Q1 2025 / Strategy Update
For the first time in years, Artificial Intelligence is not the focus of our quarterly letter to clients. We wish it was.
Instead, the story in Q1—as every client reading this letter knows—was tariffs. On “Liberation Day” of April 2, President Trump shocked the market with punitive tariff measures on nearly every country in the world, with rates that far exceeded even the worst-case scenarios coming out of Wall Street. All told, the projected tariff rate of roughly 25% surpassed even the economically catastrophic Smoot-Hawley tariff levels of the 1930s.
Volatility tied to tariff uncertainty was already high going into this announcement. In March, WestEnd actively raised cash levels in portfolios to roughly 25%, in response to all the confusion driven by the on-again, off-again, on-again nature of tariff pronouncements.
As we wrote in our March 2025 letter to clients titled “Our Response to Economic Policy Uncertainty”:
We saw this play out in April. As downside risks became more acute, the stock market tumbled into a bear market and bond markets went haywire, with the 10-year U.S. Treasury bond yield pushing past 4.5%. President Trump went from being defiant, to saying his policies would never change, to implementing a 90-day pause on the “reciprocal tariffs.” In hitting the pause button, the worst-case scenario was taken off the table, and the relief rally was one of the strongest moves the market has ever experienced.
This was the same pattern President Trump displayed in his first term and even in year-to-date 2025. It does not mean anyone can predict what will happen next. But it does tell us not to get anchored to worst-case or best-case scenarios. Trump is liable to change his mind every day.
In watching the markets closely, we saw an opportunity on April 8 with some technical indicators flashing oversold conditions. We added four names to the Core Strategy:
Countries are spending more on defense because of global tensions and geopolitical uncertainty, especially in Europe and the U.S. We expect defense spending to keep ratcheting higher as alliances fray and tensions between the U.S. and China simmer.
The U.K.-based BAE Systems is in a strong position to benefit, with key roles in major defense projects like fighter jets, combat vehicles, and submarines.
BAE’s business is supported by growing orders in both Europe and the U.S., including long-term programs like the F-35 and ship repairs.
BAE Systems could also benefit from the Trump administration’s push for more shipbuilding in the U.S.
We think elevated interest rates will benefit Charles Schwab’s net interest income.
Current market volatility could also drive trading activity higher, positively impacting Schwab’s trading commissions.
At the same time, Schwab’s diversified revenue stream can help it benefit from the potential for lower fed funds rates, of the Fed ultimately decides to step-in to ease financial conditions. This could drive more trading and overall investment activity.
All of this could support the 20%+ EPS growth expected for this year and next.
As we wrote in a February 2025 email to clients, Palantir is a clear market leader in the world of big data analysis for enterprises and government. There is really no company in the marketplace that can better help organizations—both in government and the private sector—integrate, analyze, and visualize large and complex datasets to make informed decisions.
We have been an owner of Palantir before, as clients know, but we became increasingly concerned as Palantir’s price went parabolic largely with retail backing. At one point, the stock traded at several hundred times trailing earnings and roughly 60x 2025 revenue.
The steep sell-off in markets brought Palantir back to attractive levels, and we saw an opportunity for a new entry.
Here are a few more theses to own:
Palantir’s powerful AI platforms have become mission critical for the government and many firms in the current environment.
Its unique technology (like the ontology framework) gives it an edge in solving hard problems with answers that also improve efficiency, which currently accommodates the government's DOGE strategy.
With growing demand for AI solutions and tools that are easy for nontechnical users to adopt, it is well-positioned for long-term growth despite near-term volatility.
The Street has modeled 30%+ average annual EPS growth through 2027, driven by strong revenue growth and margin expansion.
Rheinmetall is a major defense company with strong global operations, and most of its business comes from defense.
As European countries—especially Germany—increase military spending due to rising global threats and pressure from the U.S., Rheinmetall should be a clear beneficiary of increased demand.
The company is also expanding in key markets like the U.S. and Australia, and demand for its vehicles, ammunition, and defense tech is expected to grow.
All of this is expected to drive a 50%+ average annual growth in EPS for Rheinmetall through 2027.
Where We Go From Here
As mentioned, the worst-case scenario has been taken off the table for the next 90 days. But we’re still left with a 10% universal tariff on imports and an economic stand-off between the world’s two largest economies. Beijing initially responded with retaliatory tariffs of 34% on the U.S., but since then China has raised levies on U.S. imports to 125% and President Trump has raised the tariff rate imposed on China to 145%.
The 10% universal tariff plus China tariffs brings the U.S.’s effective tariff rate back up to levels well above 20%, which as mentioned earlier in this letter are on par with the economically catastrophic levels of the 1930s Smoot Hawley era. The longer these tariffs remain in place, the higher the likelihood of recession.
At the same time, this feels like another setup where a de-escalation could lead to a major market rally. If the assumption is that we’re currently in the worst place this trade war will go, then we should see relief rallies as any modicum of good news hits the tape. Bottom line, however, is that we’re probably not out of the woods yet, which we think justifies maintaining a high cash allocation as volatility likely persists.
This is an event-driven market, meaning that asset prices are essentially in a day-to-day cycle of assessing announcements, negotiations, punitive actions, and/or de-escalation. There is not a secret set of tools investors can use to navigate this type of market. Our goal is to be patient, watch for signals, and continue looking for great companies that could end up trading at a deep discount in a volatile market.
It may take some time, but as we move further into the political cycle, there will likely be growing political pressure to achieve trade deals, see results, and shift focus toward other pro-business policies like tax cuts and deregulation. That’s where we and essentially the entire business community was hoping the Trump administration would start, but we got tariffs instead. When the focus changes, however, we think compelling opportunities will surface, and we will have cash ready to put to work.
If you have any questions about the current environment or our strategy, please do not hesitate to get in touch with us. Thank you for your continued confidence in WestEnd Capital.
Notes and Disclaimers
i Important Account Minimum Reminder: Per our management agreement, WestEnd Capital maintains a minimum account size of $500,000. If the Rheinmetall trade was not executed in your account, it is likely due to your account not meeting this minimum threshold. We remain committed to providing tailored guidance and appropriate opportunities based on each client’s individual portfolio. If you have any questions about your account or how this may apply to you, please contact us.
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