At Verger we take pride in our all-weather and antifragile investment approach, especially as it grounds us with a disciplined, long-term perspective on global markets. While other more speculative and short-term focused investors often discuss their approaches with language borrowed from the world of gambling, we typically steer clear of the comparison. However, given the current state of heightened uncertainty around geopolitical and economic challenges and markets’ seemingly increased comfort with the range of potential outcomes, now seems like an appropriate time to examine the quarter’s activity through the lens of chances and wagers.
Since the Global Financial Crisis, every U.S. equity sell-off has been followed by a relatively quick rebound. In this sense, U.S. equity investors have been experiencing what gamblers call a “hot streak” and, in our view, are feeling overconfident with the asset class as a result. As opposed to the many investors currently focused on betting primarily on one (U.S. equity) game, we at Verger believe that it’s important to diversify our bets. While our prize may not be as exciting as the one for those who were heavily overweight U.S. equities, we are still enjoying winnings, in the form of positive returns, and continue to be focused on finding the long-term balance between participating in market upside and protecting on the downside.
Market Review
Markets had plenty of “wild cards” this quarter. Tariff concerns peaked in early April, dragging the S&P 500 down as much as -15% YTD. Yet, in a remarkable turnaround, the U.S. equity market staged its fastest recovery on record from a sell-off of that magnitude and the S&P 500 ended “on a roll” up +6% YTD as of June 30. The VIX Index, a measure of equity volatility, peaked in early April at over 60 and declined all the way to 16 by the end of the quarter.
This strong U.S. equity rebound was partially fueled by softer tariff rhetoric, Artificial Intelligence (AI) driven earnings optimism, and strong investor sentiment. However, the macroeconomic data reveals a more complex picture. Global and U.S. economic growth has slowed, inflation remains sticky in certain areas, and consumer resilience is showing signs of fatigue. Reflecting global uncertainty around U.S. fiscal issues and the state of the U.S. economy, the U.S. dollar continued its decline in Q2 and is now off to its worst start to a year in at least 40 years.
Despite this mixed picture, U.S. equities (as represented by the S&P 500) and international equities (represented by MSCI EAFE and MSCI Emerging Markets) all had similar returns of around +11 to 12% for the quarter. Compared to their large cap counterparts, small cap stocks lagged in the U.S. but outperformed internationally. Within the U.S., growth stocks dramatically outperformed value stocks.
For U.S. bonds, high yield outperformed investment grade during the quarter. Commodities had a negative return.
Source: Bloomberg
Market Outlook
As U.S. equity markets trade at or near all-time highs, it certainly appears that investors are “all in” on this narrow subset of the global markets. Since 2020, U.S. equity inflows have been $1.2 trillion, while inflows to non-U.S. equities have been $215 billion, or approximately 6 times less (see chart below).
Source: BofA Global Research
As we’ve pointed out in previous commentaries, these large inflows have been occurring during a period when U.S. equities are becoming more and more expensive. Per the chart below, U.S. households’ equity exposure has never been greater while, at the same time, valuations are currently much higher than longer term averages. While we believe U.S. equities should be a part of any broadly diversified portfolio, we continue to wonder if investors truly appreciate the potential risks in the U.S. equity space – risks that could potentially cause valuations to revert closer to historic, average levels.
Source: Bloomberg, Macrobond, Federal Reserve Bank of St. Louis
One potential risk is tariffs. Despite market participants’ seeming dismissal of lingering worries, tariffs remain a source of uncertainty for the future of U.S. consumers, companies, and monetary policy makers. While tariff rates have come down since early April, they still remain at a historically high level (see chart below).
Source: Cato Institute, US Department of Commerce, J.P. Morgan Asset Management
It is too early to draw conclusions about the longer-term impacts of higher tariffs on both economic growth and inflation. However, we feel there is a real risk that tariffs could have the dual impact of dampening growth and pressuring prices higher, which could result in a stagflationary environment. In such an economic scenario, U.S. equities (and bonds) would potentially be vulnerable.
Possible Scenarios Combining U.S. Growth & Inflation Outcomes
Source: Apollo Chief Economist
Market Opportunities
At Verger, our approach to diversification calls for a disciplined, long-term focus and a thoughtful understanding of the bets we’re making and the appropriate size for each. We continue to believe that it’s as important as ever to have a diversified portfolio – or, in other words, to avoid going “all in” on any one market segment. At a high level, we currently see compelling opportunities in non-U.S. equities, natural resources, precious metals, reinsurance, mortgages, and emerging market debt.
As discussed earlier, investor focus on the cap-weighted S&P 500 has driven that index to very high valuations. However, per the chart below, the equal-weighted S&P 500 and mid cap stocks are trading at much more reasonable valuation levels. Within U.S. equities, our managers continue to find compelling opportunities in the mid cap space, with companies that have an attractive combination of good growth prospects and undemanding valuations.
Source: Compustat, FactSet, IBES, Goldman Sachs Global Investment Research
In the international equity space, both developed and emerging markets have outperformed the U.S. so far in 2025, and the valuations there remain more attractive than large cap U.S. equities.
For private equity, we continue to believe that carefully selected managers, focused primarily on the smaller end of the market, have significant opportunities to add value by partnering closely with management teams to professionalize operations, improve margins, and implement strategic growth initiatives. In addition, these managers have more of an ability to sell their portfolio companies “up market” to larger PE firms or strategic buyers, who are often willing to pay a valuation premium for scaled, de-risked, and well managed businesses.
We also believe that real assets continue to provide important diversification benefits in an overall portfolio. While investors may have exposure to real estate and energy, we are of the view that allocators should think more broadly and have exposure to other sub strategies such as agriculture, infrastructure, precious metals, and other commodities & materials. Notably, in a possible stagflationary environment, as previously discussed, the real assets segment could perform reasonably well.
Absolute return oriented hedge funds (for example relative value or event driven strategies), where returns are more driven by alpha instead of beta, will likely be additive to an overall portfolio in a lower return environment and/or during periods of higher volatility. Finally, within fixed income we prefer strategies such as mortgages, hedged credit, and emerging debt, as opposed to U.S. corporate credit, where we believe spreads are too tight.
Closing Thoughts
Ultimately, there’s a fundamental difference between games like poker and investing in financial markets. In poker, the range of outcomes is limited by a fixed set of cards, allowing players to estimate probabilities – however broad – with some degree of confidence. In contrast, financial markets are shaped by countless unpredictable variables across companies, countries, asset classes, and entire economic systems, making probabilities not just uncertain, but often unknowable.
We’ve often pointed out that we at Verger do not make speculative predictions about future events or market conditions. We don’t go “all in” as a matter of principle. Instead, we remain grounded in our disciplined, long-term philosophy and our nuanced approach to diversification, where we choose to focus on more than just traditional asset class labels and historical returns and, instead, analyze the underlying and evolving drivers of risk and return. Because “the stakes” are high for us, and for our non-profit investors, it is important to continue focusing on balancing upside capture and downside protection. With this balance embedded in our all-weather investment philosophy, we feel ready to continue navigating a range of idiosyncratic markets, no matter what hands (thanks for hanging in there with us as we “play” this metaphor out to the very end!) we’re dealt.
All investments involve risk, including possible loss of principal.
Not all strategies are appropriate for all investors. There is no guarantee that any particular asset allocation or mix of strategies will meet your investment objectives. Diversification does not ensure a profit or protect against a loss.
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