Day Hagan Smart Value Strategy Update July 2025
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Summary
The DH Smart Value Portfolio continues to invest in companies producing excess returns through positive economic profitability, supported by solid balance sheets (quality), significant cash generation (profitability), and trading with considerable margins of safety (valuation). We believe these factors will continue to provide rational opportunities for the foreseeable future.
Strategy Update
U.S. equities staged a remarkable rally in June 2025, with the S&P 500 surging 4.96% for the month and notching new all-time highs, capping a powerful V-shaped rally that began in May after a turbulent spring. The rebound followed a sharp correction in March and early April, when the S&P 500 plunged more than 21% from its February intraday peak, driven by fears of recession and market turmoil triggered by aggressive tariff policies and geopolitical uncertainty. The administration’s decision to postpone “reciprocal tariffs” for 90 days in April, combined with steady economic data and easing global tensions, was pivotal in reversing sentiment and setting the stage for the rally.
Over the past three months, the S&P 500 has climbed 24% from its April lows, and the Nasdaq Composite, buoyed by renewed enthusiasm for artificial intelligence and technology stocks, soared nearly 33% since April 8, underscoring the outsized influence of growth-oriented sectors. The rally was broad-based, with nine of the S&P 500’s eleven sectors posting gains in June. Technology, Industrials, and Financials led the charge, signaling underlying economic strength and investor confidence in cyclical growth. Technology stocks, in particular, benefited from revived optimism around AI and digital transformation, while Industrials and Financials reflected expectations for continued economic expansion and robust corporate earnings.
Growth stocks outperformed value stocks during the rebound, with large-cap growth rising 17.8% and small-cap growth up 12% in the second quarter alone. This performance gap was fueled by a combination of falling Treasury yields, easing inflation fears, and the perception that growth companies are best positioned to capitalize on technological disruption and resilient demand. Small-cap stocks also participated in the rally, though to a lesser extent, as the S&P SmallCap 600 posted a 3.85% gain in June but remained down 5.29% year-to-date, reflecting ongoing challenges in the domestic economy and tighter financial conditions for smaller firms.
Internationally, U.S. equities attracted significant inflows as the U.S. dollar posted its largest six-month decline since 2009, making American assets more attractive (less expensive) to foreign investors and supporting higher valuations. This global demand, combined with robust corporate earnings expectations—S&P 500 EPS is forecast to grow 5% in Q2—helped propel the market higher, even as valuations reached elevated levels. The S&P 500’s market capitalization increased by $2.3 trillion in June alone, reaching a record $52.5 trillion.
Geopolitical developments played a critical role. The postponement of tariffs, ongoing negotiations between the U.S. and China, and a temporary easing of tensions in Eastern Europe all contributed to reduced volatility and a more constructive outlook for risk assets.
Investors also drew confidence from Federal Reserve commentary, which signaled patience on rate hikes and a willingness to support financial market stability in the face of lingering inflation and labor market uncertainty.
Sector performance in June reflected the shifting macroeconomic landscape. Technology led the way, buoyed by AI optimism and strong earnings, while Industrials and Communication Services-related companies benefited from improved growth prospects and lower interest rates. Consumer Discretionary stocks also posted strong gains, driven by resilient consumer spending and easing inflation pressures. In contrast, Utilities and Consumer Staples lagged, as investors rotated out of defensive sectors in favor of higher-growth opportunities. Energy stocks saw a mixed performance, as oil prices reversed lower following a mid-month spike despite ongoing geopolitical risks.
Looking ahead, investors are mindful of potential headwinds, including the looming expiration of the tariff suspension and the next round of corporate earnings reports, which will test the durability of the recent rally. Nevertheless, the combination of easing macroeconomic fears, strong earnings momentum, and robust global demand has positioned U.S. equities for continued leadership as the second half of 2025 begins.
U.S. value stocks appear to be a bargain at the current time, given their historically low valuation relative to the broader market and growth stocks. As of May 31, 2025, the valuation percentile for the value factor was just 18%, meaning value stocks are cheaper than they have been about 82% of the time over the past several decades (source: Vanguard). In contrast, the overall U.S. equity market is notably expensive, with the S&P 500 trading at a level that is between 104% and 173% above its historical fair value, depending on the valuation metric used. This stark disparity highlights how value stocks have lagged the broader market’s rally, particularly as growth and technology stocks have driven much of the recent gains.
This is further supported by low price-to-earnings (P/E), price-to-book (P/B), and price-to-sales (P/S) ratios for value stocks compared to industry averages, signaling attractive entry points for long-term investors. While valuations alone are not a guarantee of near-term outperformance, history suggests that such low relative valuations can set the stage for strong returns over the long run as market cycles shift and earnings growth broadens beyond mega-cap growth leaders
Earnings season for June was limited, as the bulk of S&P 500 companies are set to report in mid-July. However, early reporters from the consumer discretionary and technology sectors generally delivered results above expectations, citing resilient demand and effective cost controls. For example, select semiconductor and software companies announced double-digit revenue growth, attributing gains to continued AI investment and robust enterprise spending. In the consumer sector, retailers that reported in June noted steady sales and improved margins, helped by easing supply chain pressures and stable input costs.
The Federal Reserve’s decision to hold rates steady, combined with expectations for a potential rate cut in September, supported risk appetite and helped compress volatility. Meanwhile, S&P 500 corporate earnings are forecast to grow 5% in Q2, and profits hit new highs in Q1, up 13.6% year-over-year. This earnings strength, alongside improving economic data and a pause in new tariffs, fueled confidence in further market gains.
Technology and Communication Services stocks within our portfolio, such as Alphabet (GOOGL), Meta (META), Amazon (AMZN), Salesforce (CRM), Cisco (CSCO), Cognizant (CTSH), Dropbox (DBX), Amdocs (DOX), Qualcomm (QCOM), and Zoom (ZM) benefited from continued enthusiasm around artificial intelligence, digital transformation, and resilient enterprise IT spending. The outperformance in June underscored strong investor demand for large-cap tech. Among these, Salesforce (CRM) reported earnings in early June, beating analyst expectations on both revenue and earnings per share, driven by robust demand for cloud-based solutions and AI-powered analytics. Cisco (CSCO) also reported in June, with results slightly above consensus, but provided cautious forward guidance due to ongoing supply chain normalization and slower growth in enterprise spending.
Consumer Discretionary and Staples sectors displayed divergent performance trends, with companies such as Starbucks (SBUX), Lululemon (LULU), Ulta Beauty (ULTA), Clorox (CLX), Hershey (HSY), PepsiCo (PEP), and J.M. Smucker (SJM) exhibiting varied results. Lululemon and Ulta Beauty reported gains in their most recent earnings announcements, underpinned by resilient consumer spending and robust same-store sales growth in their latest quarterly earnings. Early-month volatility in the apparel sector, driven by uncertainty surrounding tariff policies, moderated following recent developments, including the Vietnamese trade agreement, which has bolstered the industry's forward-looking stability. Starbucks, despite not releasing earnings in June, experienced a recovery from prior underperformance, fueled by improved foot traffic and ongoing international expansion. Defensive staples, including PepsiCo and Hershey, maintained consistent performance, supported by steady demand and effective cost management strategies.
Financials, including BlackRock (BLK), Bank of New York Mellon (BK), Goldman Sachs (GS), JPMorgan Chase (JPM), Berkshire Hathaway (BRK.B), and SEI Investments (SEIC) benefited from stable credit markets and improving investor sentiment. BlackRock also reported in June, posting solid inflows into its ETF and index fund businesses, and highlighting renewed global demand for U.S. assets as the dollar weakened. JPMorgan and Goldman Sachs, though not reporting in June, were buoyed by rising capital markets activity and expectations for robust Q2 results.
Industrials and Materials such as Deere (DE), Owens Corning (OC), and Cabot (CBT) saw modest gains, reflecting improving capital expenditures and infrastructure investment. Deere continued to benefit from strong demand for agricultural equipment, while the recovery in the industrial sector supported Owens Corning and Cabot.
Healthcare was represented by Merck (MRK), which reported better-than-expected earnings in June, citing strong sales in oncology and vaccines, and reaffirmed full-year guidance. This helped the stock outperform the broader healthcare sector, which otherwise lagged the S&P 500.
Energy, Real Estate and Utilities stocks like Chevron (CVX), Coterra (CTRA), Kinder Morgan (KMI), CF Industries (CF), Public Storage (PSA), VICI Properties (VICI), National Fuel Gas (NFG), and OGE Energy (OGE) faced mixed conditions. Energy prices stabilized toward the end of the month, and while oil and gas stocks were volatile, infrastructure names like Kinder Morgan saw steady demand. Real estate investment trusts (REITs) like PSA and VICI benefited from falling Treasury yields, which made their dividends more attractive.
The portfolio’s largest sector allocations are Financials, Information Technology, Communication Services, and Consumer Staples. Our target weightings versus the Russell 1000 Value Index are as follows: Information Technology 17.6% vs. 10.5% benchmark, Healthcare 1.2% vs. 11.5%, Financials 15.4% vs. 22.7%, Consumer Discretionary 6.0% vs. 7.7%, Communication Services 14.5% vs. 7.5%, Industrials 4.7% vs. 13.2%, Consumer Staples 7.9% vs. 8.1%, Energy 5.6% vs. 5.9%, Utilities 4.8% vs. 4.3%, Materials 4.3% vs. 4.2% and Real Estate 6.0% vs. 4.2%.
The portfolio is a well-diversified mix of high-quality U.S. large- and mid-cap stocks spanning all major sectors of the S&P 500. It includes leading companies in the technology, consumer discretionary, consumer staples, financials, healthcare, industrials, energy, materials, utilities, and real estate sectors. The portfolio features globally recognized growth names like Alphabet (GOOGL), Meta (META), Amazon (AMZN), and Salesforce (CRM), which provide exposure to innovation and digital transformation trends. It also holds strong consumer brands such as Starbucks (SBUX), Lululemon (LULU), PepsiCo (PEP), and Hershey (HSY), offering stability and resilience through economic cycles.
Overall, this portfolio aims to strike a balance between growth and stability by combining innovative growth companies with established blue-chip stocks and defensive sectors, making it suitable for investors seeking long-term capital appreciation through prudent diversification across the U.S. economy.
The Smart Value portfolio strategy utilizes measures of economic profitability, balance sheet sustainability, cash flow generation, valuation, economic trends, monetary liquidity, and market sentiment to make objective and rational decisions about how much capital to put at risk and where to allocate that capital.
Please let us know if you want to discuss the portfolio in more detail or learn more about our approach.
Sincerely,
Donald L. Hagan, CFA®
Regan Teague, CFA®, CFP®
Disclosure: The aforementioned positions may change at any time.
Disclosure: *Note that individuals’ percentage gains relative to those mentioned in this report may differ slightly due to portfolio size and other factors. Returns are based on a representative account. The data and analysis contained herein are provided "as is" and without warranty of any kind, either express or implied. Day Hagan Asset Management, any of its affiliates or employees, or any third-party data provider shall not have any liability for any loss sustained by anyone who has relied on the information contained in any Day Hagan Asset Management literature or marketing materials. All opinions expressed herein are subject to change without notice, and you should always obtain current information and perform due diligence before investing. Day Hagan Asset Management accounts that Day Hagan Asset Management or its affiliated companies manage, or their respective shareholders, directors, officers, and/or employees, may have long or short positions in the securities discussed herein and may purchase or sell such securities without notice. Day Hagan Asset Management uses and has historically used various methods to evaluate investments which, at times, produce contradictory recommendations with respect to the same securities. The performance of Day Hagan Asset Management’s past recommendations and model results is not a guarantee of future results. The securities mentioned in this document may not be eligible for sale in some states or countries nor be suitable for all types of investors; their value and income they produce may fluctuate and/or be adversely affected by exchange rates, interest rates, or other factors.
There is no guarantee that any investment strategy will achieve its objectives, generate dividends, or avoid losses.
For more information, please contact us at:
Day Hagan Asset Management, 1000 S. Tamiami Trail, Sarasota, FL 34236
Toll-Free: (800) 594-7930 | Office Phone: (941) 330-1702
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