With tariff turmoil continuing to dominate headlines and unsettle markets, why does your team believe value stocks could benefit under the current administration?

Tariffs are a new component – even if the details are in flux – of an economic agenda to promote reindustrialization. Interestingly, we believe tariffs can be advantageous for value stocks in two distinct ways. In the short term, tariffs are likely to benefit traditional value sectors such as health care, utilities, real estate and financials. This is because these sectors primarily generate their revenues domestically, allowing them potentially to outperform in a tariff-heavy environment. In the long term, after an initial adjustment period, tariffs could also favor a broader range of value companies, including those in the energy, basic materials and industrial sectors. These companies are poised to play a crucial role in the reindustrialization process, providing essential resources and infrastructure.

To illustrate just how different the value and growth universes are, the following chart compares the broad sector allocations of the Russell 1000 Value and Russell 1000 Growth. Altogether, the “old economy” sectors make up 58% of the Value index versus only 13% for the Growth index. While this is a very simple analysis, the point is that with information technology accounting for almost half the Growth index, there is not much room for companies that will drive reindustrialization. This is not to say that growth managers cannot depart from their benchmarks and own more old economy stocks, but value strategies are there first. For example, the Value index has six steel companies, while the Growth index only has one.

Could you elaborate on how “old economy” stocks in your strategies are poised to benefit from reindustrialization?

We are capitalizing on the tailwinds of reindustrialization in several ways. One example is Regal Rexnord, a company that helps automate factories, which would directly benefit if more factories are built in the United States. Factory automation will be more important than ever, especially as Trump 2.0 clamps down on immigration. Also, management has specific plans to improve margins and the stock trades at only 11.8x earnings before any uplift from reindustrialization. Vulcan Materials is another direct beneficiary of industrialization. Vulcan manufactures construction aggregates and supplies concrete and materials to build new factories as well as the roads that lead to them. Since aggregates are heavy and therefore expensive to ship, the company enjoys significant pricing power in its local markets, a real comfort if inflation stays elevated.

Reindustrializing will take a long time. In the meantime, won’t tariffs hurt a good swath of corporate America? How are you navigating the earnings risk from tariffs?

Like a lot of investors, we were not sure how seriously to take Trump’s promises about tariffs, but late last year we took out some insurance by adding attractively valued domestic utilities and REITs. After two years of investors focusing on AI and related themes, it helped that many defensive, domestically oriented stocks were quite inexpensive despite improving fundamentals. For example, we hold AT&T, which trades at only 12.5x earnings and carries a 4.1% dividend yield. While we do not expect rapid growth in AT&T’s earnings, wireless carriers have started raising prices, and AT&T’s management is reducing capex and has stepped up share repurchases. We also added recently to Digital Realty Trust, a data center REIT, after a temporary pullback in the stock. The demand for data centers will remain strong no matter what happens to the rest of the economy; the stock yields over 3% and trades below the private market value of its assets.

Financials – primarily banks – are the biggest weight in your portfolios. Are they also a play on Trump 2.0?

Overall, we remain constructive on the financials sector given undemanding valuations, optimism for increased M&A activity, a steeper yield curve and prospects for deregulation. Even after a strong performance run in 2024, the majority of the sector still sports valuations last seen in 2022. And, we believe the banking industry will be one of the biggest beneficiaries of the current administration. President Trump’s appointees overseeing the industry at the SEC and other agencies are much friendlier to banks and are more likely to take their side with respect to regulations. For example, the annual tests for capital adequacy – the infamous “stress tests” – will become more predictable and transparent under Trump, allowing banks to take more risks without worrying about “gotchas” from regulators.

We also welcome more openness by the new administration to bank mergers and acquisitions. To compete effectively, banks today need to make massive investments in technology. JPMorganChase is the most extreme example of this: We invest $17 billion per year in technology. Mergers are the only way smaller, regional banks can hope to keep up with the likes of JPMorganChase and other money center and super-regional banks. Indeed, the banking industry is ripe for consolidation with over 4,000 commercial banks, and many are struggling to compete against their larger peers, given size and scale. Therefore, we own regional banks like First Horizon and Comerica that we consider likely to be acquired. 

Another bank we like that should benefit from less punitive federal oversight is Wells Fargo. Seven years ago, the Federal Reserve imposed an asset cap on the company after its cross-selling scandal, which means its balance sheet is the same size as it was seven years ago, despite all the intervening inflation, while JPMorganChase’s balance sheet has grown 60% in the same span, and the broader industry closer to 40%. Wells Fargo has plenty of runway for operational improvement, and margins should increase nicely once assets resume growing and as compliance costs come down.

It sounds as though Trump 2.0 will be a boon for value stocks. Do you have any final remarks?

After several years when value has lagged growth, we understand that investors may question why value will outperform this time. Too often in the recent past, all value had going for it was low relative valuation. Now there’s a catalyst: During Trump 2.0, value is about to become more “growthy.” In our experience as investors, we have learned not to ignore important inflection points, and Trump 2.0 is one. To be sure, the inflection toward value will not be as sharp as the one we saw after the discovery of the COVID-19 vaccine, but it has the potential to be of similar magnitude.