March 5, 2025

Tariff Tuesday

Tariffs have officially arrived. And the market doesn’t like them one bit.

On Tuesday, the Trump administration imposed 25% tariffs on Mexico and Canada and raised the level from 10% to 20% on China. Stocks fell as of midday on Tuesday, but not dramatically. It’s unwelcome news to a market that was already dealing with still-sticky inflation and diminished economic growth expectations.

We’ll see how this goes. It’s certainly possible that negotiations end these tariffs quickly, at least with Mexico and/or Canada. It may well be that the hardball negotiations ultimately result in lower tariffs overall and it turns out to be a good thing. But even if that turns out to be the case, there will likely be more tariff impositions and more near-term angst for a while.

The S&P 500 has moved into negative territory for the year and is below the level it was more than four months ago in late October. But the index returns are deceiving. It’s only lower because of technology, which is down by more than 7% YTD. Some sectors are having very good years. Health care and Consumer Staples are up over 8% YTD. Financials and Real Estate are up about 7% this year. In fact, nine of the other 10 sectors in the S&P are positive for the year.

Despite the tariff ugliness, most of the market is doing just fine. Overall S&P 500 earnings growth is strong and is expected to be the highest in more than three years in 2025. Technology is struggling as the high-flying artificial intelligence trade is consolidating. But that’s normal. Nothing goes straight up. And technology will fly again at some point. Meanwhile, the bull market is broadening out.

Nobody really knows what to expect from these tariffs. The market hasn’t really dealt with a significant tariff issue in modern times. There are no experts. We’ll just have to wait and see what happens. But at the very least, it seems they will deliver some degree of short-term pain.

But as long as it doesn’t develop into a huge issue, the bull market should forge on. The main risks are still a recession or interest rates spiking to new highs for the cycle. The market should be OK provided neither of those unlikely extremes occur.

Recent Activity

February 26
UnitedHealth Group Inc. (UNH) – Rating change “BUY” to “HOLD”

March 5
Constellation Energy Corporation (CEG) – Rating change “HOLD” to “BUY”

High Yield Tier

AGNC Investment Corporation (AGNC – yield 14.0%) – After a rough couple of years with rising inflation and interest rates, this mortgage REIT has returned about 14% YTD and is back near the 52-week high. Hopefully, it can keep going. The REIT reported solid earnings this quarter. Numbers were better for the full year but a little worse for the quarter as the environment took a slight step back. Spreads are still higher as the Fed Funds rate has already been cut 1% and longer rates are higher. AGNC had a bad run the last couple of years and it’s due for a significant turnaround. We’ll see if it can maintain the momentum and make a run toward the high. BUY

Brookfield Infrastructure Partners (BIP – yield 5.6%) – The infrastructure partnership reported earnings last month that beat expectations with 8% FFO (funds from operations) growth for 2024 over the prior year and 10% minus exchange rates. Brookfield also announced a 6% distribution increase, marking the 16^th consecutive year of payout increases. The business is delivering but the stock price isn’t. The stock still doesn’t go anywhere. Sure, it’s off the lows but it’s still eons below the early 2022 high. It continues to be at the mercy of the interest rate narrative and likely won’t break out until interest rates do. But it does deliver a solid income in the meantime and provides an element of defense to the portfolio. (This security generates a K1 form at tax time.) BUY

Cheniere Energy Partners, L.P. (CQP – yield 4.8%) – What crummy market? Cheniere operates the biggest liquid natural gas (LNG) export facility at a time of rising LNG demand worldwide. The stock had been pulling back in February but surged to a new high last week after beating revenue estimates on rising LNG demand. Natural gas is a strong beneficiary of rising electricity demand. It also helps that natural gas is the cleanest fossil fuel and is increasingly seen as a bridge to a clean energy future. U.S. exports of LNG are likely to continue to grow strongly and CQP is in a great position. (This security generates a K1 form at tax time.) BUY

Enterprise Product Partners (EPD – yield 6.3%) – Despite the tough market recently, EPD is within about a dollar of the 52-week high. Enterprise reported solid earnings with 7% earnings growth for the year and a 5% distribution hike, marking the 26^th consecutive year of an increase. Natural gas demand is booming, and Enterprise will continue to benefit. While most midstream energy companies took a hit last month on fears that AI energy demand will be less than anticipated, those fears are waning, and the midstream stocks are coming right back. EPD is still below the all-time high set in 2014 and can certainly move beyond that, especially with much higher earnings now. (This security generates a K1 form at tax time.) BUY

FS KKR Capital Corp. (FSK – yield 12.1%) – This Business Development Company (BDC) seemed like it would crawl slowly higher forever. But the recent specter of less-than-expected economic growth gripped the market and cyclical companies pulled back. FSK has benefited from the increased economic optimism that followed the election as it has a portfolio of small businesses that tend to be economically sensitive. The BDC is still in an uptrend that began last fall and continues to look solid. But it could pull back if these slower economic growth fears worsen. BUY

Main Street Capital Corporation (MAIN – yield 6.9%) – As a BDC, this story is very similar to that of FSK. MAIN has returned 42% over the past year but it has trended lower since the beginning of February. Main’s portfolio of companies not only makes high interest loans, but it also takes equity stakes. The equity stakes are the primary reason the total returns have been better than just about every other BDC. If the economy hangs on the BDC should continue to deliver, but if a slowing economy becomes an increasing problem the stock price will fall from here. BUY

ONEOK Inc. (OKE – yield 4.3%) – OKE is down but certainly not out. It had been rising over the past week but is getting knocked back again because of the tariff news. The midstream energy company reported earnings recently that solidly beat estimates with revenue and per-share earnings growth of 33% for the quarter. ONEOK expects 8% earnings growth in 2025, somewhat muted from the costs of the acquisitions, but 15% growth in 2026. Volume across the board is solid and getting stronger. But it has been an unforgiving market the past few days. I expect this stock to recover quickly. BUY

The Williams Companies, Inc. (WMB – yield 3.5%) – This midstream energy company stock is off the highs but hanging tough. It’s still in an uptrend that began in early 2024. WMB was riding high as a natural gas company as electricity demand expectations soared. But it took a big hit last month after the DeepSeek news. Although it recovered much of the loss, WMB is getting whacked a bit this week along with just about everything else. Energy prices are down on these tariff fears, and the sector is taking a hit. Midstream companies are falling too even though they are oil and gas price sensitive in terms of earnings. I still like midstream energy for the rest of this year, and this should be a good entry point if you don’t own the stock already. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 3.1%) – It’s a new high! Some select few stocks are actually having a good time in the current market. The biotech company has been soaring since the earnings report in January, up 26% since. The main driver from the earnings was the performance of its immunology drugs Skyrizi and Rinvoq, which collectively delivered $5.61 billion in revenue for the quarter. Those drugs alone have replaced the Humira revenue which peaked at a little over $20 billion annually. The earnings report showed AbbVie has replaced the Humira revenue and is poised for solid earnings growth. The Humira cliff had been holding the stock back. But it has been overcome now. BUY

Ally Financial Inc. (ALLY – yield 3.4%) – Although this online banker has trended mostly higher since the September selloff, it bounces around a lot. It also still hasn’t had an impressive move higher that several of its peers have had. Ally reported better-than-expected earnings last quarter and lower loan loss provisions after loan loss worries had held the stock back. ALLY was floundering badly along with most other financial stocks as a soaring interest rate narrative took hold. But it started to rally after the interest rate narrative improved. The good earnings report should have added propulsion to the upside. But that keeps not happening. Maybe it will take another good earnings report in April to get going. BUY

Broadcom Inc. (AVGO – yield 1.3%) – Ouch! The artificial intelligence trade continues to unwind and AVGO is getting crushed. It was down more than 8% last week and the fun is continuing this week so far. It is now over 27% below the high made in mid-December. It’s the first serious stumble in a while. The DeepSeek news started the slide but the overdue correction in previously red-hot AI stocks is continuing. But AVGO is being dragged down by the sector. Most of the issues don’t apply to Broadcom. Broadcom has a unique infrastructure niche that is not easily duplicated, and the stock has been successful for a very good reason: skyrocketing profits. The company reports earnings on Thursday after the bell. Recent earnings reports have propelled AVGO higher. Hopefully, this report can reverse some of the recent overdone selling. BUY

Cheniere Energy, Inc. (LNG – yield 0.9%) Earnings – Finally some good news. This natural gas exporter crushed earnings expectations last week. The company earned $4.33 per share, destroying expectations of $2.69 by 61% on record LNG production. The company will also have expanded operations to add to results this year. The stock did get a boost after the report but has since given back all the gains. The energy sector is taking a huge hit this week on lower consumer confidence and everything is getting dragged down. But LNG should persevere beyond the current selloff as the fundamentals are very strong. BUY

Rating change “HOLD” to “BUY”

Constellation Energy Corporation (CEG – yield 0.6%) – This nuclear power, and now natural gas, company stock is taking an epic beating. It’s down over 35% from the high made as recently as late January. The electricity trade has been under pressure since the DeepSeek news in late January. There has also been some movement away from nuclear stocks as the power source invites regulatory scrutiny and takes a long time to build. But Constellation became a big player in the natural gas realm too with its recent acquisition. High-flying stocks tend to be volatile. But electricity demand is still growing strongly, and Constellation is in an excellent position. I believe the buying got overdone. And now the selling is overdone. The stock is right around where it has technical support (around the $225 per share range) and there is a good chance of a bounce back. BUY

Digital Realty Trust, Inc. (DLR – yield 3.1%) – This data center REIT has been a great investment since it was added to the portfolio. But it has certainly been floundering of late. DLR spent December and January falling 16%. It was doing OK last month until it got clobbered by the DeepSeek news and possible negative repercussions on data center demand. DLR had benefitted mightily from the data center expansion prospects. The stock probably got a little too high too fast. But the future still looks extremely bright and DLR should recover going forward. Data center growth will continue to be a trend this year as the recent troubles probably fade into memory. HOLD

Eli Lilly and Company (LLY – yield 0.7%) – This is what I love about healthcare. The world could be going to Hell in a handbag, and it doesn’t bother these stocks. While the rest of the market is getting clobbered, LLY just rose to its highest level since October, back over 900 per share. Lilly did announce that it is offering higher doses of obesity drug Zepbound at lower prices. Plus, it doesn’t really matter to drug companies if the consumer is depressed. This is also a company that grew earnings by more than 100% this past year and is expected to grow them by 90% in 2025. BUY

McKesson Corporation (MCK – yield 0.4%) – Quietly, while nobody is looking, this supply chain pharmaceutical distributor has had an epic rise and is within a few dollars of the all-time high. It’s up about 35% since late September. The stock had been knocked down last summer and fall after the company reported supply chain issues with weight loss drugs. But those problems are behind the company. It should resume its old habit of slowly going higher and higher as it deals in a market that grows all by itself because of the aging population. MCK had been in an uptrend since the middle of December and has spiked higher while the rest of the market languishes. BUY

Qualcomm Inc. (QCOM – yield 2.2%) – The mobile device chip company delivered earnings with strong quarterly results and raised guidance for 2025. Revenue rose 17% for the quarter and EPS rose 24%. Both easily exceeded expectations. There was solid growth in just about every segment, including iPhone demand. And guidance was raised for this year. But there wasn’t evidence of a strong AI smartphone upgrade cycle. And that’s really what the market is looking for. Several analysts expect an upgrade cycle to ignite sometime this year. And that could really move the stock higher. But a breakout is unlikely until that event is within sight. Meanwhile, QCOM has been wallowing along with the rest of the tech sector. BUY

Toll Brothers, Inc. (TOL – yield 0.8%) – The luxury homebuilder company stock had a nice move higher in January but has lost all those gains since. After a tough couple of months, TOL moved convincingly off the recent bottom. But it has gotten eaten up by this market over the past several days. The luxury homebuilder reported earnings last week that missed expectations. As a result, TOL has plunged 37% from the high in late November.

Although the price is down to under 110 per share, analysts still have a price target of 150 per share for this year. Earnings only missed slightly and there is a lot of variation in possible outcomes over the next year. We will continue to hold for now on the possibility of a bounce back after the plethora of bad news. The recently lower mortgage rates may help that cause. HOLD

UnitedHealth Group Inc. (UNH – yield 1.6%) – UNH took another hit last month when the market wasn’t thrilled with the earnings report and the FTC accused the company, along with others, of overcharging for life-saving drugs. Earnings were mixed as revenue missed and EPS beat. However, the company also reiterated 2025 guidance. It’s been one thing after another with this one. The strong track record of outperformance leads me to believe this stock can make a move at some point. But the bad news keeps coming. It has been downgraded to a HOLD until UNH shows evidence of bottoming out. It has moved off the bottom and is one of the few stocks in the black on Tuesday, which shows some defensive chops. HOLD

Safe Income Tier

NextEra Energy (NEE – yield 3.2%) – Speaking of defensive chops, this regulated and clean energy utility has shown strength in the recent ugly market. That’s encouraging. Operational results have been good with earnings growth of 8.2% and a reiterated outlook through 2027. The utility also announced plans to restart its Duane Arnold nuclear plant and a collaboration with GE Vernova to develop natural gas fired projects across the U.S. The utility is taking advantage of the soaring electricity demand, and the projects are likely to deliver more revenue and stronger growth going forward. But this stock needs to generate more lasting upside traction. BUY

USB Depository Shares (USB-PS – yield 5.6%) – Markets like this are a good time to be in fixed income. Longer-term interest rates are falling and that should have the effect of increasing the price. The 10-year fell from 4.8% to around 4.1% and fixed income is rallying. This preferred stock has endured a tough bond market and should thrive in a good one. BUY

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 5.2%) – Ditto for VCLT. The long-term corporate bond ETF loves falling interest rates and hates rising ones. There will be more price pressure if rates continue to rise and vice versa. But the situation over the course of the year should be good. BUY

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