Fastest-ever recovery back to a closing high after a 15% correction

Fastest-ever recovery back to a closing high after a 15% correction

The S&P 500 had a steep correction in the early part of the quarter, as Trump’s “liberation day” announcement triggered the third bear market (or more than 20% decline) in the S&P 500 index since 2020. A subsequent reduction in trade tensions, or 90 day “pause”, helped US markets recover to new all-time highs. This marked the fastest ever recovery back to a closing high after a decline of at least 15%, according to Dow Jones Market Data. Investment banks such as UBS now believe that the US effective tariff rate will settle around 15% – well below the level envisaged by the 2 April “Liberation Day” announcement but nevertheless the highest US levels since the 1930s. The strong market recovery represents the view that the resilience of the US consumer and the adaptability of global supply chains should help cushion the blow.

In addition, the US dollar index fell to a three-year low in late June amid uncertainty over the US tariff and economic outlook. There are many perceived reasons for US dollar weakness, particularly the level of the US deficit. At around 123%, the US debt to GDP ratio is lower than Japan (exceeding 249%) and Italy (134%). The US spends the highest share of revenues on interest of the countries surveyed by the International Monetary Fund, with a net cost of debt to general government revenues of 12.5% as of May 2025.

Although the news cycle is currently focused on government levels of debt, we would encourage investors to include private and company-level debt when assessing the “stability” of a country. This is particularly relevant when considering a country like Switzerland, which has a national debt to GDP of 40% (an admirable figure!) but at the same time bank assets at 397% of GDP – leaving the country potentially vulnerable in the event of a banking crisis. The table below shows debt across these different groups within a country in addition to debt to GDP.  The table also can show the risks of just considering figures “in isolation” without thinking about context; for example, US Corporate Debt to GDP at 140% looks like a high figure, particularly when compared against other countries. It is worth noting, however, that the market capitalization of US companies as a percentage of US GDP is now around 200%, reflecting the fact many global businesses are headquartered in the US despite the majority of their sales not being there (for example, Apple’s non-North American sales account for approximately 60% of revenue).

Although short-term shifts in exchange rates can create fluctuations in portfolio values, we would encourage clients to be wary of “simple” explanations. In the long term, investments in a portfolio of companies should give clients exposure to the global economy, hopefully preserving and growing savings in the process whilst offsetting any short-term changes in currency values.

Comparing today’s top companies to the top companies in the mid-1990s

One of the things that stands out about the largest companies in the US today is that they are much more profitable than in previous years. To the end of March 2025, Meta reported a 39% net profit margin on $170bn of revenue, while Microsoft has a margin of 36% on $270bn of annual revenue. These high levels of profitability are particularly impressive when compared to some of the top performing shares in the 1990s. Even Intel’s profitability during the 1990s never exceeded 30%, while Cisco, a similarly fast-growing stock, had a net profit margin of 18% by 1997. Some of the largest companies in the mid-1990s, such as AT&T, Exxon and IBM, did not have a net profit margin above 10%. Given that today’s largest companies are much more profitable, it is perhaps justified that these companies should be more expensive.

Nevertheless, one thing to monitor is the heightened level of expense related to the boom in Artificial Intelligence spending. Amazon, Apple, Microsoft, Meta and Alphabet, plan to dramatically increase Capital Expenditure as a percentage of their sales. Microsoft, Oracle and Meta are spending more than 20% of their revenue on capital expenditure, while Amazon is spending over $90billion. The total annual amount, $400 to $500billion, is on a government-level scale. For example, the “Inflation Reduction Act” promised to spend between $40bn and $80bn a year, while the ECB’s 2011 stimulus amounted to $1trn adjusted to 2025 dollars.

While the increased spending is certainly good for the global economy, we note that capex is accounted for differently than research and development expense (more common in technology companies). Capital expenditures are not reflected immediately in the “income statement”, instead depreciating over the next three years, creating a drag on income. This drag may lower profitability in the years to come and investors will be carefully looking for signs of strong profits flowing quickly from the significant investments in AI infrastructure.

Extract from the “Pit and the Pendulum”, 2012 (Harding)

The hedge fund Winton commissioned a book, unfortunately now out of print, called The Pit and the Pendulum, a Menagerie of Speculative Follies in 2012. It has a number of stories showing the close relationship between finance and politics, as well as a number of “boom and bust” stories from across time and countries, showing their universal nature. The below extract covers a particular investment “boom” in modern-day Iran in the late 19th century:

During the Great Game, both Britain and Russia came to view Persia (modern-day Iran) as a useful buffer state and sought to conquer it through commercial means. Russia had the upper hand during the 1870s and early 1880s, but the appointment of Sir Henry Drummond Wolff as Britain’s envoy to Persia in 1888 changed that. Wolff, a firm believer in the efficacy of British capital, went straight to the Shah with plans for Persia’s material development and, by playing on the Shah’s reformist tendencies and fears of Russian domination, wangled several trade concessions for British investors.

British investors had long recognized Persia’s investment potential but, until Wolff’s mission, had eyed Persian investments warily, for the Shah in 1872 had reneged on a commitment to a major British investor and retained his GBP40,000 bond.

This mistrust was also shared by the Foreign Office, whose officials characterized Persia as “deplorably infirm”, “effete” and “even more incapable than Turkey of adopting European habits of vigorous thought or of moral sense”, concluding that “it is only important to us from its geographical position, and our interest in it must be restricted to that sole consideration”.

Wolff’s overtures to the Shah, however, managed to allay some of the investors’ concerns. Not only that the Shah agreed to return the GBP40,000 bond, but he also granted new trade concessions to Britain, including mining rights, railroad and tobacco monopolies, and the right to establish a new bank, the Imperial Bank of Persia; in addition, he guaranteed the property rights of foreign investors. Wolff arranged for the Shah to visit England in the summer of 1889 and stay  with wealthy financiers, such as the Rothschilds and Albert Sassoon, priming them first with tales of Persia’s lavish riches. The Shah’s sojourn generated a good deal of interest in Persian investment opportunities and soon speculators were confidently expecting large returns from “hot headed concessions for making or exporting every item under the sun, from telephones to tobacco and from rose-water to roulette tables”.

Prospectuses for Persian companies began to flood the London market. When the Imperial Bank of Persia was floated in October, its GBP1m capital was within a few hours subscribed 15 times over. The Persian Bank Mining Company which according to its prospectus enjoyed the “exclusive and definite privilege of working through the (Persian) Empire the iron, copper, lead, mercury, coal, petroleum, manganese, borax and asbestos mines belonging to the state” also excited much interest, as did the Imperial Tobacco Corporation (floated in 1891). Another notable flotation was that of the Anglo-Asiatic Syndicate which claimed mines and factories as well as rights to construct a carriage road and levy tolls thereon”, even though it had been set up by “two individuals of dubious reputation”.

However, these bubble companies did not last long. Shortly after the Imperial Bank converted the capital into kran (Persia’s silver-backed currency), there was a disastrous decline in the exchange rate against sterling and the dollar (instigated by the Sherman Silver Purchase Act in the US) causing the bank to lose one-third of its assets over the next five years. By 1894, the shares which had been issued at GBP12 were selling at GBP3. The Mining Company shared the same fate. Having to rely on pack mules and caravanserai routes in the absence of trains and roads meant that transportation costs were much higher than had originally been expected. The Company’s engineers also faced immense local hostility. On one occasion, a caravan was plundered and a British engineer was “seized, stripped, beaten and placed in stocks with an iron collar on his neck”.

The Tobacco Corporation fared even worse. Soon after it set up shop, a leading religious scholar declared that tobacco was unclean. Posters declaring “Death to the Infidel” and “Death to all foreigners” were posted around Tehran and Tabriz. Bazaars were closed and, following altercations between the Shah’s soldiers and a mob of mullahs, students and traders, the Europeans were forced to take refuge in their embassies. Bowing to domestic pressure the Shah revoked the tobacco concession, explaining to Wolff and the head of the ill-fated Tobacco Corporation that not doing so would very likely result in the massacre of all Christians.

The Persian bubble may not have translated into much material development but it had profound political effects. The Tobacco Protests gave religious scholars more political clout and taught Iranians that they could win against the Shah and foreign interests, paving the way for the Constitutional Revolution of 1905-07 and arguably the Islamic Revolution of 1979.

Disclaimer

I, Timothy Dowdeswell, certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

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