Market Commentary
To Infinity and Beyond
“To Infinity and beyond!” was Buzz Lightyear’s iconic catchphrase from the 1995 animated film Toy Story. In many ways, it captured the spirit of the second quarter as capital continued to flow toward technologies pushing the boundaries of innovation – from AI infrastructure and semiconductors to satellites and space exploration. Excitement surrounding satellites and space exploration accelerated following SpaceX’s record-breaking IPO, the largest in history.
Beyond launch services, investors are increasingly focused on the broader space economy, including satellite communications and potential for orbital computing over the upcoming decade. Back here on Earth, financial markets rebounded sharply in the second quarter with the S&P 500 gaining 14.9% following an announcement of a ceasefire with Iran in early April.
Semiconductors were particularly strong with the Semiconductor Index up nearly 88% for the quarter, which represented 40% of the S&P 500’s return. WTI declined by 31% in Q2 following a spike of nearly 77% in Q1. Higher oil prices raised concerns around inflation, causing interest rates to continue to rise, with the 2-year Treasury gaining 35 bp during the quarter. The Federal Reserve is no longer likely to ease interest rates despite the appointment of Kevin Warsh as the incoming Fed chair, who stressed the importance of price stability and the need to get inflation back down to the Fed’s target rate.
While semiconductors should continue to see strong demand from data center buildouts, we expect the market to broaden as inflation subsides due to lower oil prices.
Sector performance in Q2 was led by: Technology (+31.6%), Industrials (+14.5%) and Consumer Discretionary (+9.1%). Underperformers included Energy (-14.0%), Utilities (-1.2%) and Consumer Staples (-0.3%). Software showed signs of life during the quarter despite AI concerns rebounding more than 23% through May before selling off in June to end Q2 up 4.5% as measured by the S&P Software and Services Index.
Despite the first quarter’s oil-supply shock, the economy remains resilient. Corporate earnings grew 28.6%, the strongest pace in over four years, while unemployment remained low despite slower hiring. Inflation accelerated as higher energy prices flowed through the economy, leading the Federal Reserve to take a more cautious stance towards additional rate cuts. Economic growth continues despite the Iranian conflict, though Q2 GDP decelerated to an estimated 1.2% as measured by the Atlanta Fed’s GDPNow.
Growth is expected to accelerate in the second half with the end of the conflict. Inflationary impacts could prove transitory if a long-term agreement with Iran can be reached. The Federal Reserve is likely to keep its Fed Funds rate steady until it can determine whether inflation remains elevated or if this is a short-term blip.
Following Q1 weakness and the market rebound in Q2, we believe it is important to highlight the value of staying invested, as long-term returns are driven by the power of compounding. Pullbacks of 5% or greater occur on average 1.6X per year over the past thirty years, and market timing is notoriously difficult. Sharp market rebounds often occur after sell-offs, highlighting the importance of remaining invested for the long-term.
We remain disciplined in managing your portfolios, utilizing diversification to remain invested and help ensure participation in eventual recoveries. The decline in energy prices from Q1 highs could provide tailwinds for consumer spending and drive growth for cyclical sectors like Consumer Discretionary and Financials in the second half. While we remain constructive on AI and the long-term data center buildout, we believe that the strongest opportunities may become increasingly diversified as market leadership broadens.
Performance Attribution
Our top three contributors to performance for the quarter were as follows:
Palo Alto Networks (PANW 3.3% of the holdings of the fund) grew total revenue by 31% year-over-year, beating all metrics and demonstrating strength across products and services as it shifts toward a platform-centric model. In addition, RPO (Remaining Performance Obligation) grew 36%, underscoring long-term revenue visibility. The company’s products have become essential as it provides enterprise-grade cybersecurity platforms that defend modern, cloud-centric infrastructures.
Cisco Systems (CSCO 1.6%) reported revenues up 12% and GAAP EPS up 37%, driven by growth in product revenue that more than offset a slight decline in services. Product strength was most notable in CSCO’s networking portfolio, where AI infrastructure—particularly high-speed Ethernet upgrades from hyperscale cloud providers and enterprise data centers is modernizing for agentic AI workloads.
Willams Companies (WMB 2.5%) delivered record quarter results with EPS up 22%, driven by broad-based strength, particularly in the Transmission & Gulf segment. The segment increased EBITDA by 17% year over year, underscoring a shift toward more regulated, long-haul infrastructure. Management expects full-year EBITDA toward the upper half of company guidance and highlighted a robust growth pipeline including major transmission expansions.
Holdings within the portfolio that were negative contributors to performance were as follows:
AT&T (T 1.1%) reported record new adds to its fiber and fixed wireless customer base as it strategically shifts from legacy services toward fiber and 5G. T believes that a convergence of wireless-and-internet relationships creates higher lifetime value and lower churn and launched OneConnect to monetize this strategy. Revenue growth for the company was 2.7% over the last twelve months with operating margins of 19.9%, above that of the S&P’s 18.5%. However, the stock pull-back was due to the market’s skepticism that the strategy shift to converge customers to its wireless-and-internet strategy will take a long-game approach, while churn could accelerate as customers are weaned off of current discounts. In addition, there are concerns of competitive threats related to SpaceX’s talks with Charter Communications to potentially build out a consumer satellite-to-cellular mobile phone service.
Salesforce, Inc (CRM 1.3%) once again makes the top negative contributors list even though it reported a 13% year-over-year revenue increase and a 50.4% surge in adjusted EPS with strong momentum in the latest quarter. The stock was subsequently sold during the quarter. Salesforce’s AI and data integration solutions software-based products, including Agentforce and Data 360, are seeing increasing adoption among enterprise customers. Conversely, a large part of the bottom-line EPS spike was bolstered by a $25 billion accelerated share repurchase program. As it continues to be the case, the company has traded lower along with a host of software-based (SaaS) companies as the market wrestles with terminal values for seat-based licensing models. The transition to consumption-based pricing, however, should help to alleviate some concerns for those companies able to successfully navigate and evolve their pricing models. The key concern for investors is how quickly the transition can occur relative to the potential erosion of existing seat-based revenue.
TJX Companies (TJX 2.0%) reported a very strong quarter with 6% revenue growth and 29% EPS growth, all materially ahead of plan. HomeGoods was particularly strong in the quarter with 9% comps and 270 basis points of margin expansion. Internationally, TJX saw healthy comps and improved margins, with notable strength in Australia and a positive early read on its first stores in Spain. The company intends to expand its presence by 1,700 stores as it continues to expand globally. Weakness in the stock was essentially due to macroeconomic pressures and a sell-off in the consumer discretionary sector. Investor concerns rose related to inflation and rate hikes and subsequent impact on consumer spending. No idiosyncratic issues are notable for TJX at this juncture.
Activity During the Quarter
American Express (AXP 1.6%)reported solid revenue and EPS growth of 11% and 18%, respectively, in a nod toward positive payroll numbers supporting consumer resilience. Card member spending rose 10%, the strongest in three years, with broad-based growth across travel, retail and restaurants.
Taiwan Semiconductor Manufacturing Company (TSM 1.9%), continues to benefit from strong leading-edge process demand. Revenues easily beat guidance while management is confident that demand will continue to remain strong into 2027.
Arista Networks (ANET 1.9%) is also benefiting from surging demand for AI infrastructure as companies upgrade their data centers to handle massive AI workloads. Revenue growth and exceptional operating margins drove bottom-line profitability as the company’s high-speed Ethernet switching products and software subscriptions continue to grow in demand.
ASML Holding (ASML 1.7%) has a monopoly in extreme ultraviolet lithography (EUV), which are the foundational machines required to produce the world’s most advanced semiconductors. The company’s moat drives its current massive backlog and pricing power, which pushes its gross margins above 53%. Also, the growing installed base is compounding revenues within software & services, further ramping overall profitability.
UnitedHealth Group (UNH 1.8%) is showing strong earnings recovery and margin normalization after headwinds from unexpected medical utilization costs. The company actively exited unprofitable markets, right-sized premiums, and is investing in AI initiatives to boost productivity. Its depressed valuation should recover with bottom-line recovery.
Johnson & Johnson (JNJ 1.8%) is benefiting from its focus on profitability within its Innovative Medicine and MedTech divisions. Drivers of growth seen in oncology include blockbuster drugs like Darzalex and Carvykti and Icotyde for plaque psoriasis.
Purchases were funded by sales of several securities, including Tyler Technologies (TYL .63%), Accenture (ACN 1.4%), Salesforce (CRM 1.3%), Medtronic (MDT 1.2%), Abbott Labs (ABT 1.4%), CBOE Global Markets (CBOE 1.7%). and Charles Schwab (SCHW 0.99%).
Tyler Technologies (TYL .63%), Accenture (ACN 1.4%), and Salesforce (CRM 1.3%), were sold given the massive headwinds to the SAAS seat-based licensing model as investors worry that enterprise customers will bypass legacy software and build applications in-house. With this line of thinking, valuations were considered to be too high given the uncertainty of forward projections.
Medtronic (MDT 1.2%) and Abbott Labs (ABT 1.4%) were both sold given downward adjustments to full-year profit guidance due to product recalls and settlement charges for MDT related to the Flex insulin pump and continued segment shortfalls in Nutrition for ABT.
Charles Schwab (SCHW 0.99%) was sold as we shifted exposure towards companies with greater leverage to affluent consumers. We purchased AXP, whose customer base continues to demonstrate resilient spending on travel, dining, and other discretionary spending.
Call Option Premium
Volatility was elevated at the beginning of the quarter because equity investors were pricing geopolitical and inflation-tail risks rather than a normal earnings-cycle slowdown. The VIX Index had reached 28 in early April, then declined through April and May as the immediate crisis risk faded. It reached the mid-teens in June before moving higher again around renewed Iran tensions, higher yields, and technology weakness. Regardless of investor uncertainty relative to these issues, the S&P500 Index climbed the wall of worry in a powerful move higher throughout the quarter as earnings growth dominated the narrative while geopolitical tensions and inflation fears eased.
With that backdrop, option activity was elevated as positions were moved out and up in strike to continue to participate in the powerful upside move in the market. Premium generation for the fund was solid at 1% simple and 3.9% annualized gross returns. Positions were generally rewritten with a slightly shorter maturity than past quarters, with average days to maturity at roughly 90. Given the spikes in general market volatility, premiums were able to be generated with significantly more potential built-in upside return to strike prices--averaging 14.6%. The fund portfolio was roughly 42% written overall.
Protective Put Positioning
The notional value of put contracts ranged from 15% to 40% of total portfolio value, ending the quarter at roughly 27%. Positioning for the quarter consisted of spreads to reduce overall costs for protection, utilizing S&P500 Index options. Spreads were layered in in small exposures throughout the quarter after market surges and volatility declines. Given the strong market recovery and near vertical ascent through the 2nd quarter, contribution to return from put spread positioning was -1.46% and -1.19% for the 1st half of the year.
Outlook
The market rebounded strongly in the second quarter following a 1970’s-style oil supply shock in the first quarter. Leadership, however, was concentrated with semiconductor stocks surging nearly 88% during the quarter, underscoring the importance of maintaining exposure to long-term secular growth themes while remaining diversified. Encouragingly, there are signs that participation is beginning to broaden, with the S&P 500® Equal-Weight Index outperforming the market-cap-weighted S&P 500® index by approximately 300 basis points during the month of June.
We believe a durable resolution to the Iranian conflict could benefit cyclical sectors such as Consumer Discretionary and Financials in the second half, driven by potentially lower energy prices, easing inflation, and lower interest rates. The economy remains on solid footing and earnings growth continues to surprise to the upside. While there are some pockets of what former Fed Chair Alan Greenspan famously described as “irrational exuberance”, the broader market appears reasonably valued at 19X 2027 consensus earnings estimates, supported by robust earnings growth.
We continue to balance our exposure to structural growth opportunities with a disciplined commitment to diversification, which we believe remains one of the most effective ways to participate in long-term market appreciation without taking on undue portfolio volatility. We remain opportunistic in stock selection by trimming positions that appear extended and adding to new or existing positions with strong underlying fundamentals and attractive risk/reward profiles.
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The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For performance current to the most recent month end, please call 833-601-2676. |
IMPORTANT INFORMATION:
Past performance is no guarantee of future results. As with any mutual fund investment, there is a risk that you could lose money by investing in the Fund. The Connors Hedged Equity Fund is distributed by Ultimus Fund Distributors, LLC. (Member FINRA) Connors Investor Services and Ultimus Fund Distributors, LLC are separate and unaffiliated.
This information is for use with concurrent or prior delivery of a fund prospectus. Diversification does not ensure a profit or guarantee against loss. Investors should consider the investment objective, risks, charges, and expenses of the Fund(s) before investing. The prospectus and the summary prospectus contain this and other information about the Fund and should be read carefully before investing. The prospectus may be obtained by calling 844-ACFUNDS (844-223-8637).
This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct. Opinions are subject to change without notice.
Investing involves risk including the possible loss of principal. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost . There is no assurance that the Fund will achieve its investment objective. Investments in options involve risks different from, or possibly greater than, the risks associated with investing directly in the underlying securities. Large-capitalization companies are generally more mature and may be unable to respond as quickly as smaller companies to new competitive challenges, such as changes in technology and consumer tastes, and may not be able to attain the high growth rate of successful smaller companies, especially during extended periods of economic expansion.
Definitions:
Investments in options involve risks different from, or possibly greater than, the risks associated with investing directly in the underlying securities.
Call option: A call option is a financial contract that gives the buyer the right, but not the obligation, to purchase a specific asset at a predetermined price within a specific time period.
Covered call: Selling a call option on an underlying long-held security.
In-the-money options: Refers to an option that has intrinsic value because the strike price is favorable compared to the current market price. For a call option, the stock's price is above the strike price; for a put option, the stock's price is below the strike price.
Notional: In derivatives markets, such as futures and options, the notional value is the value of the underlying asset that the contract is based on.
Option premium: Price of an option contract.
Out of the money: Out of the money refers to a call option with a strike price that is higher than the market price of the underlying asset, or a put option with a strike price that is lower than the market price of the underlying asset.
Portfolio percentage written: Refers to the number of call contracts written (or sold) versus the number of shares held in the portfolio. One contract is equivalent to 100 shares.
Premium: Price of an option contract.
Premium generation: Collecting proceeds from the sale of a call option.
Put contract: Refers to a contract that gives the holder the right, but not the obligation, to sell an underlying asset. In this case, the underlying asset is the S&P 500 Index.
Put protection: Implementing a protective put by purchasing a put option vs a long underlying equity position or a broad index that is not necessarily held.
Rolling in the money (ITM) call option: A trading strategy that involves closing an existing ITM call option and opening a new one. The new option has a different expiration date or strike price
Roll qualification: A situation where closing out an existing option and writing a new option.
S&P 500® Index: A market capitalization-weighted index of 500 widely held stocks often used as a proxy for the stock market. Unlike mutual funds, the index does not incur expenses. If expenses were deducted, the actual returns of this index would be lower.
Simple: The return generated from the sale of a call option relative to the price of the stock.
Strike Price: The predetermined price at which a specific security may be purchased (for a call option) or sold (for a put option) by the option holder until the expiration date of the options contract.
Total Income generation: The income generated through the sale of the call option contracts, which generates cash and is counted as income for the portfolio.
VIX Index: The ticker symbol and the popular name for the Chicago Board Options Exchange's CBOE Volatility Index, a popular measure of the stock market's expectation of volatility based on S&P 500 index options.
Volatility: A statistical measure of dispersion of returns. It measures investors’ expectations for market volatility over the next 30 days and is often viewed as a gauge of investor sentiment or fear.
When the VIX is below 20, it generally indicates a calm market environment with lower expected volatility and a higher level of investor confidence.