The Barbell Portfolio | June update
As of June 15, 2025
Another month has passed.
The portfolio continued to extend its outperformance relative to the S&P 500 in this month.
In the June update, I will provide some updates into the macro environment and market valuation.
Thereafter, the focus will be on the opportunities and risks surrounding individual stock ideas in the portfolio, what I am currently thinking about the market and how I am deploying in this environment.
Here’s what I will be covering in the update:
Macro outlook
Valuation update
The Barbell Portfolio update
Market positioning and moves
Individual stock commentary
Macro outlook
We have gone through a more in-depth macro outlook in the May update where we discussed tariffs, economic growth, inflation, labor market and Fed outlooks.
I continue to have expansion as my base case, where we see growth continuing to hold up while inflation trends continue downwards. This, in turn, enables the Fed to continue to ease monetary policy.
The odds of a recession have certainly increased due to the tariffs imposed by the Trump administration. In this case, the tariffs may result in slower economic growth and poorer sentiment, leading to a recession.
The last scenario is when inflation re-emerges, and the Fed remains on hold for rate cuts. If economic growth stalls or slows, this could result in stagflation.
The Fed continues to note a high level of uncertainty in the outlook and may be in a ‘wait and see’ mode in the near term.
There are clear downside risks to GDP growth and upside risks to inflation, and we may need more hard data to appear before the Fed takes action.
Valuation update
Before talking more about specific stock opportunities, understanding where the broader market is today is helpful.
US equities are once again back at elevated valuation levels.
As of May 30, the forward P/E ratio of the S&P 500 is 21.3x.
When we look back at the 30-year forward P/E multiple of the S&P 500, the current 2025 multiple is 1.3 standard deviations above the average of 17x.
Again looking at it from a distribution angle does make it look more extreme.
The blue box represents the 25 percentile to 75 percentile range and at 22x NTM P/E, this puts the current S&P 500 valuation at levels at the extreme percentile range.
This does suggest that the valuation multiple has to come down over time for it to be more healthy and sustainable in the long run.
There are debates about what is the appropriate forward P/E ratio of the S&P 500 today and depending on where you take a stand on the debate, you may have different views on exactly how rich valuations are today.
The current composition of companies and industries in the S&P 500 today differs from that of 30 years ago.
An increasing proportion of the S&P 500 is now what is known as the Magnificent 7 (Apple, Microsoft, Nvidia, Alphabet, Meta Platforms, Amazon and Tesla).
While at the end of 2024, these 7 companies made up almost 30% of the S&P 500, they now comprise 31% of the S&P 500 as of May 2025.
The Magnificent 7 stocks command higher P/E ratios than the average of the other 493 companies in the index as investors are willing to pay a premium for these companies' growth, margins, and competitive moats.
Furthermore, in forward P/E ratios, the expectations of future growth will be embedded in the metric.
With a larger proportion of the S&P 500 in these Magnificent 7 stocks with stronger long-term earnings growth prospects, it is no wonder that the S&P 500 may trade at a higher multiple than it did in the past.
However, there is also the camp that believes that in the long-term, the forward P/E ratio of the S&P 500 should and will revert to its mean.
There are many factors and reasons that could lead to this occurrence, including the downfall of one of the Magnificent 7.
In my view, I still think the forward P/E multiple of the S&P 500 tells us a lot about what we need to know about investor sentiment and risk appetite in the market.
Here’s how I see the markets:
Above 21x = Overvalued
Between 18x to 21x = Base case, neutral
Below 18x = Undervalued
It’s also important to realize that P/E ratios are affected by both stock prices and earnings estimates.
This means that when stock prices go down 20%, P/E ratios go down 20%.
But if both stock prices and earnings go down by 20%, then the P/E ratios actually stay the same because of the downward earnings revisions.
In conclusion, I do think that the US market is elevated now, and investors are paying a premium for each dollar of earnings generated.
This may mean that stocks with attractive risk/rewards are now harder to find due to the entire market being expensive, but there will be dislocations and opportunities, which I will make full use of.
The Barbell Portfolio update
As of June 15, 2025, The Barbell Portfolio is up +30% compared to the S&P 500’s +2%.
The outperformance of 28% as of June 15,2025 was driven mostly by stock selection.
The top 10 stocks made up 66% of the portfolio.
Out of the 10, 9 outperformed the S&P 500 and the average return was +31%.
Conviction and stock selection did the most of the work in the outperformance so far YTD.
Profit taking helped secure the gains for the year and exiting underperforming companies early helped minimize losses.
