March Market Review

March ended with significant declines, particularly in equities.

• S&P 500: -5,75%
• Nasdaq: -7,69%
• Stoxx Europe: -4,18%
• All Country World Index EUR: -7,45% (the dollar fell 4.25%, thus in dollars, the decline was -3.20%) 
• Índice renta fija global EUR: -3,13% (the dollar fell 4.25%, thus in dollars, it rose by 1.12%) 

What caused this disaster? Before diving into details—and many of you already know—how can we determine if a market is expensive or cheap? With other assets, like real estate, we have benchmarks such as price per square meter, and this benchmark will vary based on qualitative factors like location, neighbors, noise, etc. That’s why some apartments are pricier than others with the same square footage. Financial assets operate similarly; we look for benchmarks to help us understand whether a financial asset (stock, bond, etc.) is expensive or cheap.

It’s not just about the number—we’re assuming certain things behind that number. Although financial jargon can make things seem overly complicated, this is really common sense. Let me clarify:

The most commonly used benchmark for valuing companies is the P/E ratio (not my favorite, but helpful).

P/E = Price/Earnings

This ratio indicates how many times a company’s earnings investors are willing to pay. For example, if a company’s P/E is 10, you are paying 10 times its earnings, meaning you must wait 10 years (at annual earnings) to recover your investment. Great, but is 10 expensive or cheap? As a good Galician would say, “It depends.” There is no magic number, as mentioned earlier regarding real estate; it depends on the sector, company quality, risk, etc.

Perhaps it is clearer if we rearrange the formula:

Price = Earnings × P/E

Earnings are factual¹, but the P/E (the multiple) is subjective. Depending on the multiple I assign, I determine the asset price. If I consider a company high-quality, I assign a higher multiple; if I perceive greater risk, I assign a lower one. Hence, no magic number exists.

This leads me to what happened in the market. These declines were not driven by falling earnings but rather by a shrinking multiple—a reduction in the P/E ratio. Investors perceive greater risk and thus want to pay a lower multiple due to increased market uncertainty. Remember, the S&P 500 was trading at historically high multiples, boosted by optimism around artificial intelligence, economic improvement, and improving corporate margins. Now, this optimism has been overshadowed. Why? Trump.

Firstly, there is heightened geopolitical tension due to ongoing conflicts, but investors’ main concern has been the announcement of “Liberation Day,” set for April 2, when the definitive tariff policy would be revealed. The higher the uncertainty, the less investors want to pay a high market multiple; instead, they prefer selling and buying more defensive assets, such as gold, which rose 9.26%.

In this chart, you can observe the sharp rise in the political uncertainty index created by Economic Policy Uncertainty².

Source: Economic Policy Uncertainty Index

Trump’s announced tariffs intend to boost U.S. production, creating jobs and revitalizing American industry. Additionally, revenues from these tariffs might allow for tax cuts. It sounds good, but…

1. Tariffs will likely reduce imports, and it’s uncertain whether remaining import revenues will sufficiently fund the desired tax cuts.
2. Foreign companies will export less, resulting in reduced sales, and American private sectors will suffer from higher prices.

Given this scenario, it’s logical for investors to become more cautious. Notably, American stocks suffered the greatest declines, especially the “magnificent seven” (Microsoft, Amazon, Alphabet, Meta, Nvidia, Apple, and Tesla), as illustrated in this chart.

Source: Bloomberg

Besides affecting U.S. markets significantly, the hardest-hit companies were those trading at higher multiples. Investors tend to sell first what has risen most and thus has the potential to be more volatile. Regions targeted by tariffs initially did not suffer as severely. Emerging markets rose 0.378%, and small-to-medium European companies fell only 2.9%—by the way, companies within Altum’s investment universe.

“Liberation Day” arrived, loudly announced by Donald Trump’s administration. In his speech, he talked about reciprocal tariffs and making America a richer, better country again. Here’s a summary of some tariffs:

• Universal tariff: 10%.
• Aranceles adicionales:
  • China: 34%, totaling 54%.European Union: 20%.Japan: 24%.
  • Vietnam: 46%.
• 25% tariff on automobiles and components.

I believe this is a mistake and will negatively impact international trade. Affected countries have already started to announce possible retaliations. Tariffs are protectionism, and protectionism is harmful to the economy. In the 1930s, the U.S. Smoot-Hawley Tariff Act had devastating national and international economic consequences. For instance, American imports fell by 40% and exports by 60% between 1930 and 1932³. Today’s situation is different due to the Great Depression context, but measures meant to stimulate recovery ultimately worsened the crisis.

But let’s verify if these tariffs are truly reciprocal, as Trump claims. This image shows tariffs, including non-tariff barriers imposed by other countries:

Source: BofA Research

What non-tariff barriers is Trump complaining about? In Europe, among others, these include:

• Sanitary and phytosanitary standards.
• Technical and quality standards (labeling, emissions, etc.).
• Environmental and climate regulations.
• Subsidies and unequal access to public contracts.
• Import quotas limiting American products.

Trump claims these barriers obstruct trade with the EU, being even more harmful than tariffs—a point Mario Draghi also highlighted in his latest report⁴. A theoretical tariff calculation, considering these aspects, would be:

Theoretical tariff = U.S. trade deficit with the country/U.S. imports from that country

Applying this formula to the EU yields a 39% tariff. Hence, Trump argues they’re effectively charging half that rate, implying they should be satisfied. However, this argument seems weak, suggesting fair trade wouldn’t involve trade deficits—a historically inaccurate notion since trade deficits have always existed. Indeed, global trade has significantly reduced poverty worldwide.

What raises doubt is the exaggerated theatricality of the tariff announcement, leading me to suspect—as I’ve read elsewhere—that the U.S. truly aims for trade negotiations⁵ from a position of power or perhaps aims to weaken the dollar to reduce the trade deficit.

All this maneuvering has made markets extremely nervous, widening the range of potential outcomes—in other words, increasing uncertainty and thus reducing the multiple (P/E) to reflect this scenario.

What should we do? Immediate consequences are:

• The steepest declines came from companies trading at demanding multiples. For example, Nvidia has dropped 32% from its January peak.     
• Companies selling products with narrow margins may face serious challenges due to increased costs or even stop producing if they lack pricing power. Low-margin companies typically lack such pricing power.  

This environment offers attractive opportunities because when markets panic, investors sell indiscriminately, creating excellent opportunities in companies with high margins, low debt, and stable growth—precisely the companies we seek at Altum.

[1] Taking into account the profit already published. There is the estimated P/E which is calculated with the estimated profit..

[2] Tool developed by Scott R. Baker, Nicholas Bloom and Steven J. Davis. This index is constructed based on news analysis, tax law changes and dispersion among economic forecasts. 

[3] Qué son los aranceles Smoot-Hawley, que profundizaron la Gran Depresión de 1929 y desataron la última gran guerra comercial de EE.UU. – BBC News Mundo

[4] 97e481fd-2dc3-412d-be4c-f152a8232961_en

[5] Trump se abre a negociar los aranceles si le ofrecen “algo fenomenal” a cambio