Otso Monthly – July 2025
How did we do?
July was relatively calm. At least compared to the prior months of significant trade volatility. Otso performed reasonably in July. After fees, we delivered a 3.61% return in AUD terms (benchmark was 3.58%), and a 2.33% return in USD terms (benchmark was 2.30%). That is, we marginally beat the S&P500 benchmark net of fees.
What happened in July?
The market did well in July. The S&P500 rose around 2.3%, increasingly relatively consistently throughout the month. The USD also strengthened in July, bolstering the value of the fund’s US holdings in AUD terms.
What then moved the market in July? Well, there were several factors.
Earnings: Earnings grew around 6.4% year-on-year with 34% of the S&P500 reporting thus far, according to Factset. Assuming that earnings grew at 6.4%, earnings growth will be low by historical standards. But, it will have grown for eight consecutive quarters. Furthermore 80% of reporting companies have reported an actual EPS that is above forecasts, even if the magnitude of the earnings surprise is relatively low.
Progress towards a rate cut… hopefully: The Fed kept rates unchanged at its latest meeting. Furthermore, June CPI was 2.7% and core PCE was 2.6%. Inflation is above the Fed’s target level. However, there are some signs that employment is weakening, with significant downward revisions in employment data. Optimism remains that the Federal Reserve will start easing in September.
Growth surprised to the upside. The advance Q2 GDP estimate (July 31) printed 3.0% q/q saar, aided by trade swings as imports fell; that helped quell fears of an imminent slowdown and supported cyclicals.
Relatively quiet tariff month: July had relatively little negative tariff news. The EU and US agreed on a 15% tariff on EU goods (with the EU imposing no tariff on US goods). The EU also promised to increase investment in the US and to purchase more US energy and defense items. The agreement came on the back of a similar agreement with Japan. The progress towards trade deals has supported optimism that the US and China will progress towards a constructive outcome.
Looking forward
We remain optimistic about the US and do not believe that the US will enter a recession or that there will be a significant downturn. Indeed, in our recent interview, Diana Mousina – the deputy chief economist of AMP – also suggested that a recession in the US is unlikely.
Analysts consensus forecasts suggest an 11% upside on the S&P500 over the next 12 months. Predicting precise index levels is fraught. However, predicting directionality is less so. Only 5% of analysts maintain a sell rating on the S&P500. Given that interest rates are falling (reducing the yield on cash), we see more upside in the S&P500 than in holding cash per se. We particularly believe this to be the case when coupled with a derivative overlay strategy.
We strongly believe that talk of the end to “US exceptionalism” is greatly exaggerated. While our investment mandate restricts us to the US, we remain convinced that the US has significantly better policy settings than other “Western” markets. In short, the UK, Europe, and Australia cannot compete with the US because of their burdensome regulation and high taxes. Europe and the UK have higher personal, corporate, and capital taxes than the US. The corporate taxes directly weigh on corporate performance. The personal and capital taxes also weigh on individual incentives. In all cases, Europe and the UK have precisely the wrong policy settings to “grow the pie” so as to both encourage economic growth and performance. Unless, and until, the US starts to copy Europe (or vice versa), we remain bullish on the US relative to other “western” economies.
Going into August, our positioning remained positive beta and relatively diversified across names in the Nasdaq Composite and S&P500. Given that we tend to prefer derivative overlays, so as to enhance returns and reduce losses, we are focused on the more liquid names.