First Quarter 2025 Mid-Quarter Update

Hi, I’m Nick Puncer, Portfolio Manager and member of Bahl & Gaynor’s Investment Committee. Today is Friday, March 7, 2025, so we are more than 2/3 of the way through the first quarter, and we wanted to provide investors with our thoughts about the year to date and outlook.

The quarter started with optimism regarding economic growth, which is understandable given the strong economic profile of the last two years and the substantial equity returns this fact pattern has supported.

But challenges have mounted, including:

• The emergence of DeepSeek as a potentially lower-cost disruptor of the US artificial intelligence ecosystem,
• Attempts to reduce fiscal spending via DOGE and congressional action; and,
• Fluid tariff policy enactment across major US trading partners.

These factors have not yet significantly affected growth, inflation, or other economic variables, but policy volatility has weighed on investor sentiment. This can eventually impact investment decisions and promote elevated volatility in equity markets.

Friday, February 21, seemed to be the first day of market action reflecting the emergence of a “growth scare”:

• Market action that day carried a distinctly defensive market tone,
• The volatile trading pattern has generally been sustained through February and into March,
• This has generally benefited our high-quality, dividend growth approach, leaving all four marketed strategies ahead of their respective benchmarks for the YTD period through March 7.

Our Investment Committee views these periods of elevated volatility as opportunistic because they generally produce investor over-reactions, which can lead to assets becoming mis-priced:

• In particular, we have been focused on the opportunity set in the Health Care and Consumer Staples sectors, where investor expectations appear to be quite low, yet business models exist within these sectors that fit our quality and shareholder capital return criteria.
• We are also aware of sectors where expectations may be lofty coming into this period of volatility, like Information Technology and Consumer Discretionary. This is not to say we are downbeat on the categories as a whole, but funding opportunistic asset mis-pricings in beaten-down sectors is often best achieved by sourcing funds from sectors where high expectations may be at risk of disappointing investors.

Taking a step back in terms of market outlook, we believe the last two years of healthy equity returns were largely driven by the upside surprise of avoiding recession. We suspect the avoidance of recession was a base case expectation for investors entering this year, which is partly evidenced by equity index targets published by the Street to begin the year that were largely ahead of levels achieved by the end of 2024.

All of this is to say that continued disruption to the narrative of a “no recession scenario” could sustain volatility like what we are seeing now.

To manage this risk, we focus on owning reasonably priced assets, with a low-volatility source of return in the form of dividends and dividend growth, and underlying business models capable of compounding throughout economic cycles.

We do think that active management possesses an advantage of choosing risk exposures in a volatile environment, and we do see ample opportunity for our style of investing to add value across the market cap range.

On that note, we will conclude by inviting you to review two recent and brief white paper publications: “Big Reasons to Think Small – Volume 2,” and “Market Concentration: At the Tipping Point?” on our website under the Insights tab.

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