma. We have asked this of most of our companies that if not all that we've been speaking with, were circling around. I just got out of a meeting asking another CEO about this. And even if you assume a 50% tariff rate, which would be very high, and you assume that a hundred percent of these various companies products are manufactured in foreign countries. So here you can see the tickers of various biopharma companies, Regeneron Insight, Biogen, et cetera. The hit that they would take to their EPS is 5%. It's very modest, and that's just because in general with biotech, there's a big markup that they do. Their gross margins are very high, and so even if there's a change in say input cost to make the actual medicine, it doesn't really affect the profitability structure hardly at all of the whole company.

So that's not an issue. However, the issue that our industry has is not tariffs as much as regulatory and policy related. So this was a survey that was done by Morgan Stanley of a group of investors who said, what's the biggest issue that we're facing? And as you can see in purple here, the overwhelming concern is policy and regulatory. What's RFK going to do? What's the FDA going to do? Is there a path forward? All those kinds of questions are by far the most important on RFK. His views remain uncertain to the public. He says different things on different days, and it's frankly very confusing. I have been following him with great zeal since his appointment. He attended the funeral of, to his credit, he attended the funeral of a child who died of measles. In case you don't know, measles has a one in a thousand fatality rate when it infects a child. So one in a thousand is comparable to covid. So this is a very serious condition here, and you can see in this tweet that he put out, he said The best way to prevent measles is through the MMR vaccine. And I was certainly personally glad to see this. However, he took a lot of flack for it, and I thought, well, hey, maybe his views are changing. He gave a speech a few days ago to the FDA, which was much more of a conspiracy theory speech, and he called the employees of the FDA sock puppets of basically the deep state. And so he goes back and forth. It's hard to read. We are in a period of uncertainty here. We have been speaking to our companies and in general, they have been saying that their interactions with the FDA have been smooth and there hasn't been disruption there. So we will see how that all plays out. In addition, the FDA seems like it's trying to be more industry friendly. I won't get too much into the innards of this, but they have offered some kind of an olive branch. It appears to the companies to end some of the steps that were previously required about antibody related drugs. This is an area that is exploding. It is probably the hottest area in all biotech, which is how you can use antibodies either directly or through something called an A DC, an antibody drug conjugate, basically linking an antibody to a toxin in order to kill a cell. We are in the early innings of what will be probably decades of innovation around these antibodies, and they're going to continue to dramatically change how cancer and autoimmune disease are treated. Okay, let's look at the leading indicators. Leading indicators.

I wish I had better news. They continue now. They're three plus year decline. I'm still in the camp that this is that rolling recession that we have talked about before. This is Andrew Denny's term. So unfortunately not great news here. However, and this is I think where it is admittedly not going to show up in the data, but I think that there are some very interesting trends that are afoot. There is a startup firm on the west coast called Y Combinator. It's one of the premier firms that are out there, their CEO, this is amazing, is saying that a quarter of the new VC startups, 95% of the code was written by ai, past tense, was written by ai, now will be written past tense. It's already at that stage where there is a huge improvement in productivity and what AI can do to transform the best of the best, most elite tech companies that are out there.

Another very intriguing tweet here, Tesla company put out a tweet saying, one day your car rather will drive itself right to your house. You can just kick back, take a nap, read a book, watch something, and then Elon Musk added in a subtweet this year, 2025. I mean, who knows if he's exactly right here, but the progress is absolutely breathtaking. The innovations that are happening, it is very, very exciting. I continue to believe that most people don't appreciate how powerful these underlying trends are to improve productivity, and I do want to do a call on that at some point on just how powerful this is to actually boost the economy and boost the markets. But this is afoot. Eric Schmidt was the CEO of Google. He was the CEO of Google during the glory days that made Google what it is. He is no longer the CEO, but he is very active in the tech community.

And this is his own view here is he thinks that AI is under hyped, not overhyped. And he calls this the San Francisco view. He says that most of the people in the tech industry in Silicon Valley are thinking that AI is going to replace most programmers and top math grads in one year from today. Okay? This is not years away from now, but this is what they believe is coming. And he thinks that people are not paying attention to the improvements here. He thinks that in year two, recursive self-improvement begins where these algorithms start to make themselves better. And then he thinks that, and again calls this the San Francisco view that believes that there's whole communities who believe this from years three to five, artificial general intelligence or a GI will be on par with the smartest mathematicians and physicists of our age, and we would have that in our pocket.

And then year six, artificial super intelligence in theory, AI that is smarter than the sum of all humans combined. So even if he's remotely close here, this is huge for the industry. Obviously this could have tremendous effects for the very fabric of society, and it's going to be an incredible time here to be an investor. And I think there's some great ways to invest. The excitement is moving as well into not just algorithms, but into robots. I've seen so many of these. This is a recent startup that got funded at a $40 billion valuation, and they manufacture these robots. BMW contracted with them. They're going to be populating their plants with these robots. They can work 24 7 in order to do a lot of the manufacturing. That right now is done by people. Again, this is something that it is coming. It is happening. It's going to completely change the way that we make goods.

It's going to change the way we interact with the world. And so how do we position ourselves in the light of these very powerful trends? And again, I really hope to do more on this in future calls. I hope you can join about how significant this is going to be for your own time, how you manage your life, and how this is going to affect your investments. I will say that first thing on positioning is that because there's been this pre-buying, the data are going to be distorted for several months. Okay? So that means we're flying blind for a while. People have been buying all kinds of stuff because they're worried about tariffs not getting resolved, which means just lots and lots of data distortion. I mean, now we're in April. I think this is probably going to happen through July, August at least that there's just going to be such distortions that it's going to be very hard to interpret.

So I hope I have shown you that the bear case is strong. I hope I've also shown you that the bull case is strong. It's really hard to decide. And I am very sympathetic with those who say it's a coin toss. The betting markets and these economists, whether or not this is, we've already seen the bottom or if there's a new bottom to come, but here is where I really want to stress this point. Whenever there's uncertainty, what we should do, what you should do, what I should do is we should anchor on what we do know. There's a lot of uncertainty. I think I mentioned this. Uncertainty is the word of the year, but there is a lot that we can know, and we can know how the market is valuing companies. We can look up on the share price. We can times it by the number of outstanding shares.

And we can say, right now the market is valuing company A, B, C at a certain valuation. We can know that that's not an unknown quantity. And what we can do is we can compare those valuations to what typically occurs in a recession. I showed you that a lot of companies have pulled back already, okay, how much have they pulled back? And based on where the market is valuing it to today, is that an over discount or an under discount to what normally happens in a recession? And if you can do this exercise and if you can do your fundamental work, this is what we're doing here at Eventide is that now you can buy companies that have priced in a lot of bad news, maybe too much bad news or stocks that have just sold off in this very high correlation environment. Okay? So basically assume the worst.

Okay? This is what I'm going to say to you all here. Assume the worst. Assume that it's going to be a recession. It's going to be hard because you know what? I gave you a lot of credible arguments. It could be bad. Okay, maybe there's going to be some great deals and it's going to turn around, but a lot of damage has been caused disrespect, trust has been broken. It's going to take time for markets to heal. So let's be prudent, and let's just say, you know what? Let's just plan for the worst here. Let's plan for a recession and find the companies that are going to do well even in those kinds of environments, and whose valuations reflect that. And then some, okay? There is a very principled way in which you can do this kind of a screen. I'm not going to walk through this in a lot of details here, but basically you can compare the market pricing to where basically the bottom up estimate is, or what normally happens in a recession.

And you can compare, has the market overly penalized what the company would do even in a recession? And the punchline is that these are the most attractive industries here. Transportation, materials, semiconductors, automobiles and components, pharma, biotech and life sciences, tech, hardware and equipment, capital goods, financial services, banks, commercial and professional services, consumer durables and apparel. And if you can look there and be valuation sensitive and pick great companies, you should do really well. We have been through great financial crisis, we've been through covid, we've been through our shared crises, and this playbook has been a way that people have succeeded in the past. This is from my CO CIO, Dolores Sanford, great investing advice here that's good for us to take to heart in the face of heightened uncertainty, no doubt and unprecedented volatility. We remain focused and you should too, on investing in resilient and well-managed companies that can perform well through near term macroeconomic and policy related disruptions, which are a reasonable base case and are positioned well for long-term enduring growth.

I think this is a great way for us to go. Alright. In conclusion, there are many strong arguments favoring a declining market and perhaps a recession. I gave it my best to show you how severe and how scary things are, but especially factoring in valuations which are depressed, especially in certain pockets. There are good arguments that the worst is behind us. This is a unique situation to have such extreme outcomes there. And we can't know which set of arguments is correct. If anybody tells you, I know this or I know that they're wrong, they can't know. We don't have a big enough sample size of trade wars to make statements like that. It's just irresponsible. United Airlines recently gave two sets of guidances, which I thought was interesting. They gave the recession guidance and then they gave their base case more non-res recessionary guidance there.

That's the kind of thinking that I think we need to be doing. And then if we anchor on what we do know, it's prudent to allocate capital toward companies that have already priced in a recession or at least can weather recession very, very well. And then as always, a balanced long-term discipline approach is especially a wise, we have seen time and time again, people sell at the lows. They think they can time the market. Boy is it hard to do that, and it's way better to use just all the normal disciplines of rebalancing, being long-term, being disciplined, not staring at your screen too much and making yourself sick emotionally there. And over the long haul, we have seen that investors can do really well there. Alright, with that, I'm going to hand it back to my colleague, mark.

Thank you Finny, and thank you all for joining us. We do apologize that getting to the slides was a little bit challenging today, so we will follow up with a link to all of the slides today. So thank you all for your patience in that regard. Finny, we are at time, so let's just jump ahead. Two slides real quickly to cover even Tide in our investment offerings. Many of you have been investors for an awful long time and we are incredibly grateful for your trust. In our team, we do now have 10 strategies ranging from mutual funds to separately managed accounts. In the last many months, we've launched a couple of ETFs, which we're thrilled about, and we also have dedicated private market strategies as well. So these overall strategies will range from growth equities to dividend oriented equities, bond funds, as well as balanced.

And so we hope those will serve you and your clients well. Let's jump ahead one more. For those of you who want to jump into those investment strategies and learn a little bit more about the positioning of them and the view today. Please join us in two weeks with Dolores Bamford Co-CIO to talk about resilient strategies for volatile markets. Here's the QR code, and we'll include this as well in the follow-up email to all of you. Again, we're so grateful for your trust and your partnership with us. Thank you, and we hope that you enjoy a great Easter and weekend.