Global Market Trends: AI, Geopolitics, and Investment Strategies in Q2 2024

Baird Q2 2024 International And Global Growth Fund Commentary

Global economic growth looks to be steadying, following several years of negative shocks and despite the current environment ofelevated interest rates and heightened geopolitical tensions. Global equity markets continued to appreciate during the second quarter, but artificial intelligence ('AI') has been the real fuel. It has supercharged the performance of U.S. stocks in particular because the biggest, marquee AI plays are heavily represented in the U.S. index. As a result, U.S. stock market performance and earnings growth have been quite narrow recently, and U.S. stocks outside of the AI orbit have lagged. Stocks in the emerging markets and international developed markets also appreciated but have a fraction of the AI theme represented in their indexes. On the economic side, the soft-landing scenario has gained more traction. Global inflation has continued to moderate, while economic expansion has remained relatively healthy. However, central banks remain concerned about some lingering inflation pressures, and the extent of the decline in global interest rates has also moderated. Our investment strategies focus on the long-term, allowing us to navigate short-term economic fluctuations. We prioritize businesses that align with secular trends and have strong competitive advantages and market positions. Our portfolio companies are chosen for their high profit margins, strong balance sheets, and consistent cash generation. We believe these qualities will endure even in challenging macroeconomic conditions. Our concentrated, conviction-weighted portfolios are designed to outperform market growth rates over an investment cycle. Additionally, our portfolios are diversified across a wide range of secular growth themes. For instance, within the top ten holdings of our international strategy, in addition to holdings in AI, themes include obesity, industrial automation, financial services in emerging markets, e-commerce, mobile gaming, and digitalization. In this inflationary environment, we have consistently made adjustments to focus on assets that we consider are capable of maintaining pricing power or are more attractively valued. These characteristics should safeguard against the negative impacts of inflation on equity investors, specifically, the shrinking of profit margins and valuation multiples. In the second quarter of 2024, the Baird Chautauqua International Growth Fund Net Investor Class returned +1.18%, outperforming the MSCI ACWI ex-U.S. Index® ND, which returned +0.96%. The Baird Chautauqua Global Growth Fund Net Investor Class returned +4.12% during the quarter, outperforming the MSCI ACWI Index® ND, which returned +2.87%.* For the MSCI ACWI ex-U.S. Index, growth style slightly underperformed value style. Within the MSCI ACWI Index, growth style significantly outperformed value style, and large capitalization stocks significantly outperformed small capitalization stocks. In emerging markets, growth style slightly underperformed value style. Sector and country performance were mixed for the quarter. MSCI Sector and Country Performance (QTD as of 06/30/2024) The risk appetite in equity markets has picked up this year, and volatility has been subdued. There is optimism that resilient economic growth can accompany disinflation, or in other words, form a soft landing. Market sentiment waned briefly in April, but it rebounded significantly in May and June. U.S. stock market performance was strong and driven by a handful of mega-cap technology and technology-adjacent stocks that underpin the artificial intelligence growth theme. As a result, these sectors massively outperformed the rest of the market. There were worries about the narrowness in both stock performance and earnings, as the rest of the U.S. market lagged the handful of AI-related companies along both measures. The stock performance of emerging markets was also strong during the quarter, while that of international developed markets was up modestly. In the U.S., the latest economic data revealed more traction for disinflation and the soft-landing narrative. Both the headline and core measures of personal consumption expenditures ('PCE') inflation registered their lowest levels, both at 2.6%, this year in May. Additionally, the purchasing managers' index ('PMI') survey in June showed the fastest expansion in the U.S. for the last two years. On the monetary policy side, the Federal Reserve has tempered expectations for rate cuts this year considerably. It started the year forecasting three rate cuts, but instead has held rates firm and forecasts only one this year. Fed officials have been advocating for patience so that there is greater confidence that inflation is consistently moving toward its target. In contrast, the European Central Bank ('ECB') cut interest rates for the first time since 2019. Inflation in the eurozone has fallen substantially since last year. Underlying inflation has also eased, reinforcing the signs that price pressures have weakened, and inflation expectations have declined at all horizons. That said, ECB officials appear to be divided on policy thereafter and therefore should be in no rush to cut rates again soon. Economic data in Europe continues to point toward easing inflation and a soft landing. Eurozone PMI has been in expansion territory for four straight months. The services sector continues to drive the recovery, and the rate of contraction in manufacturing continues to slow. Also, there are signs of recovery in Germany as well, with the business surveys steady in May and consumer confidence picking up. FUND PERFORMANCE AS OF JUNE 30, 2024 The Baird Chautauqua International Growth Fund outperformed its benchmark during the quarter. Allocation effect and stock selection were both positive for the period, with holdings in consumer discretionary and industrials, and relative overweight to information technology, contributing most to returns. Stock selection in the financials and health care sectors detracted most from relative returns. Regionally, holdings in Asia & the Pacific Basin and North America-particularly Japan, Singapore, and Canada-contributed, while holdings in Europe-predominately in the Netherlands and Denmark-were the largest relative detractors. The largest contributors to relative returns in the Fund were Sea Limited, Taiwan Semiconductor, and Recruit Holdings. The largest detractors were Adyen, Bank Rakyat, and Genmab. The Baird Chautauqua Global Growth Fund outperformed its benchmark during the quarter. Stock selection was the primary driver of performance during the period, with holdings in consumer discretionary, industrials, and communication services contributing most to relative returns. Stock selection in financials and relative overweighting and holdings in health care detracted. Regionally, holdings in North America and Asia & the Pacific Basin-particularly the U.S., Singapore, Taiwan, Japan, and Canada-contributed, while holdings in Europe-predominately in the Netherlands and Denmark-were the largest relative detractors. The largest contributors to relative returns in the Fund were Taiwan Semiconductor (TSM), Alphabet (GOOG,GOOGL), and Sea Limited (SE). The largest detractors were Adyen (OTCPK:ADYEY), Bank Rakyat (OTCPK:BKRKY), and Genmab (GMAB). Sea Limited Sea reported first quarter earnings that substantially beat expectations. Its important e-commerce business achieved record-high revenue, order volume, and gross merchandise volume. Additionally, there had been a reduction in competitive intensity, whereby Sea and its competitors had raised commissions, and Sea has been a market share gainer. Taiwan Semiconductor Taiwan Semiconductor (TSMC) reported first quarter earnings that beat expectations. Additionally, TSMC has been an important beneficiary as a picks-and-shovels play with rising data center and AI revenue, and its capacity in leading-edge manufacturing nodes have been fully booked through the end of next year. Recruit Holdings (OTCPK:RCRRF, International) Recruit reported March results that were in-line with expectations. Though its near-term forecasts were for flattish growth, the company highlighted the fact that its HR technology business was near its cyclical bottom after declining over the last year. Additionally, this business has extremely high operating leverage, which sets the company up for increased earnings power in 2025 and beyond. Alphabet (Global) Alphabet reported Q1 results that beat expectations, with growth accelerating in each of its business segments: Google, YouTube, and Cloud. Google is benefitting from usage and cost amortization from its AI improvements and showcased a number of new products for both consumer and enterprise segments in its recent user conference to monetize this technology transition. Adyen Adyen provided a revenue update in Q1, whereby net revenue growth met expectations. It also demonstrated volume growth that was substantially above the end market growth rate, indicating substantial market share gains, particularly with large enterprise customers. Therefore, take rates also compressed due to the mix effect. Adyen's products clearly remain attractive to global retailers on product integration and lowering the total cost of ownership. Bank Rakyat Bank Rakyat reported first quarter earnings that missed expectations. A significant increase in provision expenses was the main drag on earnings, primarily due to a weaker repayment capacity for borrowers that have been impacted by high food price inflation and El Niño. In addition to raising provision expenses, Bank Rakyat lowered its growth forecast for the microloan segment and also tightened its underwriting standards in light of this development. Nonetheless, return on equity for Bank Rakyat remains robust and is expected to remain above the 10-year average for the bank. Genmab Genmab reported better-than-expected revenues, and sales of their new drug Epkinly also beat consensus. Genmab did not raise its 2024 guidance but plans to update guidance by the next earnings report. Shares are down largely on investor concerns regarding the upcoming head-to-head data of their next-generation candidate GEN3014 versus Darzalex and whether Johnson & Johnson will opt-in to the product. Management remains confident about GEN3014, and results will likely be known before year-end. Baird Chautauqua International Growth Fund Top & Bottom Contributors for Q2 2024 Baird Chautauqua Global Growth Fund Top & Bottom Contributors for Q2 2024 For the Baird Chautauqua International Growth Fund, 78% of companies that reported earnings during the quarter were in-line with or exceeded consensus estimates. For the Baird Chautauqua Global Growth Fund, 79% of companies that reported earnings during the quarter were in-line with or exceeded consensus estimates. Our conviction weighting process, which considers our estimates for growth, profitability, and valuation, is key to our portfolio management strategy and has been additive to returns over the long run. In the International Fund, we reduced positions in ASML, Novo Nordisk (NVO), Recruit Holdings, and Taiwan Semiconductor. Proceeds were used to increase the Fund's position in Brookfield Renewable (BEPC). In the Global Fund, we reduced positions in Alphabet, ASML, Novo Nordisk, Nvidia, and Taiwan Semiconductor. Global economic growth looks to be steadying, following several years of negative shocks and despite the current environment of elevated interest rates and heightened geopolitical tensions. According to the World Bank, global growth is projected to hold steady at 2.6% in 2024 before edging up to an average of 2.7% in 2025-2026. Growth this year is estimated to be faster than previously thought, due mainly to the continued solid performance of the U.S. economy. Additionally, the World Bank projects growth in developed economies to remain steady at 1.5% in 2024 before rising to 1.7% in 2025, and it projects growth in emerging economies to be 4% on average over 2024-2025. This outlook is muted in comparison to growth rates during the decade prior to the pandemic, which averaged 3.1%, despite the anticipated moderation of various cyclical headwinds, such as supply chain shocks and high commodity prices. Slower growth is true for both developed and emerging economies, and it has weakened notably in countries that have experienced high rates of inflation. Global trade growth is recovering, supported by a pickup in goods trade. Services growth is less of a tailwind this year, given that tourism has nearly recovered to pre-pandemic levels. However, the trade outlook remains tepid, partly reflecting a surge in trade-restrictive measures and heightened trade policy uncertainty. There are some notable bright spots in the global economy. In particular, the U.S. economy has shown impressive resilience amidst the most drastic monetary tightening in four decades, and it is one of the main reasons that the global economy could have some upside potential. India and Indonesia are two additional examples of global bright spots, and they continue to be relative overweights in our portfolios. India's economy has been buoyed by strong domestic demand, growing investment, and strong services activity. The World Bank projects it to grow at an average rate of 6.7% for the next three years, making India the fastest growing large economy in the world. Indonesia is projected to benefit from a growing middle class and generally prudent economic policies, and the World Bank projects it to grow at an average rate of 5.1% for the next two years. On the other hand, growth in China is predicted to slow this year and ease further in 2025 and 2026, with cyclical headwinds weighing on growth in the near term, along with a continuing structural slowdown. Inflation continues to decline globally, making progress toward central bank targets, but at a slower pace than previously estimated. Core inflation has remained stubbornly high in many countries, propped up by fast growth of services prices. Recently, the pace of disinflation has slowed, reflecting a slowdown in the rate of decline of core inflation and a partial rebound in energy prices. As a result, many central banks are remaining cautious in lowering interest rates. The World Bank forecasts that global inflation will moderate to 3.5% in 2024, 2.9% in 2025, and 2.8% in 2026. Major central banks are projected to gradually lower interest rates over the remainder of the year, but the level of real interest rates may remain a headwind to economic activity and should help reduce inflation further. Central banks continue to emphasize that the pace of easing will be cautious, reflecting persistent inflationary pressures, and even robust economic activity in the case of the U.S. Over the next couple of years, interest rates are likely to remain high, especially as compared to those of the recent decades. If further delays in the disinflation process emerge, policy rate cuts may be postponed. Over the last two-plus years, we have reduced Greater China weightings on a net basis, inclusive of holdings in Mainland China, Hong Kong, and Taiwan. In international portfolios, roughly 18% of assets are invested in Greater China holdings, which is modestly overweight relative to the benchmark. In global portfolios, roughly 11% of assets are invested in Greater China holdings, which is overweight relative to the benchmark. We believe our Chinese holdings are at valuation levels, in the context of their long-term growth outlooks and competitive positioning, that more than compensate us for the risks. Our Chinese holdings are exposed to secular growth areas of the domestic economy (private consumption and health care) that align with government priorities, have strong balance sheets and resilient cash flows, and are not reliant on restricted Western technology inputs for future growth. Our investment strategies focus on companies that benefit from long-term secular trends and have strong competitive advantages and market positions. Some of the most promising growth opportunities over long investment horizons may not be heavily influenced by current global events or specific regional circumstances. These opportunities include our investments in and around cloud computing, software-as-a-service, digital transformation, artificial intelligence, semiconductor technology, e-commerce, payment systems, industrial automation, electric vehicles, and innovative biologic and biosimilar therapies. Additionally, there are other exciting growth prospects related to the rapid expansion of consumer markets, particularly in emerging economies and notably in Asia, which are driving the demand for various consumer products and financial services. The ongoing trend of economic slowdown should not undermine the enduring strength of these investment themes, or the business models and market positions of the companies in our portfolios. Additionally, we have deliberately chosen companies with healthy profit margins, robust balance sheets, and consistent cash flow generation. Essentially, we have selected portfolio companies that we consider to be financially stable, even in challenging times. As a result, our portfolios have the capacity to surpass market growth rates in the long run. We have made significant efforts to protect against the most damaging risks associated with inflation on equity investments-margin pressure and multiple compression. Our focus has been on selecting companies with pricing power due to the critical nature or value- added aspect of their products and services. These companies are capable of adjusting prices in times of inflation, safeguarding their profit margins. Additionally, we have adjusted our portfolios to include companies with more appealing valuations, considering the increased market discount rates. There have been no changes to the investment team at Chautauqua Capital Management nor have there been changes to the ownership structure of our parent company, Baird. Respectfully submitted,

Wall Street Exclusive - 'Mean Reversion' (NYSEARCA:IWM)

Taking the steps to a normalization process that brings stock market equilibrium will be necessary to sustain any BULL market advance. One-sided markets always end badly. "Maintain a firm grasp of the obvious at all times." - Jeff Bezos The View on Wall Street The stock market was banking on six rate cuts as we started the year, and with it looking like we might see one cut, not many would have predicted the ~18% S&P gain we've recorded this year. This is another example of how the backdrop can drastically change and, more importantly, produce unexpected results. What really happened was the economy stayed more resilient than most "experts" thought. Like myself, many underestimated the staying power of the massive stimulus doled out after Covid was under control. Forgiving student loan debt ($167 Billion to date) and spending Billions more on accommodating illegal migrants were never factored into the equation. Therefore, the notion that a recession was right around the corner drifted into the sunset. Unfortunately, that also hampered the Fed's fight against inflation. While the rest of the world has already begun cutting their interest rates, the US has yet to do so. In addition to inflation remaining above target for longer, these are the reasons why the Fed has remained on the sidelines. A better economy is always good for the stock market. Remove the threat of recession, and stocks become a different ballgame. Add in a catalyst like Artificial Intelligence, and it's clear why technology is the best-performing sector. While most stocks have had an up-and-down year, economically sensitive areas like Communications Services (GOOGL, AMZN), Financials, and Energy have added solid gains. Eight of the eleven major market sectors have produced little to no gains since March. While the year-to-date stats are impressive, it's a little shocking to see that only Technology (XLK) and Communication Services (XLC) showed a gain in the second quarter. This past week's recent reversion to the mean trade discussed in the past couple of weeks is starting to change that scene. Looking at the overall economic backdrop, the consumer represents ~70% of the US economy, and the government stimulus has kept that resilient. On the one hand, it's good because the manufacturing data has been abysmal for 2+ years and is still in contraction today. While there is talk about a manufacturing renaissance adding jobs and opportunities, the data doesn't support that rhetoric. Another concern being voiced by some economists is the outsized growth in government employment versus the private sector. Government employment rose by 70,000 in June, higher than the average monthly gain of 49,000 over the prior 12 months. This trend is currently running at a much larger percentage of the overall historical job growth numbers. The economy is about as one-sided as the market. None of this screams recession, but this path does indicate that government spending is increasingly driving job growth. The vast deficits aren't sustainable, and how long the government can sustain the economy is debatable. It's an answer to a question that we may not want to hear. In the future, the consumer will have to find a way to stay resilient, which will depend on the solid job market. For that to occur, Corporate America has to remain strong. Keeping regulations and taxes in check will go a long way to making that happen. With a divided Congress today and a huge budget deficit, any efforts to dole out more handouts will likely be squashed. Inflation has actually been stickier than the world expected, and with a "higher for longer" backdrop, the staying power of the consumer comes back into question. The market stats confirm one of the biggest risks market analysts see out there - the concentration in the market. Undoubtedly, our economy is technology-based today, but we are experiencing a period where the pendulum has swung a bit too far. There is nothing unusual about that. It occurs with individual stocks, sectors, and indices all the time. Markets overshoot to the upside and overshoot to the downside. The reversal of those swings makes trading in the markets so difficult. It's impossible to time the exact moment when that occurs. When the initial reversal starts, it's ALWAYS doubted. Investors are of the mindset that the strong trend is just pausing and nothing can go wrong with the fundamental backdrop driving the trend, and it will continue indefinitely. Seasoned investors know that to be a myth. Like the wild swings in the pendulum, "reversion to the mean" is also part of the investment backdrop. It still might be premature to say we are at that point in time with this market scene, but understand that this is how the market works over time. Make no mistake: taking the steps to a normalization process that brings stock market equilibrium will be necessary to sustain any BULL market advance. One-sided markets always end badly, so this "change" is a welcome sign for the BULLS. So unless active investors are day-trading or making quick swing trades, this is a scene where we have to be more selective in the types of companies that we invest in and manage risk according to our unique situations. There are a handful of stocks whose valuations, for deserved reasons, have gone up quite high. Since Nvidia (NVDA) first announced the dawn of Artificial intelligence with their EPS report in May of '23, we've seen many companies outside of large-cap tech stocks underperform. Their fundamentals remain solid, but the investing public hasn't reacted positively. This imbalance is actually what opens up a lot of opportunities for us. We need to turn our attention from the "Magnificent Seven" to the "Magnificent Alternatives." The backdrop has created a larger valuation gap, which has created opportunities outside that group of large-cap stocks. Lately, it has not been a popular strategy to advise because investors have felt left behind for longer than they wanted to. However, that's exactly what I've recommended. Over time, diversification will turn frowns to smiles when a genuine reversion to the mean does, in fact, take place. I'll repeat for newcomers -- that doesn't mean the MAGS contingent should be sold. It means we must put the market in perspective and think beyond tomorrow or next week. While many may not have the luxury of investing for the next 20 years, the goal of remaining diverse in our selections is paramount. I keep getting asked what the catalyst for valuations will be to reconverge and get rewarded for some of the opportunities that are present today. First, the aforementioned "reversion to the mean, then, ironically, it will be AI itself. Data centers, energy, and those companies that supply power represent MORE value today because of AI. Beneficiaries will be found in Healthcare (XLV), which set a new all-time high this week. Think about how much efficiency we can get out of the healthcare system if we can actually apply AI to research and development projects. It simplifies connections with customers and connects patients to doctors. AI can power industrial profitability. After talking about "reshoring" for 2+ years, AI may be the catalyst to reenergize a theme that was started before the COVID crisis. The proper regulatory environment could provide a manufacturing renaissance both in the US and in Europe, opening up growth opportunities. The market might be looking ahead and assigning a higher probability of that and other "positives" during anticipated "change." The Trading Week The shift to a broader market continued as trading opened on Monday, leading to more new highs in the major indices. The S&P 500 rallied 0.31%, closing at 5632 and recording its 38th new high this year. The DJIA joined the new high parade with a rally of 0.53%, while the NASDAQ added 0.40%. The Russell 2000 (IWM) confirmed the money rotation theme, leading the major indices with a 1.8% gain on the day. Entering Tuesday's session, the S&P 500 had posted gains in nine of the last ten sessions. The HOT streak continued with the index rallying 0.62% closing at 5667, its 39th new high. Tech was DOWN, and most everything else was UP. The NASDAQ was flat, while the tech ETF (XLK) was the lone losing sector (-0.56%). The DJIA added 1.9%, recording back-to-back highs. However, Tuesday's session was once again all about the small caps. The Russell 2,000 recorded its fifth straight day with a 1%+ gain. With the IWM's 3.5% gain, it's clear where the new momentum is. We now have a chart that looks like a tech stock. The move sure has the scent of what I've mentioned to members of my service. Hedge funds are unwinding the LONG Tech/SHORT small-cap trade. Wednesday turned into a tech rout. It started with the pre-opening S&P futures and continued throughout the day. The S&P was up 83 points in the prior three sessions and gave back 76 points of that gain, leaving the index virtually flat since last Friday. The index was down 1.3% when the dust settled, closing at 5588. However, it was a completely "mixed" picture. The DJIA rose 0.60% to its 3rd record high in a row. After its ~10% 4-day rally, the small caps (IWM) gave back 1%. The NASDAQ was the weakest of all, falling 2.7%. After a failed rally attempt Thursday morning, the S&P 500 dropped for the second day in a row, shedding 0.78%. Small-cap outperformance was nowhere to be found, as the Russell 2,000 dropped 1.85% on the session. The only sector higher on the day was Energy, with a 0.33% gain. Every other sector was lower, with over 1% declines in Materials, Financials, and Consumer Discretionary. The worst performer was Health Care, which fell 2.3%. Gold, Silver, and Uranium all fell. Bottom Line: There was nowhere to hide. There was no respite from the selling on Friday. Every index closed in the red, with the DJIA leading the way down, losing 0.93%. Only Healthcare and Utilities posted gains for the day. The two-week winning streak for the S&P was broken, as was NASDAQ's six-week winning skein. On the flip side, the DJIA extended its weekly winning streak to three, and the Russell 2000 (IWM) made it back-to-back weeks with gains. So, for the moment, the script has been flipped, keeping investors wondering what comes next. The Economy The Empire State index slipped to -6.6 in July from -6.0, remaining in negative territory since last December. The components also moderated. The Philly Fed Manufacturing report has been the outlier in the manufacturing story in 2024, and it continues with the latest report. The Philly Fed index surged to 13.9 in July from a 5-month low of 1.3. The ISM-adjusted Philly Fed rose sharply to a 26-month high of 55.4 from 47.6 in June. This week's Philly Fed rise joins an Empire State drop, leaving sentiment overall likely ticking up to a neutral reading from slight contraction territory. The Leading Index dipped 0.2% to 101.1 in June. That follows the 0.4% decline to 101.3 in May and the 0.6% drop to 101.7 in April. Today's print is the lowest level since April 2020. The LEI has been negative in 20 of the last 21 months. The components were mixed, with four contributing negatively and six positively. Consumer sentiment, new orders, yield spread, and unemployment insurance claims led to June's LEI decline. June retail sales ex-vehicles were up 0.4% vs. last month, compared to the consensus of 0.1%. Ex-autos and Gas, total sales were up 0.9%, which was 0.7% better than the consensus forecast. Nonstore retail (online) saw the largest increase, as sales jumped 1.9% on top of May's increase of 1.1%. NAHB Homebuilder sentiment fell 1 point to 42, its lowest level of the year and the lowest since August 2020. Elevated interest rates weighed on sales and kept construction financing costs high. The Global Scene China Data: Q2 GDP rose 4.7% less than expected, slower than the 5.3% year-on-year increase in the first quarter. While Industrial production rose at a solid pace, retail sales hit the worst monthly growth rate since the end of 2022 (and remember, these are not inflation-adjusted). ECB: After cutting rates for the first time at its last meeting on June 6th, the European Central Bank left rates unchanged as expected at today's rate decision. Its policy statement was consistent with prior communications, but economic commentary was dovish; "Most inflation measures were stable or edged down in June" and the inflationary impact of wage growth is being buffered by profits". Political Scene While many like to exclude "politics" from the investment equation, the market tells us differently through its price action. Media outlets and research firm analysts have been discussing a "Trump trade" since the "debate," Biden's mounting opposition to step down increases the odds of a Trump win. Vice President Harris would be considered the frontrunner for the nomination, but other nominees could emerge - potentially impacting the race odds and market impact. The upcoming election is certainly part of the investing conversation, whether one wants to admit it or not. Be that as it may, the market does not like uncertainty, and what we have on the Democratic side is a boatload of uncertainty. While all will eventually be worked out, it can easily add to the volatility that has recently surfaced. Getting back to what is being called a "Trump trade," my feeling is that these "fads" usually have little staying power, as it's pure speculation to call the outcome of an election that is months away. Savvy investors will have plenty of time to assemble a game plan after the results are in. In the meantime, we'll be inundated with reports on all of the "what ifs" that this election may hold. Here are excerpts from a recent Federated Research analysis; Let's put our emotions aside for the moment and compare Biden and Trump regarding policies and the potential investment implications. Assuming divided government, which might arguably be the case even if there's a "slim" sweep, one would expect Trump to extend the tax cuts and drop corporate tax rates to 15-20%. Biden, by contrast, would limit the tax cuts to individuals making $400K per year or less and married couples making $450K or less while increasing corporate taxes from 21% to perhaps 28%. The Inflation Reduction Act is likely to survive a Trump win, though the GOP might pare it back. Immigration would likely slow under Trump, but it could be that the labor market is already weak enough that this would fail to stoke inflation. As for tariffs under Trump, the 10% global tariff he has proposed seems less likely to go into force than the 60% tariff on Chinese imports. Certain sectors and industries would fare better depending on which candidate wins. If Trump, expect India to benefit from China tariffs. Other areas that could benefit from Trump: Financials, liquid natural gas, Medicare Advantage and for-profit education. As for Tech, Biden might be softer on export controls of semiconductor firms but firmer on regulation of big tech here and abroad. The reverse is true for Trump. A trade war, more likely under Trump, would hurt Industrials. In election years, we normally see Energy trade sideways or lower from this point until the election but then look for a jump afterwards. Finally, there are certain issues either candidate will face. We'll bump up against the debt ceiling in the summer of 2025. Trump's individual tax cuts sunset at the end of 2025 as do ObamaCare subsidies. Certain features of both presidencies seem likely to remain: high deficits, skepticism towards China, protectionism and industrial policy. The populist phenomenon in the U.S. and globally suggests further issuance of debt to be paid at some indeterminate time in the future - as we continue to kick the can down the road. It is a very "fair " assessment of the political environment. I've simplified the situation for clients and members of my service. One candidate proposes raising taxes, and one proposes keeping the low tax backdrop in place. For the record, I have a bias towards low taxes and a pro-business backdrop. That has always been my focus since I started investing decades ago. When I turn the office lights on in the morning, I want to work in a positive, low-tax, and regulatory environment because that can offset many other ills and issues the US economy faces. In essence, I'm rowing with the tide, not against it. Bottom Line: It is WAY TOO EARLY to begin thinking about or, worse yet, positioning for ANY perceived election outcome. As mentioned in earlier reports, what happens with the makeup of Congress is more important because they can control what might or might not get put into law. Earnings Earnings reports ramp up significantly over the next two weeks, with a total market cap of $12.3 trillion in S&P 1500 members (359 stocks) hitting the tape next week and another $21.6 trillion (555 stocks) the following week. Alphabet (GOOLG) will be the first mega-cap to report on Tuesday (7/23), along with Tesla (TSLA), followed by Amazon (AMZN) next Thursday (7/25). The next mega caps will not be for another week when Microsoft (MSFT) will come out with results on Tuesday (7/30), followed by Meta (META) that Wednesday (7/31) and Apple (AAPL) the day after (8/1). The following week, there will be a big drop in large-cap stocks reporting, but the slate will still have many stocks (over 300), including the next closest names to entering the trillion-dollar market cap club. The last of the mega caps, NVIDIA (NVDA), won't report until late August. Macroeconomy This section presents a series of issues that may not necessarily impact the market today but can pose problems for the MACRO scene. Green Energy Debacle There has been a lot of investment and hype, but the green energy transition from fossil fuels isn't happening. Achieving a meaningful shift with current policies has already been shown to be too costly. Globally, we've seen $2 trillion tossed at this issue in 2023 alone to try to force an energy transition. Over the past decade, solar and wind energy use has soared to record levels. But that hasn't reduced fossil-fuel use, which increased even more over the same period. It's the argument that was brought forth at the beginning of this failed experiment. Alternatives are just that, at best, backups to abundant and, more importantly, reliable energy sources. Now that we have entered the first phase of the AI transition, the argument to continue using fossil fuels is enhanced. Studies show that when countries add more renewable energy, they do little to replace coal, gas, or oil. It simply adds to energy consumption. Research shows that less than one unit of every six units of green energy displaces fossil-fuel energy. The administration's EIA (Energy Information Administration) concludes that renewable energy sources worldwide will dramatically increase by 2050, but that won't be enough even to begin replacing fossil fuels -- oil, gas, and coal will all keep rising, too. The writing has been on the wall, but many global policymakers have refused to read it. The world has an unquenchable thirst for affordable energy. In the past 50 years, oil and coal use has doubled, hydropower use has tripled, and gas use has quadrupled. The use of nuclear, solar, and wind power has surged. Other than the last two mentioned, ALL are reliable PRIMARY energy sources. Solar and wind fail on both counts. They aren't better because, unlike fossil fuels, which can produce electricity whenever we need it, they can produce energy only according to the vagaries of daylight and weather. At best, they are cheaper only when the sun is shining or the wind is blowing at just the right speed. The rest of the time, they are expensive and mostly useless. The proponents of green energy never want to recognize that when the cost of just four hours of storage is factored in, wind and solar energy solutions become uncompetitive with fossil fuels. The notion that the current green energy plan, which promotes heavily subsidized renewables, will magically make fossil fuels disappear is deeply flawed. The problem has been the same since day one of this green push: COST with little or no RESULT: This spending splurge WILL continue to slow economic growth, making the actual cost balloon to absurd proportions. Renewables will become a viable solution as technology improves, but that isn't the case today. Spending money on what is already deemed an inadequate substitute for global energy needs is a folly that has to end. A Recession Looming? Last month's jobs report showed another uptick in the unemployment rate to 4.1%, up from a low of 3.5%. We're getting very close to tripping the Sahm rule in the next couple of months, which has a perfect record of calling recessions since 1960 (we've always had a recession when the 3-month moving average of the unemployment rate increases by 0.5% in less than a year; we are at 0.4% today). Will this be another indicator that will fail economists, or will the SAHM rule continue its perfect record? Overreaching Regulation Another climate change lawsuit is overturned. Baltimore was suing fossil-fuel producers for causing a public nuisance with their emissions and misleading consumers about their contributions to climate change. The city demanded that the companies pay damages for sundry climate harms allegedly resulting from their emissions. It's another example of the insanity that has gripped a faction of the US. Most, if not all, of these frivolous attempts to "control" society have already been struck down by the Supreme Court in many rulings against the administration and its regulatory agencies. The real harm is the waste of taxpayer money that could be used to lift the city out of poverty. Entitlements keep increasing. Critics called Obamacare the non-affordable care act and were roundly criticized. Unfortunately for the American taxpayer, they were right. The Congressional Budget Office estimated in its revised 10-year budget forecast last month that ObamaCare subsidies would cost $1.3 trillion over the next decade. The law's Medicaid expansion for healthy adults earning below 138% of the poverty line is projected to cost another $1.4 trillion. The original 10-year cost estimate for ObamaCare, made in 2010, was $940 billion. Food stamps are another program that increases during times of economic stress, but they never seem to retreat when the economy recovers. According to the administration's experts, the economy is doing just fine. So, one has to wonder why 42 million, or 12.4% of the US population, are getting food stamp benefits today. The cost of the food stamps program for 2023 was $112.9 billion. As with any handout, there are numerous reasons why the true cost is far greater than originally proposed. The primary reason is that entitlements always cost more than originally estimated, and Congress always expands them. That's how the U.S. has ended up with entitlements that the country can't afford, but the politicians are too afraid to reform. There was a time when the US could absorb waste. With a multi-trillion debt load, that time is slowly slipping away. The Daily chart of the S&P 500 (SPY) The S&P 500 closed the week on a three-day losing streak. That gave us a look at the first "crack" in the rally off the April lows. The index closed below the initial support trendline for the first time since May 30th. Unless the BULLS can gather enough buying power to retake that trendline, the S&P appears to be heading down to test secondary support. It would equal the 5% -- 6% April setback if that occurs. A break below would enhance the probabilities for the S&P's largest pullback since last October. Final Thoughts THANKS to all the readers who contribute to this forum to make these articles a better experience. These FREE articles help support the SA platform. 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Thematic Mid-Year Update: What's Next For AI And Geopolitics

Geopolitical fragmentation requires an evaluation of overseas dependence and a focus on U.S. reshoring. Shifting supply chains and varied demographics create strategic prospects across markets. As the AI buildout propels a potentially historic capital expenditure cycle, investors could be poised to unearth opportunities across industries amid greater geopolitical fragmentation. Jay Jacobs, U.S. Head of Thematic and Active ETFs at BlackRock U.S. and international equity markets have demonstrated resilience, flirting with all-time highs, despite significantly reduced expectations in the number of Fed rate cuts in 2024 and lingering inflation worries. This performance, however, has been narrowly concentrated at both the stock and sector levels, including in AI, tech, and emerging markets. We believe investors may want to look beyond today's market leadership to find underappreciated areas that may be well-positioned to benefit from powerful secular tailwinds, or mega forces, that can drive long-term growth. In a market characterized by greater dispersion, equity investors can look beyond recent market leaders to pinpoint beneficiaries both within and beyond mega-cap tech and AI. Jeff Shen, PhD, BlackRock Systematic Equities Co-CIO In the short term, we believe two mega forces have the potential to reshape the global economy and could reach critical inflection points: In our Thematic Mid-year Update, we focus on these two mega forces and highlight where we believe the most compelling opportunities lie. Within AI, we look to the ‟picks-and-shovels" of this technology amid tremendous demand for hardware, digital infrastructure, and power. Within geopolitics, we look to potential beneficiaries of changing supply chains, including a domestic focus on tech and manufacturing, as well as emerging market up-and-comers. AI has transcended "buzzword status," with businesses across all sectors looking to quickly integrate the technology. It's estimated that over 80% of enterprises will have used generative AI by 2026, up from less than 5% in 2023, noting the technology can both improve efficiency and enhance products & services. Companies have different AI platforms to choose from (ChatGPT, Claude, etc.), but virtually all paths of greater AI adoption are set to accelerate demand for the underlying infrastructure that powers the technology or the "picks and shovels" of the AI industry: data centers, semiconductors, and certain raw materials. We are facing what may become one of the largest infrastructure efforts in world history, driven by the explosive growth of AI adoption. There is immediate and tremendous demand for data centers that must be built with AI workloads in mind, and the computing power and data storage necessary to support AI's growth. Jensen Huang, CEO of Nvidia (NVDA), estimates that the shift from general-purpose computing to accelerated computing is expected to require at least $1 trillion of investment if not more, and believes we are only 5% into this buildout. In our view, the market is underestimating the amount of money that will be spent on the development of data centers over the next 5-6 years. 2023 marked the onset of a new industrial revolution. We are now building ever-larger AI factories to manufacture intelligence. This buildout phase is only in its second year and I expect it to continue throughout the decade, to become the largest infrastructure investment in history. Tony Kim, BlackRock Head of Fundamental Equities Global Technology The potential beneficiaries of this historic capex cycle are vast, ranging from operators and suppliers of data centers to a broad range of semiconductors, as well as electric power infrastructure and critical materials. Markets and headlines have largely focused on one type of semiconductor critical to AI called a Graphics Processing Unit (GPU), which performs complex computations in parallel. GPUs are crucial for training large language models or (LLMs), like ChatGPT. GPUs are not the only type of chip that may benefit from broader AI adoption, other types of semiconductors or "chips," along with their equipment and packaging, all play a critical role in the AI ecosystem and are potential beneficiaries. We believe, the AI opportunity is bigger than just one semiconductor company. The industry is projected to reach $1 trillion in revenue by 2030, with computing and data storage driving 25% net growth. As such, the broader semiconductor sub-industry could be well-positioned amid this AI capex ramp up. Global semiconductor market value by vertical, $B Source: McKinsey. "The semiconductor decade: A trillion-dollar industry", as of April 1, 2022. CAGR refers to the compound annual growth rate (%). For illustrative purposes only. Forward-looking estimates may not come to pass. Chart description: Bar chart showing that by McKinsey estimates, the global semiconductor industry is projected to become a trillion-dollar industry by 2030, largely driven by the automotive, data storage, and wireless segments. Power infrastructure may need an overhaul to keep up with AI energy demand. AI data centers cannot support the growth of the technology without another crucial input, power. Data centers need an abundance of inexpensive electricity to run powerful servers and keep them cool. Critical IT power is defined as the usable electrical capacity at the data center floor which is available to computer servers and networking equipment that is housed within the server racks. The chart below shows a measure of the power capacity available to U.S. data centers (in megawatts). Critical IT capacity in the U.S. will need to triple from 2023 to 2027, and surge well beyond, to keep pace with rising demand - with the vast majority driven by AI's arrival. The use of power toward Al data centers is expected to grow rapidly Global data center critical IT power (megawatts-MW) Source: semianalysis.com, "AI Datacenter Energy Dilemma - Race for AI Datacenter Space", as of March 13, 2024. For illustrative purposes only. Forward-looking estimates may not come to pass. Chart description: Bar chart showing the use of critical IT power in megawatts broken out by AI data center usage and non-AI data center usage. The AI data center usage is increasing over time and is estimated to triple from 2023 to 2027. All of this means we may see a demand for power not experienced since the dotcom boom, that's because along with AI's rise, other power-hungry themes are emerging like electrification, Electric Vehicles (EVs) and a potential resurgence in US manufacturing (driven by reshoring). Adding energy production capacity, improving power transmission, and scaling energy storage solutions will be key to meeting this resurgence in energy demand. Investors interested in the AI theme may consider the iShares Semiconductor ETF (SOXX), the iShares US Digital Infrastructure and Real Estate ETF (IDGT), and the BlackRock Technology Opportunities Fund (BGSIX). Copper could be the chokepoint for meeting demand for energy infrastructure and digital infrastructure. Copper is an essential input to many aspects of energy infrastructure as well as digital infrastructure. Copper demand is growing rapidly; it's projected to rise nearly 20% by 2030 from 2023 under the IEA's Stated Policies scenario, which is based on the current policy landscape. While clean energy applications are expected to be the biggest drivers of copper demand growth, data centers will also play an important role. Yet despite several secular tailwinds driving copper demand growth, supply growth remains anemic. World copper mine production is growing slower than expected, as it takes on average 10-20 years to permit and build a new copper mine. Persistent copper supply deficits could become a chokepoint for AI's growth if energy infrastructure is unable to keep up with soaring power demand due to a lack of copper. JPMorgan forecasts that the additional power consumption required by data centers could add another 2.6 million tons, to an already 4 million metric tons deficit by 2030. Investors interested in copper may consider the iShares Copper and Metals Mining ETF (ICOP). Geopolitics is increasingly important to the global economy especially in a year where countries representing half the world's population are holding elections.Domestic and foreign policies have rapidly reshaped supply chains, with technology and manufacturing drawing the lion's share of attention amid intensifying global economic competition. Dispersion is accelerating for U.S. technology stocks at the intersection of innovation and geopolitics. Evolving dynamics in globalization and industrial policy have the potential to disrupt years of established hiring practices and growth strategies. Linus Franngard, BlackRock Systematic Equities Portfolio Manager The U.S. technology sector is highly globally-dependent, deriving large parts of its supply chains and nearly 60% of its revenue overseas. Given its exposure to economic and national security, the technology sector is increasingly caught in the crosshairs of rising geopolitical tensions. Tariffs, export bans, and corporate fines are becoming commonplace between economic blocs as AI, data privacy, and semiconductor supply chains become increasingly important to economic policy and politicians platforms. As such, we are seeing a clear dispersion forming between tech firms that are more exposed to geopolitical risks and those who aren't. One way to measure exposure to geopolitical risk is to look at company hiring practices. In the chart below, we highlight global job postings by American tech companies. The yellow bars represent the firms with the most U.S. -centric job listings, and the purple bars represent the firms with the most international hiring practices. Over time, we see a clear and growing divide between tech firms that hired abroad and those who invested in maintaining a U.S.-focused workforce. In our view, this gap reveals a potential investment opportunity focused on identifying companies driving domestic self-sufficiency and mitigating geopolitical risks. In addition, we believe these firms with more U.S. centric hiring are potentially poised to benefit more from government support, such as tax credits or government contracts, vs. their more globally exposed peers. Widening gap in international hiring trends of U.S. firms (2016-2024) Source: Burning Glass Technologies, as of June 2024 using data as of May 2024. For illustrative purposes only. Chart description: Bar chart showing U.S. tech firms with the most U.S.- centric job listing, and the firms with the most international hiring practices, highlight a clear and growing divide over time between firms that hired abroad and those who invested in maintaining a U.S. focused workforce. Investors interested in tech independence may consider the iShares U.S. Tech Independence Focused ETF (IETC). Looking beyond tech, manufacturing is enjoying a renaissance in the United States as policy efforts to "reshore" production are yielding powerful results. Since the pandemic, the U.S. has implemented several policies to increase domestic production and reduce reliance on global supply chains. These policies, which include the Infrastructure Investment and Jobs Act, the Inflation Reduction Act, and the Chips and Science Act, are expected to lead to well over $1 trillion in spending to rebuild infrastructure, support high-growth industries like EVs, and secure supply chains for key technologies like semiconductors. Reshoring is the process of bringing production or manufacturing back to the country of origin, previously outsourced to other countries. By bringing manufacturing back to the U.S., the risks of unstable supply chains, shipping delays, poor product quality, and trade tensions could dramatically decrease. Tony DeSpirito, BlackRock Global Fundamental Equities CIO While government stimulus often aims to drive domestic economic growth, reshoring policies may also increase the resiliency of the U.S. economy, via the reskilling of the manufacturing workforce, enhancing the quality and safety of products, and reducing the potential impact of geopolitical tensions on our ability to procure vital goods. Total construction spending in manufacturing in the U.S. has increased 4X since 2014 Source: Federal Reserve Economic Data, "Total Construction Spending: Manufacturing in the United States, Millions of Dollars, Monthly, Seasonally Adjust Annual Rate", as of May 2024. Chart description: Line chart showing total construction spending in the U.S. in millions starting in March of 2014 through March of 2024, with the amount increasing 4x over the time period. Regardless of the outcome in this year's presidential election, the reshoring trend could accelerate through increased tariffs, government spending, or both. "On trade, presumptive Republican nominee, former President Trump has suggested a more protectionist stance that would levy a 10% across-the-board tariff and a 60% tariff on Chinese goods," according to the BlackRock Investment Institute. Presumptive Democratic nominee, President Biden is expected to keep his current protectionist policies, like higher tariffs for some sectors, industrial policies favoring domestic production and the use of export controls. Investors interested in capturing the themes of U.S. manufacturing and reshoring may be interested in the BlackRock Large Cap Value ETF (BLCV), which is actively managed by Tony DeSpirito and the BlackRock Income & Value team. The intersection of trade policy and youthful demographics could spur emerging market (EM) opportunities Outside the U.S., trade policy and rewiring supply chains are creating new opportunities in select emerging markets. Among those countries positioned to potentially benefit are Mexico and India. Mexico remains the U.S.'s top trading partner, benefiting from geographic proximity, strong manufacturing-based economy with competitive labor costs, and increased supply chain integration with the U.S. The June election of Claudia Sheinbaum, as Mexico's president could signal a continuation of recent deepening trade ties to the U.S. given that she comes from the same political party as Mexico's outgoing incumbent. Similar trends are occurring in India where the labor pool is deepening its ties with the U.S. Boosted by a large, youthful, English-speaking working population. As a result, both India and Mexico have experienced GDP growth at a higher rate in the past three years than in the previous decades. While near-term growth may be driven more by policies surrounding rewiring supply chains, demographics could become a primary driver of long-term economic growth in these countries. By 2050, China's share of working age population could see a significant decline to below 60% from 73% seen in early 2010s, as evidenced in the chart below. Other EM countries like India, Indonesia, and Mexico may see both population growth and a more stable composition of working age population over the next few decades. This divergence is highlighted in the below chart, showing that demographics will play an increasingly important role in supply chains and trade relationships as developed markets like the United States, Europe and Japan continue to age and see slowing workforce growth. Investors interested in exposure to the theme of Emerging Market supply chains and demographics may be interested in the iShares Emerging Markets Ex-China ETF (EMXC). Shifting population landscapes in emerging economies Source: Reuters Refinitiv, data based on 2023 OECD Labour Force Statistics. Chart description: Line chart showing the working-age population as a % of total population in India, China, Brazil, Mexico, and Indonesia. Highlighting a diversion in demographic trends over time. For illustrative purposes only. Forward-looking estimates may not come to pass. The vast acceleration we're seeing in AI along with the impact of elections around the world are real catalysts presenting potential investment opportunities, ranging from the picks and shovels being used in the AI buildout, to the reshaping of global supply chains. Thematic strategies, using a tailored construction process in each theme's value chain, may allow investors to capture the tailwinds of mega forces that are reshaping our global economy. © 2024 BlackRock, Inc. All rights reserved. Gartner, Catherine Howley, "Gartner Says More Than 80% of Enterprises Will Have Used Generative AI APIs or Deployed Generative AI-Enabled Applications by 2026." As of October 11, 2023. Forward-looking estimates may not come to pass. The Motley Fool, Nicholas Rossolillo, "Nvidia CEO Jensen Huang Says "A New Computing Era Has Begun- How Much Higher Can the Stock Fly". As of August 27, 2023. Forward-looking estimates may not come to pass. Gartner, "Gartner Forecasts Worldwide AI Chips Revenue to Grow 33% in 2024." As of May 29, 2024. Forward-looking estimates may not come to pass. McKinsey & Company "The Semiconductor decade: a trillion-dollar industry" as of April 1, 2022. Net growth calculated based on total revenue of $590B in 2021, with a $125b growth in revenue of computing and data storage from 2021 to 2030, accounting for 25% total net growth of the global semi market at $475B. Forward-looking estimates may not come to pass. Semianalysis, "AI Datacenter Energy Dilemma- Race for AI Data Center Space." As of March 13, 2024. Goldman Sachs, "Generational Growth- AI data centers and the coming US power demand surge." As of April 28, 2024. Forward-looking estimates may not come to pass. IEA, "Global Critical Minerals Outlook 2024." Page 263. As of May 2024. Forward-looking estimates may not come to pass. Reuters, Ernest Scheyder, "Copper Industry warns of looming supply gap without more mines." As of April 21, 2023. Forward-looking estimates may not come to pass. WSJ Pro, Joseph Hoppe & Chrisan Moess Laursen, "AI Siphons Copper Supplies Needed for Green Transition." As of June 6, 2024. Forward-looking estimates may not come to pass. Source: BlackRock, Aladdin Explore, using revenue breakdowns from the S&P 500 index as of 4/30/2024. U.S. Department of transportation, "Bipartisan Infrastructure Law (BIL) / Infrastructure Investment and Jobs Act (IIJA). Illustrating the IIJA act alone authorizes over $1 Trillion. BlackRock Investment Institute, "What we're watching in 2024 elections." As of June 10, 2024. International Monetary Fund, "GDP per capita, current prices." As of May 2024. Reuters Refinitiv, data based on 2023 OECD Labour Force Statistics. Forward-looking estimates may not come to pass. Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses, which may be obtained by visiting the iShares Fund and BlackRock Fund prospectus pages. Read the prospectus carefully before investing. Investing involves risk, including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/ developing markets or in concentrations of single countries. Funds that concentrate investments in specific industries, sectors, markets or asset classes may underperform or be more volatile than other industries, sectors, markets or asset classes and than the general securities market. Actively managed funds do not seek to replicate the performance of a specified index, may have higher portfolio turnover, and may charge higher fees than index funds due to increased trading and research expenses. Negative changes in commodity markets could have an adverse impact on companies the Fund invests in. The price of the equity securities of companies engaged in mining and the price of the mined metals may not always be closely linked. Worldwide metal prices may fluctuate substantially over short periods of time, so the Fund's share price may be more volatile than other types of investments. Technology companies may be subject to severe competition and product obsolescence. Convertible securities are subject to the market and issuer risks that apply to the underlying common stock. The Fund's use of derivatives may reduce the Fund's returns and/or increase volatility and subject the Fund to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. The Fund could suffer losses related to its derivative positions because of a possible lack of liquidity in the secondary market and as a result of unanticipated market movements, which losses are potentially unlimited. There can be no assurance that the Fund's hedging transactions will be effective. Small-capitalization companies may be less stable and more susceptible to adverse developments, and their securities may be more volatile and less liquid than larger capitalization companies. This material represents an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular. The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective. The information presented does not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision. This material contains general information only and does not take into account an individual's financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial professional before making an investment decision. The information provided is not intended to be tax advice. Investors should be urged to consult their tax professionals or financial professionals for more information regarding their specific tax situations. The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, "BlackRock"). The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Bloomberg, BlackRock Index Services, LLC, Cboe Global Indices, LLC, Cohen & Steers, European Public Real Estate Association ("EPRA® "), FTSE International Limited ("FTSE"), ICE Data Indices, LLC, NSE Indices Ltd, JPMorgan, JPX Group, London Stock Exchange Group ("LSEG"), MSCI Inc., Markit Indices Limited, Morningstar, Inc., Nasdaq, Inc., National Association of Real Estate Investment Trusts ("NAREIT"), Nikkei, Inc., Russell, S&P Dow Jones Indices LLC or STOXX Ltd. None of these companies make any representation regarding the advisability of investing in the Funds. With the exception of BlackRock Index Services, LLC, who is an affiliate, BlackRock Investments, LLC is not affiliated with the companies listed above. Neither FTSE, LSEG, nor NAREIT makes any warranty regarding the FTSE Nareit Equity REITS Index, FTSE Nareit All Residential Capped Index or FTSE Nareit All Mortgage Capped Index. Neither FTSE, EPRA, LSEG, nor NAREIT makes any warranty regarding the FTSE EPRA Nareit Developed ex-U.S. Index, FTSE EPRA Nareit Developed Green Target Index or FTSE EPRA Nareit Global REITs Index. "FTSE®" is a trademark of London Stock Exchange Group companies and is used by FTSE under license. © 2024 BlackRock, Inc or its affiliates. All Rights Reserved. BLACKROCK, iSHARES, iBONDS, LIFEPATH, ALADDIN and the iShares Core Graphic are trademarks of BlackRock, Inc. or its affiliates. All other trademarks are those of their respective owners.

Heartland Value Fund Q2 2024 Portfolio Manager Commentary

Though popular equity indices are priced at historically high levels, we have been able to initiate new positions at admirable valuation discounts. "You can't take the same actions as everyone else and expect to outperform."- Howard Marks The esteemed value investor Howard Marks wisely pointed out the fallacy of thinking you can follow the herd while expecting to outpace it at the same time. Successful investing, he noted, is "the exact opposite" of trend following. We agree. Our willingness to steer clear of the path toward speculation by staying true to Heartland's 10 Principles of Value Investing™ has helped us outperform the Russell 2000 Value® Index so far in 2024 and over the past 1, 3, and 5 years. The Heartland Value Fund has also outpaced a majority of its small value peers - including active and passive strategies - during these time periods, according to Morningstar, by focusing on well-managed, undervalued businesses with resilient balance sheets and sound business strategies. Such attributes may lack flash in an era marked by the speculative frenzy surrounding artificial intelligence, yet these are precisely the types of businesses being targeted for acquisition. Canadian Western Bank, which we initially purchased in 2021 at a cost of around $22 (USD) a share, agreed to be bought last month by National Bank of Canada and was trading at more than $30 a share at the end of June. At around the same time, Poland Spring owner BlueTriton agreed to merge with Primo Water, another portfolio member. With the typical stock in our Fund trading at just 10.5 times 2025 estimated earnings per share, versus 19.9 for the S&P 500 Index, we wouldn't be surprised if there were more take outs to come. Even if that does not come to pass, we are confident a portfolio constructed on the merits of low price to earnings and low debt with strong earnings and revenue prospects makes sense in all markets. What gives us this conviction? For starters, we have implemented guardrails to make sure that performance is driven by security selection, and not because we are overweight or underweight an industry relative to the index. Even if those allocations are the result of bottoms-up stock picking, and not a top-down sector bet, they could end up being more responsible for the Strategy's results than our selection effect. To prevent this, sector exposures (with exceptions for small sectors) must be no less than 50% and not more than 150% of the benchmark's. Our goal is to win in each area of the market so we can deliver consistent outperformance. Another comforting factor is that when it comes to security analysis, we seek confirmation through old-fashioned "boots on the ground" examination. For more than 40 years, Heartland has engaged in active, in-person fundamental research to gain first-hand knowledge about a company's operations and strategy. We want to see, with our own eyes, how its products stack up versus the competition's. This is accomplished, in part, through meetings with management and customers, such as founder Bill Nasgovitz's recent visit to the Charles LeMoyne Cancer Center, a customer of a long-term holding, Accuray Inc. (ARAY). Through his visit, Bill gathered insight into Radixact, an Accuray product, manufactured in Madison, Wisconsin, being installed in the Montreal hospital to radiate cancers (see photo below). Visiting a company to ascertain its suitability for a portfolio seems to be becoming a lost art. In an era of passive investing, where investors feel comfortable buying an index fund or ETF without understanding what they own, we believe this on-the-ground research sets us apart from the crowd. For the quarter, the Heartland Value Fund was down 3.21%, outpacing the 3.64% loss for the Russell 2000® Value Index. Stock selection was mixed during this brief period, with the Strategy outperforming the benchmark in Consumer Staples, Financials, Industrials, Information Technology, Materials, and Real Estate, while lagging in other areas including Consumer Discretionary, Energy, Health Care, and Utilities. Security selection, however, was the primary reason the Fund has beaten the index so far this year, up 3.29% versus the loss of 0.85% for the benchmark. While opportunities aren't necessarily plentiful, we try to take advantage of them when they arise. A good example is Hexcel Corp. (HXL), a new position added during the quarter. We didn't have any holdings in the aerospace & defense portion of the Industrials sector entering the period. Admittedly, this is not a huge sub-industry group; in fact, it only makes up a little more than 1% of the Russell 2000 Value Index. But we are mindful that deviating from our benchmark's weightings detracts from our stock picking and potentially adds risk and volatility to our Strategy. The good news for us was the shares took a hit in early April, after the market reacted negatively to the announced appointment of Tom Gentile as Chief Executive Officer. Gentile formerly served as CEO of Spirit AeroSystems, a major aerospace supplier that ran into production challenges and quality issues on parts produced for Boeing. Investors clearly did not like the hire, but we felt the reaction was excessive. Gentile inherited bad contracts at Spirit, and the HXL Board of Directors has significant experience in the aerospace & defense space, so we feel confident they understand the implications of their decision. Hexcel seems to be in the 3rd inning of a long-term recovery. The company is diversifying into new defense production, where its composites are critical for stealth platforms. The sweet spot for the business, however, is in wide-body aircrafts (such as the Airbus A350 or Boeing 787) that help airlines lower their unit costs. This segment has yet to bounce back from the global pandemic, so there is still runway for HXL's rebound. Yet the shares are attractively priced relative to cash flow, trading below prior aerospace M&A multiples. Management seems to agree, as there has been a healthy dose of insider buying activity lately, including on the part of its outgoing CEO, who recently purchased nearly $1 million in company stock. Another area where we are underweight is banks, but we don't just want to add holdings in that industry to check a box. The goal is to find well-run institutions in good regions with solid population growth. Enter Seacoast Banking Corp. of Florida (SBCF). SBCF, which provides commercial and consumer banking, wealth management, and mortgage services across Florida, has been on our watch list for some time. Investors, concerned about Seacoast's profitability, have pushed the share price down more than 17% year to date. But we believe the bank's net interest margin is poised to rebound in the second half of this year. Meanwhile, management has been aggressively reducing costs by closing redundant branches at the same time it has been adding bankers. If loan demand picks up even modestly, the combination should result in decent operating leverage. An added benefit: Seacoast could be a takeout target, as it is one of the few remaining pure-play regional banks in Florida, one of the highest growth regions for financial services. Yet the stock trades at just 1.5 times tangible book value, which is one standard deviation below its 10-year average multiple. In this volatile market, we also understand that promising long-term opportunities may already reside in our portfolio; our job is to have the discipline to stick with them, even amid short-term challenges. An example of this is Century Communities (CCS), a homebuilder based in Denver. The stock slumped more than 15% in the second quarter along with other homebuilders as mortgage rates rose. While weakness in real estate could persist for the next few quarters, this is a case where the story is about the future. Simply put, there is a massive shortage of homes in America after building rates fell below the 50-year average following the global financial crisis. Since 2012, 7.2 million more households have been formed than single-family homes constructed. As the median sales price on new homes sold rose to $433,500 in April, housing affordability sank to record lows, putting a strain on the lower end of the market just as millennials are forming new households. Less than 52% of millennials currently own homes, compared with 78% for Baby Boomers and 70% for Gen X. This is creating an attractive supply-demand dynamic for CCS, as approximately 94% of the homebuilder's sales are made to entry-level buyers. We believe Century's management team, which has guided the company to more than 20 consecutive years of profitability, should be able to navigate the housing slowdown while taking advantage of this gap. Yet the stock trades at just under 1X book value versus 1.7X book for homebuilders and 4.3X for the S&P 500. We agree with Howard Marks: It doesn't make sense to passively follow the herd like index funds. Given how richly priced the broad market is today, we are fine going in a different direction to build in a margin of safety. The fact that mega-cap tech stocks continue to outperform in the face of historically frothy prices, in our view, only makes the case for small value stronger. As value investors, our job is to be disciplined enough to avoid what the crowd is buying today while being patient enough to pounce on opportunities, which is guided by our 10 Principles of Value Investing™.