The Dividend Corner: 2025 Mid-Quarter Update

Hi, I’m Nick Puncer, Portfolio Manager and member of Bahl & Gaynor’s Investment Committee. Today is Thursday, May 15, 2025, so we are halfway through the second quarter, and we wanted to provide investors with our thoughts about the year so far and our outlook.

Markets have regained a meaningful portion of what was lost in the volatile drawdown experienced after “Liberation Day.” This advance has come via a combination of the passage of time, reversal of some policy proposals, and contours of trade policy resolution emerging so companies can return to the collective highest and best use of their resources: maximizing profits.

In our interactions with investors during this quarter, several questions are a consistent staple of our discussions. We will answer them here but also provide broader thoughts that we believe may be helpful in positioning for the future.

How are your strategies positioned to navigate the ongoing volatility driven by trade and tariff policy uncertainty and where do Bahl & Gaynor think we go from here?

This is the first question we get, usually before sitting down, and usually asked in a way that exhibits genuine concern, which is understandable.

We think it’s best to divide answering this question into two parts: first-order and then second-order effects of trade policy uncertainty.

The first-order narrative we recount is along the lines of, “Markets ended 2024 with high valuation levels, and therefore greater sensitivity to any potential change in the growth outlook. Tariffs just happened to be the particular domino flicked into this fact pattern.”

It makes sense that the first-order reaction to the growth disruption precipitated by trade policy uncertainty is the compression of the price/earnings (P/E) multiple of a very expensive market. Because Bahl & Gaynor’s strategies came into this market fact pattern with considerably lower portfolio-level valuations, part of our downside protection YTD has simply been the avoidance of an as-significant compression in P/E multiple.

But this is not the complete picture. To complete the picture, we must examine idiosyncrasies present in both the large cap and small/mid (or smid) cap portions of the equity market.

In the large-cap space, concentration in top index constituents, which include many of the Magnificent 7, contributed significantly to the indexes’ nearly 20% peak-to-trough decline. We highlighted in our Investor Letter and quarter-end edition of The Dividend Corner that not only have the top 10 constituents of the S&P 500 grown to represent 35% of the index’s market cap at 3/31/2025 (versus 17% a decade prior), but the average downside capture of these top constituents has risen to 134% versus 92% a decade ago. While the beta of the market will always be one, this does not mean its volatility is constant.

Our work in portfolio construction and fundamental analysis is heavily focused on intentionally building downside protection potential so it is present in volatile periods whenever they arise and independent of proximal cause. For our large-cap strategies, this has involved avoiding the concentration of market indexes, selecting companies with lower-volatility business models and therefore lower-volatility equity, combining portfolio constituents in such a way as to maximize the benefits of diversification, and maintaining valuation discipline. This discipline has contributed to year-to-date downside capture ratios for our large-cap strategies ranging from approximately 60% to 75% versus the S&P 500.

The smid cap portion of the equity market possesses a different form of concentration. Nearly 40% of constituents were not profitable in the last four quarters ended 1Q2025 and this figure has been rising since 1990. A lack of profitability leaves a company dependent on external sources of capital, and capital market access can be unpredictable. Growth di