SEI Forward.

Hi, I'm Jim Smigiel, SEI's Chief Investment Officer, here with another installment of SEI Forward.

Equity markets scaled a wall of worry in the second quarter of 2025, rallying sharply, perhaps unexpectedly from their post liberation day lows to reach all time highs. Positive developments on tariff deadlines were enough to overcome negatives on the geopolitical stage, but we start the second-half of the year with many of the very same questions.

• What will the final tariff framework look like?
• Will conflicts continue in Europe and the Middle East?
• Will the global economy avoid recession?

Given the unpredictable year we've had thus far, let's start with a review of potential market drivers where we actually have some semblance of clarity.

So what have we learned so far? First and foremost, the global trade dynamic will be changing dramatically as a result of U.S. tariffs, which reached their highest levels in more than 85 years and are likely to remain there at a minimum. We may not know the final details, but we do know we are in a new paradigm which will have implications for both global economic growth and inflation.

Next, developed government debt growth will continue unabated as fiscal and monetary stimulus are prevalent across the globe, which we see as a structural tailwind for higher longer term interest rates. Yield curves have already steepened, particularly in the U.S. and have more room to move, most notably in Europe.

Next, U.S. dollar weakness has accelerated in 2025, with greenbacks declining over 7% in the second quarter and over 10% from their 2025 highs. And this is based on tariff policies and rising deficits, slowing growth concerns and substantial stimulus outside of the United States.

Speaking of outside the United States, the divergent in equity valuations between the U.S. and the rest of the world remains wide. Though this gap has narrowed thus far in 2025, earnings have been robust in the U.S. and we'll have to see if this is the start of a new trend or just a flash in the pan.

Now let's look at how we're positioned for the latter half of the year. Our biggest changes this quarter stemmed from our recognition of rising recession risks. While our base case remains that the global economy will avoid recession, we recognize a slowing in both the hard and soft data with European stimulus coming next year and beyond in the U.S. Federal Reserve in wait and see mode, it is unclear whether the second-half of 2025 will look more like the first or second quarter.

With this as a background for our U.S. investors, we removed our overweight to broad commodities in favor of gold exposure given our positive view of supply and demand dynamics and the likelihood of a weaker U.S. dollar. In addition, we have adopted a neutral stance on longer term U.S. yields while maintaining our position for a steeper yield curve. Debt dynamics should keep longer rates range bound at best and easy monetary policy should lead to further widening between the short and longer term yields. We also remained positioned for stubborn inflation with an emphasis on longer term maturities.

In terms of equities, global diversification remains a strategic theme, as does our preference for active management, which includes value, quality and momentum factors, particularly an emphasis on value and low volatility this quarter. We also continue to expect broader participation from U.S. equity sectors and capitalizations in the latter half of the year.

Finally, credit spreads remain relatively tight, yet yields overall appear attractive. We continue to prefer securitized credits over corporate debt given the favorable risk adjusted yields. Asset classes such as CLO's look particularly interesting at this stage of the cycle.

As always, we would like to thank you for your continued support.