As has been the case over the past few years, much can change in a quarter, and such is the case for this quarter’s review of our dividend growth strategies. On the positive side, it ensures there’s always something to write about!
In this quarter’s letter, we want to add some color to what we’ve been seeing in company earnings and what picture that has given us for the state of the US Economy as we move forward.
First, let’s start with the overall market performance and some good news. US Stocks, and truly Stocks across the globe have risen at a torrid pace from the 20% selloff in early April. Reaching new highs and seeing the S&P 500 eclipse 6,000 and reaching nearly 6,500 before beginning to sell off as of the time of this writing in early August.
Make no doubt about it, the power behind equities has been two-fold: better than feared trade negotiations and the unrelenting drumbeat of earnings growth from those benefitting from the Artificial Intelligence build out. Across the Technology, Utility, and Industrial sectors, companies have seen significant growth from the capital investment and business & personal demand from AI. Moreover as the shift begins to occur from just training “models” (think ChatGPT), to creating “agents” or “products” (think automating tasks), a whole new crop of potential beneficiaries are coming to the fold.
While many of the most speculative names in these markets are not a good fit for our dividend growth strategies, we’ve seen significant growth from companies in the Semi-Conductor, Chip Manufacturing, Cloud Computing, Enterprise Software, and Power Utility businesses that we own.
The greatest source of momentum in this industry is the sheer amount of capital being invested by companies to chase leadership in this new business. Companies including Meta (Facebook), Microsoft, Amazon, Alphabet (Google), Nvidia, Tesla, AMD, Taiwan Semi Conductor, and others are together investing hundreds of billions of dollars into capital expenditures THIS YEAR to do everything from sourcing the best chips, to building data centers, to sourcing power to run it all. The sheer amount of capital being deployed is most reminiscent of the late 90’s Telecom build out, however a key difference is the companies investing generally have pristine balance sheets with seemingly no limit to the amount of capital they can raise to fund their growing businesses. Likewise, in the case of Amazon, Alphabet, and Microsoft, nearly all AI use cases today run on the “cloud”, meaning by having the best infrastructure available they are creating revenue off of serving as the “operating system” for things like ChatGPT. This is evident by the significant growth rates reported this earnings season by Amazon Web Services, Microsoft’s Azure Cloud unit, and Alphabet’s “Google Cloud Platform”. All these companies have reported very strong results this quarter. (all data and earnings
As referenced in the title of this quarter’s note, I believe we are seeing a “tale of 2 economies” and the time has come to talk about the part of the economy that isn’t all sunshine and rainbows… Underneath the optimism of the Technology Sector and its related counterparts, we’ve seen generally weak numbers across a variety of economic data and industries.
A brief sample is below:
- July Jobs numbers missed expectations and negative revisions provide negative 3 month labor totals (CNBC)
- Healthcare, one of the largest parts of the economy is suffering from higher utilization and simultaneous weakness in Medical Devices, Insurers, and Pharmaceutical Companies (Thomson One)
- Luxury Goods companies are facing increased tariffs and demand in both the US and Asia is down considerably (Seeking Alpha)
- Hotel booking data in Q1 was reported down 8% from Business Travel Magazine
- Commodity Producers including oil, gas, and synthetic chemicals have reported weak pricing and demand.
- Housing continues to grind sideways with a large cap between buyers and sellers created bloated inventory levels across the southwest and southeast housing markets.
Now, this doesn’t mean solid companies haven’t been reporting positive earnings and dividend growth. We’ve been pleased with the performance of our strategies this year. A bellwether for dividend growth investing, the Morningstar US Dividend Growth Index is up 6.46% through July 31st (Morningstar). However, the “real economy” that the majority of Americans, particularly those without significant assets, interact with is softening, and in my view the time for the Federal Reserve to cut interest rates is here.
The Federal Reserve has a two-folded mandate of stable prices and full unemployment. It is true that some prices and inflation remain above the 2% long-term trend. However, with the sheer amount of capital being deployed in AI by very strong companies, some prices will rise regardless of interest rates. Another fair point on the part of those who disagree is that the Tax Bill will stimulate growth and push inflation up. While this might be true, the cost of tariffs (which are essentially taxes regardless of who “pays them”) is largely offsetting the fiscal push of the Tax Bill.
Moreover, for those that are concerned about the inflationary impulse of tariffs, Brian Wesbury of First Trust has perhaps best articulated that Tariffs are not inflationary unless the money supply expands alongside them. All else being equal raising the price of one good will result in either less demand for that good OR less demand for other goods because the purchaser can no longer afford to buy as many goods. There will be 1-time price adjustments in many goods as the result of tariff rates as negotiations settle out, but that is not something interest rate policy can fix. High interest rates are designed to fix sustained annual increases in prices, which for many (most?) parts of the economy have been solved.
Through the hundreds of hours each quarter that Dr. Bowlin and myself spend looking at companies and data, I believe the case is clear that interest rates should be brought incrementally down from their current levels.
Finally, while there are some storm clouds in the markets, don’t take that to mean we are pessimistic about the path ahead. There continues to be a stunning amount of entrepreneurship and innovation in the markets and we anticipate some of the sectors experiencing turbulence will give us strong entry points into wonderful businesses as we manage the strategies for the years ahead.
If there is anything you’d like to discuss with me or our team, please don’t hesitate to reach out. It’s our pleasure to serve as your wealth advisors.
August 2025
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.
