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A Tale Of Two Shoppers: Holiday Shopping In America

This holiday season feels like a tale of two shoppers. Consumer sentiment is near multi-decade lows, with the University of Michigan index hovering around levels historically associated with recession. At the same time, American household savings have been buoyed by a historic rebound in the stock market. A rally fueled by AI optimism and resilient corporate earnings has pushed markets higher while tariff concerns seem to have evaporated almost as quickly as they first surfaced. This widening gap between the financial health of America’s earning class and the buying power of market participants is becoming one of the defining narratives of the decade.

The driving force behind consumer sentiment is wage growth. Real wage growth for top earners continues to outpace inflation, but at the same time, lower-income households, still digesting the whiplash of the pandemic economy, have watched their wage gains stagnate or disappear entirely. Not having wage growth to fall back on when real, everyday inflation hasn’t gone away can have profound implications on spending habits for most Americans.

Note, inflation hits everyone differently. Every household has its own basket of goods, its own definition of “expensive,” and its own pain points. Recent earnings and consumer insights from retailers show almost everyone is looking for a deal. Strong stock market returns can bolster retirees’ spending habits, but for the majority of working Americans, this holiday season will likely center solely around finding the best deal in town.

Are Tariffs Impacting Shoppers?

After dominating headlines earlier this year, tariffs seemed to have faded from public consciousness. Markets corrected in dramatic fashion following Liberation Day in April as investors tried to interpret the ripple effects of escalating levies on supply chains, consumer goods, and import costs. But as markets rebounded and AI-driven optimism took over, tariffs gradually drifted out of the spotlight, even though their impact hasn’t completely disappeared.

Part of the reason consumers don’t feel tariff-driven inflation is because of where those costs actually land. Much of the tariff pressure shows up in categories like personal electronics, appliances, and durable household goods – items that carry slower replacement cycles and more flexible margins across the supply chain. In many cases, suppliers and manufacturers have absorbed a majority of the hit to stay competitive, leaving prices at the counter or online relatively unchanged. Furthermore, when it comes to CPI, the highest tariff exposure sits in the goods categories that make up a smaller share of the average household budget. Even when higher input costs eventually make their way to consumers here, the impact on the overall “inflation rate” that gets reported in the data should be pretty minimal.

However, that doesn’t mean that Americans won’t feel inflation. They feel it every day because right now a lot of the items with perceived rising prices are items that are really visible, tied in to everyday living. Food, energy, and shelter are the three CPI baskets that tend to really matter for consumers and any moves here really attract attention. These items account for a disproportionate share of monthly spending, especially for lower- and middle-income households. A 3% rise in groceries hits harder than a 10% rise in laptop prices simply because families buy milk and eggs every week, not MacBooks. Additionally, costs like rent, the mortgage, or insurance also tend to dominate budgets, so even small moves there can start to crowd out discretionary spending.

There is a psychological aspect to inflation as well. Price increases for some grocery items can be particularly jarring. A 25%increase in high visibility items like coffee or beef stands out and makes people reevaluate their shopping patterns even if the overall grocery bill may only be up a few percentage points.

The recent decision from the Trump administration to roll back tariffs on beef and coffee imports from Latin America is encouraging. Cheaper protein and cheaper caffeine may not solve inflation, but they do ease pressure on households that remain sensitive to grocery prices. More importantly, the reversal is a quiet acknowledgement of a long-standing economic truth – tariffs are inflationary by design, and consumers ultimately face the consequences in the long-run. The efficacy of tariffs at reducing our budget deficit can be debated, but general consensus on Capitol Hill is that American shoppers need some price relief.

Shopping for Deals

The evolution of the K-shaped economy has been on full display in 2025. Walmart’s recent earnings captured the dynamic better than anything else. Strong demand for fast shipping, online convenience, and private-label value pushed the stock sharply higher. Yet the real story was how much market share Walmart has gained across all income brackets. Wealthier households are trading down, middle-income households are stretching their budgets, and lower-income households are making uncomfortable substitutions. Everyone is hunting for a deal.

Consumers are no longer loyal to brands – they’re loyal to prices, and retailers know it. Even high-income shoppers, who historically gravitated toward premium labels, are gravitating toward generic-labelled essentials and groceries. Buy-now-pay-later usage is also climbing across income tiers and expected to reach over $20 billion worth of transactions in November and December, increasing 10% from 2024. Technology is changing the playing field too – holiday shopping searches will likely be heavily AI-assisted this year, making it easier to find a good deal and compare prices quickly. AI utilization is also going to reward digitally focused marketplaces. The ones that are not only competing on price, but who understand how AI is going to interact with their pages, those companies are likely set to receive more attention than ever before.

Retailers are also pulling forward discounts earlier into the season. Getting ahead of Black Friday deals gave big corporations a chance to compete against resale marketplaces like eBay (EBAY) and Poshmark, especially as more consumers are willing to buy secondhand, premium-branded clothing and gifts.

With retailers leaning into early discounts, they have also acknowledged the current state of the consumer through their store layouts and holiday inventory. Costco, for example, is accommodating the slowdown in discretionary spending by stocking up on seasonal basics like winter apparel, holiday meal prep, and paper products while still leaving some room for top-end luxury items like saunas and furniture for those unaffected by inflation. The unnecessary holiday décor likely won’t get as much shelf space this year. Simply said, there is no more middle ground. It’s deal or no deal now.

Technology Heating Up Shopping Competition

One of the most underappreciated shifts in the economy is the transformation of retailers into technology companies. Walmart (WMT), Target (TGT), and Costco (COST) are no longer defined solely by their physical stores. They are becoming full-stack platforms built on logistics networks, data infrastructure, and AI-driven personalization that rival the capabilities of traditional tech firms. Walmart, for example, will begin listing its stock on the more tech-focused Nasdaq exchange in December. Goodbye old-school retail, and hello AI integrated retail.

While it’s becoming evident for retailers, this theme can easily be applied across the U.S. economy more broadly – we live in a world where big companies with integrated technology stacks are able to leverage size and scale in a way that puts small companies at a serious disadvantage. Consumers often protest the domination of corporate entities over the small business – it’s a popular political refrain. But spending habits aren’t exactly aligned. Every time consumers restock laundry detergent through the Amazon (AMZN) app, they’re directly contributing to the dominance of big corporates!

The forces pushing retailers in this direction are straightforward. In the midst of elevated inflation, consumer spending has shifted toward groceries and essential goods, leaving retailers with little room for error when it comes to margins. To expand profitability, companies are turning to technology and data monetization as key growth engines. At the same time, consumer expectations have changed. Shoppers now demand same-day delivery, seamless returns, near-perfect order accuracy, and tailored recommendations – all of which require sophisticated technology behind the scenes.

Tariffs and supply chain volatility add another layer of complexity. Incorrectly forecasting inventory has never been more expensive, pushing retailers to rely on AI to determine what to stock, where to place it, and how to price it. In many ways, the retailers best positioned for the next decade are those that behave less like merchants and more like technology companies with powerful logistics capabilities. The winners will be the firms that use data to create a loyal following of consumers seeking protection from the seemingly ever-increasing cost of living in America.

Checking Out

This holiday shopping season is shedding light on America’s K-shaped economy. While wealthier households enjoy rising asset values and stronger wage growth, lower- and middle-income consumers continue to feel the pinch of everyday inflation. But across income brackets, the hunt for deals has become the defining theme. Retailers have responded by leaning into technology, logistics, and data-driven personalization to meet these evolving demands and protect margins. Tariffs and pricing pressures remain in the background, quietly influencing both what eds up on shelves and what consumers can afford. Americans are still going to shop this holiday season, but more cautiously and price-sensitive than ever before.

Why American Housing Markets Have Stalled

The U.S. housing market is currently in a paradoxical state. On one hand, there’s a significant demand backlog driven by millions of Americans in need of homes and decades of underbuilding. On the other hand, the usual mechanisms that convert this demand into actual home closings are stalled. Home sales are currently the lowest they’ve been in over 30 years! Mortgage rates have yet to come down meaningfully for it to make sense for homeowners to truly consider a move and the construction labor market has seen better days as it grapples with a low supply of workers and a surge in input costs. The affordability of the white picket fence is increasingly being criticized by young professionals, meaning the rental market is not just for Americans on the move. For prospective homebuyers, homebuilders, and investors this creates a landscape that appears ripe with opportunity but demands caution in practice.

Interest Rates Impact Housing Affordability

Mortgage rates remain one of the most pivotal factors in housing affordability. Following the ultra-low rates of the post-pandemic era, the market has shifted to higher levels, though they’ve eased slightly recently. According to Freddie Mac data, the average 30-year fixed mortgage rate stood at 6.27% as of mid-October 2025.

A decade of near-zero interest rates after the Great Financial Crisis had allowed developers and investors to leverage extensively for favorable cap rates. Nonetheless, new starts didn’t necessarily surge relative to the broader reappearance in aggregate demand. More regulatory hurdles and financial constraints also made it hard for homebuilders to take advantage of the near zero rates.

Fast forward a few years and interest rates again throw a wrench in the system; after low Covid era interest rates initially stoked demand, the rapid rate hikes in 2022 crushed affordability and created a lot of grid lock in the housing system. Newly high rates discouraged sellers from listing their homes as a comparable refinance rate was so much higher. So housing supply dropped. At the same time, higher rates have made purchasing a house more expensive – so demand is down too.

The recent decline in rates should be supportive for the housing market, at least on the surface. This is visible with builder sentiment rising to its highest level in six months. Yet, the degree to which rates have dropped may not be substantial enough. Many homeowners secured sub-4% rates during the pandemic and are reluctant to move and refinance just because of an extra 25 basis point reduction in mortgage rates.

Absent sellers coming into the market and new supply coming online, lowering rates could just serve to push home prices even higher as buyers potentially come back into the market. Moreover, affordability must be viewed holistically: while current rates aren’t historically extreme, persistent inflation is curbing discretionary spending, making mortgage payments more burdensome for American consumers.

Why Is Building New Homes So Expensive?

The homebuilding industry faces persistent structural challenges that hinder supply growth. Top of mind currently is a shortage of skilled construction labor. A joint study by the Home Builders Institute (HBI) and the National Association of Home Builders (NAHB) estimates that this labor shortage cost the single-family sector over $8 billion in lost production in 2024 alone, while delaying construction times by an average of almost 2 months. Even more notably is that immigrant labor constitutes a significant portion of the construction workforce. Large-scale deportations can exacerbate already existing shortages, leading to sharp increases in labor costs. Removing thousands of workers can slow construction projects and reduce output by millions of jobs – affecting both immigrants and U.S.-born workers while driving up home prices.

Additionally, land use regulations continue to make homebuilding more burdensome. And this isn’t a national problem – it’s a local problem which makes it even harder to address at scale. This is likely not talked about enough – when we struggle to create new homes for people to live in, an entire generation of workers can become priced out of new job opportunities and innovation can stall. Ample housing is necessary to enable relocation in our country and eliminate frictions for our workforce to move about freely.

However, this is easier said than done. NIMBY (“Not In My Backyard”) forces actively resist efforts to make housing more affordable, driven by one fundamental motivation: scarcity. Homeowners know that the value of their property depends largely on the supply of homes in their neighborhood. While zoning reform sounds promising, it is a complex challenge that is likely to persist for many years.

And we can’t forget about inflation. Homebuilders face rising input costs like lumber, concrete, and steel, and it doesn’t help that the current administration has placed tariffs on goods coming from our next-door neighbors like Canada and Mexico. The vast majority of U.S. lumber imports come from Canada, while Mexico is a leading exporter of lime and gypsum products used in drywall manufacturing. Homebuyers, on the other hand, have to deal with soaring homeowners’ insurance premiums, which have surged nearly 70% since 2019. These rising insurance costs inflate total housing carrying expenses, erode affordability, and can even depress home values in disaster-prone areas like Florida and California.

The overall impact: even as mortgage rates dip, other under-the-radar costs continue to rise, tightening buyer budgets. Combined with homebuilders’ input and labor cost burdens, potential homebuyers are in a tough spot right now.

Baby Boomers Impact The Housing Market Too

Baby boomers dominate the housing market, owning approximately 40% of residential real estate. As a result, the U.S. housing stock is now skewed toward larger homes – a result of homebuilders catering to older folks upgrading houses throughout their life. Today, however, demand has shifted toward smaller starter homes like 2-bed/2-bath units favored by Gen Z renters transitioning to ownership. This mismatch is extremely important because it tests the theory that houses will become more affordable once baby boomer’s pass their homes off to the next generation of buyers – what if nobody wants those homes? This is where renovation will have to come into play to address the wrong kind of supply coming to market. The retail giants like Home Depot (HD) and Lowe’s (LOW) will continue to enable renovations and additions like smart home technology, insulation upgrades and kitchen tear downs and are poised to maintain their stronghold on the home improvement market.

Worth considering is that baby boomers’ grip on supply in the U.S. will be compounded by advances in medical tech and AI-assisted home systems. The availability of human capital to serve this generation will also be critical. Staffing firms providing in-home skilled nursing, paired with AI, are likely to make staying in your home as you age more practical. This is paired with the fact that nursing home costs are becoming increasingly unaffordable – abundant demand for rooms paired with lack of supply is making access to high quality nursing homes expensive. Enabling our country’s senior citizens to “age-in-place” is a huge market for Big Tech firms like Apple (AAPL) – wearable tech and assistive access within their iOS has only served to make their lives easier and has plenty of runway to continue to scale.

Hard to Argue Against Renting

With homeownership increasingly unattainable for younger generations, renting has become the new norm. The old school American dream of buying a house after graduating college and starting a job is increasingly out of reach for younger workers. Delaying the first home purchase until after age 30 is not at all uncommon – meaning the renters market is more important than ever. When interest, taxes, insurance, and maintenance are all taken into account, owning is generally more expensive and time consuming than renting. Additionally, the opportunity cost from putting a down payment on a house can’t be ignored. For generations prioritizing their time and spending more on experiences, the homeownership lifestyle is becoming more out of style.

This trend benefits consumer discretionary firms tailoring products to renters. Interior design services offering non-permanent customizations are in high demand. Stocks poised to benefit include furniture and home goods retailers like Wayfair (W), which offers affordable décor for temporary lifestyles. Additionally, rent-to-own specialists like Upbound Group (UPBD) could see upside as budget-conscious renters furnish without large upfront costs. These companies capitalize on renters’ habits of prioritizing flexible, value-driven purchases over permanent investments.

Another point of contention with the renting vs. owning debate has been private equity behemoths becoming more involved in the residential market. Wall Street buying up Main Street has been criticized extensively by Capitol Hill, but the share of single-family homes owned by companies like Blackstone (BX) is still relatively small. And while many might point to Wall Street as the main culprit for making suburban homes unaffordable, there are real benefits to offering homes for rent v. purchase. Enabling lower income families to rent in the suburbs gives their children better access to high quality schools and quality of life – key factors in determining future financial health and college graduation rates.

Wrapping It Up

Structurally, the U.S. housing market is undersupplied, and demographics point to long-term tailwinds for the sector. But higher borrowing costs, ownership burdens, and industry bottlenecks paint a cautious picture for prospective homebuyers. Investment potential endures, but it will demand discipline: the current landscape does not lend itself to the traditional path of becoming a homeowner anymore. Until supply sorts itself out, look for opportunities within America’s renting cohort and enabling technology. The story of housing being unaffordable in America did not happen overnight, and it will probably take years to fix.

By: Colin Cheaney, CFA

Nearshoring is reshaping the North American supply chain, driving a reconfiguration of shipping routes as manufacturers relocate closer to where the American consumer shops. While tariff uncertainties continue to influence trade, large retailers and wholesalers remain relatively insulated, functioning as pass-through entities that can absorb rising input costs while maintaining margins. Even when prices rise, people still need to go shopping for their groceries and staples. Even discretionary goods still get purchased when prices rise, though the quantity and type of good may shift. In this hypercompetitive and turbulent environment many businesses are sharpening their focus on customer retention and differentiation.

A key competitive advantage emerging from this shift is the expansion of last-mile delivery and additional consumer services. E-commerce leaders like Amazon have set high expectations with vertically integrated logistics, prompting traditional retailers and wholesalers to enhance their own delivery capabilities. Historically reliant on third-party services for shipments of groceries, home appliances, and other goods, these companies are now investing in last-mile infrastructure to improve speed and efficiency.

As last-mile delivery evolves, businesses that streamline logistics and expand direct-to-consumer services stand to gain market share. For investors, this sector presents a compelling opportunity to support enabling firms while reducing exposure to the volatility of tariff-sensitive markets.

Serving The American Consumer

While manufacturers often face supply chain challenges related to tariffs, large-scale retailers and wholesalers generally aren’t as sensitive. Wholesalers can purchase goods in bulk, leveraging economies of scale to secure lower prices, and by doing so, can negotiate favorable terms with suppliers and absorb higher shipping costs. Both wholesalers and retailers also benefit from the use of bonded warehouses, where goods are considered to still be in transit, which enable storage without immediate tariff payments. This approach provides them with flexibility in managing inventory costs and delaying the tariff impact until goods are moved into domestic markets and sold to end consumers. Firms like Walmart (WMT) can then pass those costs directly to the consumer if need be in the form of higher prices on both essential and discretionary goods.

Even if tariffs are implemented in the coming months, the major retailers and wholesalers in the U.S. will continue to sell goods to American consumers. Walmart’s recent sales outlook for 2025 sent the stock into a slump due to forecasts lower than what analysts had expected, but they still forecasted 3-4% expected sales growth in the first quarter this year. The American consumer is really hard to slow down! Regardless of the overall economic climate, people need essentials — groceries, cleaning supplies, medicine, etc. — and companies like Walmart (WMT) and Costco (COST) continue to be cost-effective options for Americans. While consumer spending may shift to lower-cost substitutes in a recession, these companies have taken precautions to dampen any worrisome investors.

While added input costs are passed on to consumers, these companies also take steps to “recession-proof” their aisles and provide options for people across the income spectrum. For example, Costco (COST) has leveraged their membership-based business model to create pricing stability for customers. Walmart (WMT) and Target (TGT) both have their own loyalty programs, and even their own private brands which have become more and more popular as people are more open to “trade down” while shopping. Recent survey data from McKinsey & Company suggests that more than 80% of US consumers believe private brands to be of equal or higher quality compared to national brands. So, while Americans are becoming less loyal to brand names and pivoting to private labels like Costco’s Kirkland Signature or Walmart’s Great Value, these chains are still able to retain customers and reward brand loyalty. The composition of goods in grocery carts may change, but where they shop likely won’t.

Building The Right Shopping Experience

With large-scale retailers and wholesalers more insulated from potential tariffs, CEOs are instead contending with how to best balance in-store sales with e-commerce sales. In Walmart’s latest earnings report, considered a bellwether for U.S. consumer trends, e-commerce sales rose 20% YoY and one third of shoppers elected for delivery times of three hours or less. Convenience, speed, and efficiency are top of mind for consumers, and retailers have had to adapt. With the share of goods purchased online continuing to increase, retailers have increasingly turned to micro-fulfillment centers, which are smaller warehouse facilities designed to stock high-demand items closer to consumers. These centers allow for quicker order processing and reduced transportation costs, ensuring that customers receive their purchases faster.

Additionally, the rise of dark stores, retail locations repurposed for online order fulfillments, has helped businesses streamline operations and reduce overhead costs. These dark stores are strategically stocked with high demand products and located in densely populated key markets to reduce delivery times as much as possible. With less foot traffic compared to traditional storefronts, it’s also much easier to implement automated sorting/ packing systems and use robots to speed up fulfillment — whether it be footwear, groceries, or electronics, expect to see more dark stores pop up in your hometown. Investors should also keep in mind the companies that enable the buildout of same-day delivery and micro-fulfillment centers — industrial REITs. Companies like Amazon (AMZN) and Walmart (WMT) collaborate closely with industrial REITs like Prologis Inc (PLD) to develop facilities integrated with cutting-edge automation systems that cater directly to their fulfillment needs.

Even with the need for local fulfillment centers and dark stores, traditional storefronts have also never been more valuable. According to CBRE Group, retail real estate has the lowest vacancies of any commercial real estate sector. It could be as simple as elevated foot traffic from flexible work-from-home schedules or the desire for an expert opinion — but at the end of the day, there’s plenty of reasons for Americans to still shop in-person. In-store shopping still far outweighs online shopping in terms of retail sales dollars. Annual U.S. retail in-store sales for 2023 topped over $7 trillion, while online sales came in slightly above $1 trillion — still a massive difference between the two shopping methods, but one whose gap will likely continue to narrow.

For reference, online sales as a percentage of total retail sales have more than doubled since 2017. So, to further protect the appeal of in-store shopping, retailers can look to promote their installation and pro-shop services. Take Home Depot (HD) for example – as the largest home improvement retailer in the U.S., its earnings are closely tied to housing activity, but even if home sales slow it can still benefit from DIY home renovations by existing homeowners. Offering an expert opinion on drywall installation or paint jobs still has its perks. Either way you slice it; the large retailers have plenty of resources at their disposal to adapt to evolving consumer spending patterns down the road.

Delivering The Goods

With that being said, last-mile delivery is now the name of the game. Companies like DoorDash (DASH), Instacart (CART), and Uber (UBER) dominate last-mile delivery for grocery stores, restaurants, and even convenience stores, but how do the larger players make it happen? Costco, for example, has embraced partnerships with Instacart to offer same-day grocery delivery, allowing members to receive bulk goods without visiting physical warehouse locations. By leveraging these networks, stores can scale their delivery operations without maintaining an extensive fleet of delivery vehicles, making the process both cost-effective and able to comply with consumer expectations.

Even without scale, smaller retailers have options. Walmart’s home delivery service, GoLocal, has gained significant traction and recently announced integration into IBM’s Sterling Order Management system. IBM customers can now access the delivery service through their order management system and greatly reduces the friction for accessing GoLocal’s same-day delivery options. The gig economy drivers within GoLocal’s network are able to deliver goods from places like Home Depot to Sally Beauty, meaning traditional storefronts have almost become their own makeshift warehouses.

On the flip side of that coin is a retailer like Amazon. While the e-commerce giant used to rely on partnerships with the likes of FedEx, UPS, and USPS, the scale at which it’s grown has allowed for the build out of its in-house logistics network to get orders from their distribution centers to the end-consumer. Amazon offers both independent contractor work called Amazon Flex and third-party businesses called Delivery Service Partners for package deliveries, in addition to having their own employees drive their fleet of more than 20,00 electric delivery vans and counting. Reducing the distance between inventory and their customers has also been enabled by their same day delivery centers where fulfillment, sortation, and delivery are all vertically integrated. Besides Whole Foods, Amazon doesn’t have its own stores, so to compete with the likes of Walmart and Target, faster deliveries are the key to customer loyalty.

Investing In The Future

With major players having leveraged third-party services, while also expanding their own logistics networks, it will come down to who can offer the fastest delivery at the lowest cost. To achieve lower costs while not sacrificing quality of service, automation stands to take a front seat in the buildout of last-mile delivery. Drones and driverless cars have quite an opportunity ahead, but the upfront capital investment required will be substantial, meaning partnering with large-scale retailers or third-party delivery services has been common especially during this initial buildout phase. Certain cities like Los Angeles have already seen an increased acceptance of robotics for food delivery thanks to Serve Robotics Inc (SERV). The company’s partnership with Uber (UBER) introduced autonomous sidewalk delivery robots to bring down the all-in costs of ordering food online. Noteworthy is that without having to tip the robot, customers feel like they’re saving money which can lead to a stickier customer base.

Artificial intelligence, outside of robotics, is also transforming last-mile delivery by making routes more efficient and cutting input costs. Predictive analytics allow businesses to foresee demand spikes and allocate resources properly, in turn avoiding costly delivery delays. Embedded AI in third-party delivery services can examine traffic patterns, weather, and roadblocks to recommend the quickest delivery routes and lead to smarter navigation over time. Time is of the essence in last-mile delivery, so every second counts. While AI is already being used in proprietary logistics operations, the next step is to implement at the ground level, meaning equipping delivery drivers with the latest IoT technology to further enhance delivery data collection and overall efficiency. Amazon has reportedly been developing smart glasses for its drivers to assist with road navigation and even navigating hallways in commercial buildings for drop offs. From where we stand today, wearable tech will likely be adopted first by employees like delivery drivers, as there’s more of a use-case compared to the typical American consumer.

Checking Out

Retailers and wholesalers are navigating a rapidly evolving supply chain landscape, balancing the impacts of nearshoring, tariff uncertainties, and shifting shopping preferences. While they can pass through costs associated with tariffs or inflation, their competitive advantage increasingly depends on last-mile delivery innovations and expanded consumer services. The competitive landscape demands investments in logistics, automation, and micro-fulfillment centers to transforming how goods reach customers quickly and efficiently. As e-commerce continues to grow, the retailers that present the best investment opportunities are those who best integrate technology, delivery networks, and in-store experiences to solidify their market dominance.

Defense Spending Could Protect Your Investment Portfolio

The U.S. defense industry is emerging as one of the most resilient sectors for investors. Amid global instability and rising geopolitical tensions, American policymakers are displaying a unique commitment to military strength. The recent passage of President Trump’s “One Big Beautiful Bill”, a sweeping piece of legislation that pushes U.S. defense spending to historic highs, and a newly agreed upon EU – U.S. trade deal underscores this trend. The bill adds $150 billion in new funding to the Department of Defense, bringing total projected spending for the 2026 fiscal year to over $1 trillion. On top of that, the EU has committed to over $600 billion of military equipment procurement in the coming years. The signal to markets is undeniable: defense is a national and global priority.

For investors, this presents an opportunity. Massive new capital is now earmarked for shipbuilding, advanced munitions, next-generation aircraft, and a new missile defense system dubbed the “Golden Dome.” Defense stocks, long considered cyclical or defensive, may now be positioned for long-term structural growth. Interestingly, this surge in spending comes even as U.S. military expenditures, as a share of GDP, sit at multi-decade lows. According to the Stockholm International Peace Research Institute (SIPRI), global defense spending has climbed 37% over the past decade, but America’s share of that growth has not kept pace with its expanding economy. In short: U.S. defense spending is climbing fast in absolute terms, but relative to our economic size, there’s still plenty of runway ahead.

Geopolitical Tensions: Fuel for the Defense Industry

Ongoing wars in Europe and the Middle East and intensifying tensions in the Indo-Pacific have forced governments across the globe to rethink their defense postures. In Europe, Russia’s continued aggression in Ukraine has led to a dramatic increase in defense budgets across NATO member states. The 2% GDP target for defense spending has given way to a 5%+ target for European members, meaning our allies are finally putting their money where their mouth is – although those expenditures are far from guaranteed. For context, in 2024, the U.S. spent roughly $3,000 per citizen on national defense, more than four times what most European nations spent, according to an article from Barron’s. In Europe that number needs to rise meaningfully if they’re going to hit their NATO commitments.

The Middle East is increasingly unstable. U.S. involvement in ongoing conflicts in the region, including efforts to deter Iran’s nuclear program and manage the persistent tensions between Israel and Palestine, continues to highlight the need for advanced missile defense systems, precision munitions, and rapid deployment capabilities.

The conflict also highlights the expenses associated with war. Every rocket fired comes with a price tag and restocking munitions is expensive, especially when a conflict is hot and countries can’t afford to wait for supplies.

The conflict in the Middle East is also indirectly expensive in that it introduces significant volatility into global oil markets. Iran, as a key OPEC member, controls the northern side of the Strait of Hormuz, through which roughly 20% of the world’s petroleum supply passes. Any disruption here carries both economic and strategic consequences – further justifying elevated defense spending.

Meanwhile, tensions in the Indo-Pacific region continue to build. China’s assertiveness around Taiwan and the South China Sea places it in direct competition with U.S. naval and diplomatic interests. The need to prepare for a potential conflict in the region has subtly been called to the forefront via Trump’s recent focus on shipbuilding and other maritime industries. U.S. naval power is extremely important if we were to see a real conflict develop here, but we need more ships. The U.S. market share in shipbuilding has plummeted to just 0.13% as of 2023, down from 5% in the 1970s, according to the U.S. Naval Institute. In contrast, China, Japan, and South Korea now account for over 90% of global shipbuilding capacity. As a result, the U.S. is more reliant on allies and commercial partnerships than ever before – a vulnerability that further underscores the need for investment.

Defense Spending and Foreign Sales: A Boon for Contractors

The international dimension of rising defense spending adds a powerful tailwind for U.S. contractors. In 2024, the U.S. Department of State reported that global arms transfers for the U.S. reached nearly $118 billion, and $97 billion of that was funded directly by U.S. allies and partners. American dominance in foreign military sales is accelerating, not just because of technological superiority, but because of interoperability. As Europe, the Middle East, and Asia expand their defense budgets, they are prioritizing systems that integrate seamlessly with U.S. platforms. Whether it’s the F-35 fighter jet or the Patriot missile system, American defense tech is becoming the global standard.

This shift has economic implications as well. Defense remains one of the few areas where the U.S. still plays a leading role in high-value manufacturing, a strategic lever in our otherwise service-dominated economy. Arms exports give the U.S. a trade advantage, especially as reducing the trade deficit remains a priority for the Trump administration. The recently finalized EU-U.S. trade deal, which lowered blanket tariffs from 30% to 15%, also includes a pledge of $600 billion in EU military procurement. While the real flow of capital will depend on each country’s budget realities, demographics, and political might, the rhetoric alone has been enough to push European defense stocks lower. The market is betting the major U.S. defense contractors, commonly referred to as the primes, will ultimately be the benefactors.

Between 2020 and 2024, the U.S. accounted for 43% of all global arms exports, according to the Stockholm International Peace Research Institute. Key buyers include Saudi Arabia, Japan, Australia, and EU nations – many of which are now aiming for defense spending levels of 3–5% of GDP. For major U.S. firms like Lockheed Martin (LMT), Northrop Grumman (NOC), and RTX Corp. (RTX), this means multibillion-dollar order backlogs and increased income diversification. It also acts as a hedge against domestic budget volatility, reinforcing the fact that U.S. contractors don’t need to rely solely on Washington to grow.

The Autonomous Future of Defense

A growing portion of new defense dollars is being directed not just at traditional weaponry, but at artificial intelligence, autonomy, and next-generation battlefield technology. While tanks and missiles still matter, it’s AI, drones, and predictive analytics that will define the next phase of military dominance. Companies like Anduril Industries are at the forefront of this transformation. Their autonomous drone systems, battlefield command software, and AI surveillance tools are redefining how militaries perform in combat environments. The basis for all current and future R&D is that the U.S. military needs technology that is mass-producible and entirely replaceable. Unmanned and easily replaceable aircraft are a no-brainer for potential future conflicts.

Meanwhile, Palantir Technologies (PLTR) continues to expand its work with the Department of Defense, building decision-intelligence platforms that help military leaders simulate outcomes and deploy resources more efficiently. These capabilities aren’t theoretical -they’re already being used in logistics, counterterrorism, and battlefield planning across several branches of the U.S. military. The software-first approach is here to stay.

Defensive Cybersecurity

Beyond the battlefield, the digital domain is just as critical. Companies like Palo Alto Networks (PANW), Fortinet (FTNT), and CrowdStrike (CRWD) are playing crucial roles behind the scenes, working alongside defense contractors to secure U.S. military networks and infrastructure. Their platforms are already being used to detect foreign intrusions, prevent ransomware attacks, and build cyber resilience across key defense systems. As cyberattacks from nation-state actors continue to escalate, the Pentagon is steadily shifting a greater portion of its IT and cybersecurity budget toward these firms, viewing them as essential partners in modern warfare. Tanks, aircraft, and ships are worthless if you can’t secure the digital infrastructure required for operations.

And then there’s SpaceX. Its Starlink satellite network has become essential for battlefield communications, notably in Ukraine, and its ability to launch defense communications into low-Earth orbit has made the company indispensable to Pentagon strategy. The militarization of space is no longer a sci-fi concept – it’s a live and growing budget category. Taken together, these companies represent a shift from defense as a manufacturing industry to one centered around software, autonomy, and connected systems. Investors looking to position themselves for the next decade of military innovation would be wise to watch not only the legacy names – but also the disruptors.

Parting Thoughts

Ultimately, investing in the defense sector isn’t just about capitalizing on geopolitical unrest – it’s about understanding the structural realignment of global priorities. Defense is a central pillar of economic, technological, and industrial strategy. New legislation in the U.S. and international military spending commitments signal a paradigm shift. Multiyear visibility into global defense spending is music to the ears of the legacy contractors. Rising players in autonomous systems, cybersecurity, and satellite communications are building out the next generation of military infrastructure. There’s lots to be excited about, and investors looking for durable tailwinds in a shifting global order should take a look across the entire defense spectrum.

Digital payments have been around for a while – whether it’s swiping a debit card, using Apple Pay, or sending money through apps like Venmo or Zelle. But behind the scenes, all of those transactions are layered on top of the traditional banking system. Stablecoins might change that.

Stablecoins operate outside of the traditional payment system offering a fundamentally different way to move money.

Think of a stablecoin like a digital dollar that can be sent anywhere in the world instantly, even on weekends or after hours, without waiting for a bank to approve the transfer. They’re designed to keep a stable value, commonly tied 1:1 to the U.S. dollar, and move across blockchain networks instead of having to go through a bank. For most American consumers using Venmo or Zelle, the immediate impact of stablecoins may appear minimal. But the implications for stablecoins in the world of investments are far broader.

Looking at stablecoins now is important because the U.S. Senate recently passed the GENIUS Act. The Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act still needs to get approved by the House of Representatives, assuming they don’t try to pass their own version, but it’s a big win for President Trump and crypto advocates more broadly. Clear federal rules and regulations for issuing stablecoins will massively boost credibility and allow America’s largest enterprises to participate and pursue technological innovations that could improve customer retention, reduce costs, and streamline processes and payments.

The Simple Allure Of Stablecoins

Boiled down, stablecoins are simple digital assets pegged to traditional fiat currencies. Think of them as a blend between bitcoin and US dollars. They are designed to combine the speed and transparency of blockchain technology with the price stability of an asset like US dollars. The first major stablecoin from Tether launched in 2014 with a simple premise: hold one dollar in reserves for every token issued. It soon became indispensable to crypto traders who needed a stable medium of exchange for buying and selling different cryptocurrencies that didn’t support funding with US dollars.

But stablecoins faced a gut-wrenching test in 2022 with the collapse of TerraUSD (UST), a stablecoin designed to maintain its peg through complex incentives rather than being backed by US dollar reserves. When confidence wavered and investors sold off, its value plummeted to zero – erasing over $40 billion in wealth and drawing the attention of regulators. It quickly became clear that these so-called stablecoins weren’t as stable as they sounded.

The GENIUS Act now marks a clear signal that stablecoins are here to stay as it lays the foundation for how they can operate within the U.S. financial system. At the heart of the bill is a requirement that all stablecoins be fully backed by cash or short-term U.S. Treasuries on a 1:1 basis. This ensures that for every stablecoin token issued, there is a corresponding dollar in safe, liquid assets. The bill also mandates monthly reserve disclosures and annual independent audits to ensure transparency. Simply put, the GENIUS Act is here to make sure that stablecoins that look like digital dollars end up behaving like a digital dollars.

Stablecoins are also primed for a moment in the spotlight because of the technological advancements we’ve made over the past few decades. The computing power required to operate a stablecoin operation used to be significant, but today’s technology is built different. Everyone has a smartphone and a digital banking app, and the data centers loaded with Nvidia or AMD chips can easily handle the computing requirements.

Stablecoin Implications for Banks and the Treasury Market

Pegging stablecoins 1:1 to US dollars means the Treasury market just added a new purchaser – the stablecoin issuer. If these issuers grow like we expect them to grow, they could become a meaningful source of demand for treasuries, helping to offset a reduction in demand for treasuries from foreign central banks. A 1 – 1 ratio for a source of liquidity is exceptionally demanding. The impact on treasury flows are already proving significant – Tether, the largest stablecoin issuer in the world right now, owns more Treasuries than Germany.

However, these stablecoin issuers don’t exist completely outside the current financial system. Rather, stablecoin issuers will need to work closely with US banks as they’ll need a custodian of their reserve assets. The inference here is that this doesn’t change who is actually buying and holding the US Treasuries, the big banks in this case, but rather, this shifts the underlying deposit bases of the banks. Large deposit sizes can be good for banks, but the concentration of deposits with a few customers – the stablecoin issuers – can actually make the banks fragile. From a bank liquidity perspective, retail capital is a much more stable source of funding, typically FDIC insured, and less likely to be transferred out. Stablecoin assets are going to be concentrated, and unfortunately could be vulnerable to being withdrawn.

If stablecoins start to offer a yield, they could drive even more significant demand. Money markets and high yield savings accounts often come with liquidity provisions and restrictions. Highly liquid and transferable stablecoins may start to supplant some of the base building blocks and revenue drivers of the existing financial system. Banks recognize the risk to their business models – many technology oriented banks are exploring issuing their own stablecoins to stay ahead of the curve. For example, Fiserv Inc. (FI) has indicated it plans to launch its own stablecoin and platform for its 3,000+ smaller sized bank clients.

Still Lots to Unravel for Merchants

Clarity around regulation opens the door for consumer brands to issue stablecoins with confidence, knowing they are operating under a recognized legal framework. This is especially true in the world of payments. Every merchant you can think of will be looking at stablecoins as a way to decrease their transaction fees and optimize their working capital. Faster settlement and lower transaction costs, especially when sending cross-border payments to suppliers or employees, could save companies like Walmart and Amazon billions of dollars each year.

Two likely avenues for merchants are that they either become issuers of their own stablecoins or allow payments using stablecoins issued by a third party like the big banks, Circle (CRCL), or Tether.

Today’s process for completing a credit card transaction requires a payment gateway to route credit card information, a card network like Visa or Mastercard to authorize the transaction, and the issuing and acquiring banks working together to send the funds. Interchange and processing fees can eat up into the merchant’s bottom line, and the extra day or two for settlement is a thorn in the sides of CFOs trying to manage cash inflows and outflows.

From a capital efficiency perspective, wholesalers and retailers have to explore how a new medium of exchange that works instantly and offers absolute transparency, like stablecoins, can bring down costs when it comes to receiving payments, paying employees and suppliers, and purchasing inventory. Instant settlement on the blockchain for payments and cutting out clearinghouses and other intermediaries is a massive undertaking. It’s no surprise that Visa and Mastercard are also pursuing innovations in the stablecoin space.

Additionally, issuing branded stablecoins opens the door for enhanced loyalty programs and stronger customer retention. Because stablecoin issuers are not obligated to pay out interest they earn on reserves, this can enable merchants to essentially self-fund discounts and customer rewards. An Amazon or Walmart stablecoin could create an entirely new customer experience!

International Stablecoin Demand Will Be Significant

While the use case for U.S. consumers comes from driving efficiencies, enabling international access to stablecoins and in turn the stability of U.S. dollars, is an equally large opportunity. This is important both in terms of sending money abroad, and with regards to localized spending. Sending money internationally can take days and incur fees as high as 5–10%, but stablecoins can execute the same transaction in minutes at a fraction of the cost, using public blockchain rails to route payments. This payment route is especially meaningful in developing countries, where access to U.S. dollars can serve as a hedge against local currency volatility and isn’t necessarily easy to obtain.

Addressing local currency volatility is a huge opportunity for stablecoins. With just a smartphone and an internet connection, individuals in emerging economies can hold dollar-denominated savings without having to open a bank account in the United States. They can sidestep the fees from locally domiciled banks and easily access a stable vehicle that holds its value for the long term. This is especially important for international freelancers working for American domiciled consulting or technology companies, and for immigrants sending money back to their home country to support their families.

What Else Can Stablecoins Do?

One of the more revolutionary ideas enabled by stablecoins has been programmable money. Through smart contracts, users can build financial logic into payments – delayed transfers, conditional payments, or micropayments sent by the second. These features are basically impossible to replicate in the traditional banking system, but a company like Coinbase (COIN) enables smart contract interactions directly through its wallet and app.

Importantly, the traditional payment networks, like Visa (V) and Mastercard (MA) have their sights set on finding a way to adapt with stablecoins. The benefits of these payment rails for merchants when it comes to security and settling customer disputes is still extremely valuable. Visa and Mastercard can essentially allow a customer and their digital wallet provider to pay using a stablecoin or other digital currency, but still have the merchant receive fiat currency at the end of the day. Companies like Paxos and Anchorage sit right in the middle of the exchange to custody the stablecoins and then allow Visa to send a fiat currency payment. Don’t count these corporate behemoths out – their scale and influence on the payments industry is immense.

Stablecoins For The Future

While stablecoins have entered the limelight as of late, it’s worth pointing out that we’re still in the very early stages of their adoption. The current market value of all stablecoins out there is about $250 billion – a mere speck when compared to the almost $40 trillion supply of US dollars. Becoming the new digital plumbing of our financial system is no easy feat and every stablecoin is going up against payment network giants that have built our payment infrastructure from the ground up.

If broader adoption picks up, investors should keep tabs on how stablecoins impact banks and the Treasury market. As big brands and traditional payment networks attempt to coexist with stablecoins, remember that the first attempt likely won’t be the best, and it surely won’t be the last. Even if stablecoins don’t make it mainstream, the technology is here to stay.

The U.S. healthcare system is the best in the world for complex care. We have the most innovative drug companies, the best medical devices, and incredible doctors and surgeons.

The U.S. healthcare system is also the most expensive system in the world.

One key component of the medical system that has long been a point of contention is drug prices. U.S. drug prices are extraordinarily high compared to the rest of the world. The exact same medication that’s sold in the United States is often sold overseas for a fraction of the cost. This pricing disparity has long been a point of consumer dissatisfaction, but elevated inflation and recent executive actions are putting the topic of drug prices back under the microscope.

The history of drug prices in the U.S. and the way in which they’ve risen could be a much longer essay than the article we are writing here – but there are a few key points that are worth discussing. In particular, we want to call out how the industry has shifted over time to pull pricing power away from the drug companies and to put the power in the hands of insurance companies. The shift involves obvious conflicts of interest, but there are also significant nods to potential efficiency gains and economies of scale. The issue is nuanced and it’s difficult to pinpoint what the right balance is to ensure we have access to the best medicine, at reasonable prices, without stifling innovation.

From Healthcare Cost-Saver to Market-Maker

If there’s any single culprit behind high drug prices, it has to be pharmacy benefit managers (PBMs). For decades, PBMs have quietly amassed power in the U.S. healthcare system. They are the penultimate corporate middlemen – negotiating prices, controlling formularies, and ultimately determining what shows up on your insurance plan’s covered drug list.

Their influence on drug prices has grown substantially as their parent companies continue to acquire and vertically integrate specialty pharmacies, provider networks, and rebate aggregators into their business models. If you don’t know what any of those things mean or how they interact, don’t be discouraged. The opacity of the business model is one of the key components that allows PBMs and their parent companies to generate profits and keep drug prices moving higher.

So, what is a pharmacy benefit manager? Decades ago, as employer-sponsored health insurance grew to be more complex, insurers needed help managing drug benefits. Patients needed access to a growing number of drugs, and insurance companies needed to know which ones to cover. PBMs emerged to fill this administrative gap, acting as intermediaries to process claims, negotiate pharmacy contracts, and provide “formularies” – lists of drugs that would be covered under an insurance plan. The job of a PBM, on paper, is to help health insurance plans manage the cost and utilization of prescription drugs. Simple enough in theory – the PBM sits in the middle between doctors prescribing the drugs, pharmacies distributing the drugs, and the insurance companies who are paying for the drugs. Put simply, they were making sure everyone is on the same page.

Over time, the economics evolved. PBMs began to consolidate, preaching that bigger scale meant more negotiating power with the drug companies to lower list prices, which in turn meant better deals for the insurance companies and for the end patient. Unfortunately, increased bargaining power also leads to potential conflicts of interest and more opportunities for PBMs to drive profits towards their own bottom lines. Drug companies know that they’re going to have to pay the PBMs to get their drugs approved and put on formulary lists. Without being on a formulary list, that drug isn’t going to be covered by insurance, which means nobody is going to use the drug. That’s where the shenanigans start.

Drug companies actually end up being incentivized to increase drug prices, knowing they’re going to have to give rebates and concessions to the PBMs. This rebate system ultimately ends up being the biggest conflict of interest, and the biggest hurdle to affordable drug prices. PBMs are supposed to put drugs on formularies because they’re effective for patients, not because they’re getting big rebates from the drug companies. But you can easily see where the PBM might start to leverage their situation to make a profit. The higher the list price of the drug, the bigger the rebate, and the more potential earnings for PBMs. The PBM has all the leverage, and crucially, end patients aren’t really part of the savings equation.

And, as if that wasn’t messy enough, the PBM’s potential conflicts of interest get even messier when the PBM isn’t an independent company.

Does Healthcare Care For Your Health?

Over the years, there’s been intense consolidation within the PBM market, with the three major players – CVS, UnitedHealth, and Cigna – now controlling more than 80% of it. Notice anything about those three companies? All three of them aren’t really known as being PBMs. They’re all actually insurance companies. That’s right, the companies who determine what medications are covered or not covered are the same companies who are paying for the medication. If United Health goes to a drug company and says, “pay us a bigger rebate” and we’ll make sure that your drug is on the list of approved drugs for our patients, it’s hard to see a scenario where the drug company says no.

Tracking the flow of money tied to a single drug transaction can be incredibly complex, given the many interrelated players. Take, for example, a patient buying insulin at the pharmacy. The pharmacy first purchased the insulin in bulk from a wholesaler, who bought it from the manufacturer. Before the pharmacy can even sell the drug to an insured patient, it has to be approved for coverage – placed on the formulary – by the PBM. The PBM is probably only putting the drug on the formulary if they’re going to get some rebates from the drug manufacturer. The patient also likely needs to have a prescription for their drug, which means they needed to talk to their doctor – someone preapproved as being in network by the insurance plan.

The patient not only pays premiums on their insurance, but then also has to pay a co-pay at the pharmacy when it’s time to buy the drug. Given that the pharmacy might be owned by one of the large insurance companies, the co-pay is likely a source of profit for the insurance company as well, either directly or indirectly. If that all sounds confusing, it’s because it is! The integration of so many players under one umbrella creates enormous complexity.

Of course, the vertical integration of insurance with PBMs and physician groups could also provide scale-based efficiencies. It’s natural for these companies to combine like this. Scale brings benefits when you’re trying to make sure patients have access to different kinds of doctors, and scale is a huge factor in reducing the cost and risk associated with insurance pools. And theoretically, larger groups should have more bargaining power to demand price cuts from the drug companies.

Unfortunately for the insurance companies though, the vertical integration has made it hard for them to redirect the blame for rising costs towards anyone else.

Trump Targets Lower Drug Prices

In an effort to lower drug prices in the U.S., President Trump recently issued an executive order promoting the Most Favored Nation (MFN) pricing model. This policy aims to align what Americans pay for certain medications with the lowest price paid by other developed countries. The move faced immediate pushback from both drug manufacturers and the parent companies of PBMs, who stand to lose significantly if list prices are slashed. Remember, the rebates the PBMs get are generally going to be higher if the list price for the drug is higher.

In our opinion, the move to shake up drug pricing is misguided. The current practice of localized pricing works to find an equilibrium between maximizing access to the drug while also maximizing the drug maker’s ability to generate a profit. Artificially lowering drug prices in the United States by benchmarking to international prices simply ensures that the rest of the world has less access to our drugs, while accessibility for Americans is unlikely to change for the better. That’s because drug accessibility here in the US is a function of not only price, but also of formulary design and insurance coverage for the medication. Lower list prices could end up meaning smaller rebates and reduced incentives for insurance companies to provide some sort of drug coverage.

Forcing drug makers to offer their drugs at lower prices may also stifle innovation. While nobody likes paying high prices, companies need to be able to generate a return on their investment in order for a project to be viable. Keeping that incentive system in place is important.

Fortunately, the executive order left room for negotiation; price targets for the U.S. market remain undecided. However, the implications are clear. People are fed up with the high cost of healthcare and politicians looking to garner favor with their voter bases are going to keep on looking for opportunities to attack the space. The opaque profit model and conflicts of interest inherent in the current business structure are easy political targets.

PBMs vs. Healthcare Regulation

PBMs have long profited from the arbitrage between inflated list prices and manufacturer rebates. If MFN-style reforms take hold, PBMs may see their margins compress and rely more on flat administrative fees rather than back-end rebate deals. Increasing bipartisan scrutiny and pressure to lower drug prices generally threaten the opacity of their business model, potentially sparking further consolidation as legacy PBMs scramble to defend market share and margins. Meanwhile, newer market entrants offering direct-to-consumer delivery – effectively bypassing PBMs – could align with the current administration’s embedded directive to facilitate direct-to-consumer purchasing programs at MFN prices.

Expect some form of rebate pass-throughs or the elimination of spread pricing to try to make it into a bill, both of which would dent margins, but would be substantial undertakings. The rise of rebate aggregators, entities often owned by large PBMs that negotiate rebates on behalf of multiple clients, significantly complicates regulatory efforts to trace rebate flows and the logistics of pass-throughs. PBMs, for their part, maintain that these entities and rebates in general help to lower insurance premiums and fund broader plan benefits, but Americans have grown increasingly skeptical that these benefits ever reach them.

For large insurers owning PBMs – like CVS (Caremark), Cigna (Express Scripts), and UnitedHealth (OptumRx) – reform could trigger a shift in profit centers toward more stable revenue sources such as medical services, specialty pharmacy, or basic insurance premiums. But reducing intermediary involvement might also force PBMs to spin off their pharmacy operations entirely. The conflicts of interest clearly run deep in a system where the middleman influences which drugs are covered by insurance while simultaneously owning the pharmacies dispensing those same drugs.

Still, reform momentum is building. Increased transparency could usher PBMs into a new era of accountability and structural change – though whether this benefits patients or merely reshapes profit flows remains to be seen.

Is Healthcare Investable?

Healthcare stocks have had a rough go this year, but the system is still ripe with subsectors set to benefit from continued innovation in artificial intelligence. Playing the politics game and picking the winning PBMs and insurers is likely to leave investors disappointed, but structural tailwinds like AI and an aging population in the US aren’t going away any time soon.

Progress in drug discovery and genetic research has been constrained by trial-and-error methods that are extremely cost-intensive. With AI, we’re entering an era where whole-genome sequencing can be done in hours instead of weeks, and AI models can predict molecular interactions with stunning accuracy. This leap in computational power means we’re not just speeding up what we already do – we’re enabling entirely new approaches to medicine.

As sequencing becomes cheaper and more accessible, the efficacy of drugs only stands to increase. Think about a biotech firm that sequences the DNA of thousands of cancer patients. With AI, it can quickly identify recurring mutations and design drugs that specifically target those genetic flaws, potentially leading to more effective and personalized cancer treatments.

As the traditional PBM model comes under pressure, new pharmacy models emphasizing transparency, affordability, and direct-to-consumer pricing could also gain traction. GoodRx (GDRX) offers cash pay alternatives and coupons that bypass PBMs. Mark Cuban’s Cost Plus Drugs also aims to offer radically transparent pricing by selling drugs at cost plus a flat markup. Even Amazon has entered the arena to offer direct-to-consumer shipments and a direct-pay option that’s potentially cheaper than using insurance. Amazon Pharmacy is expected to be available to over half of the U.S. by the end of 2025.

Ultimately, what was once a sleepy and steady sector of the US economy is starting to become much more dynamic. Drug innovation is accelerating, and established insurer and PBM business models are coming under scrutiny. In a shifting landscape there will be opportunities for savvy investors who look for innovation and can handle volatility and uncertainty.

Tariffs May Make Cheap Consumer Electronics A Thing Of The Past

The devices we rely on most — smartphones, laptops, tablets, and other smart accessories — share a common thread that is often invisible to the average consumer: The vast majority of them are manufactured, or at least assembled, in China. This fact, long accepted as a byproduct of globalization, has recently come under renewed scrutiny as U.S.-China trade relations have soured. With the U.S. economy, workforce, and education system increasingly dependent on affordable, high-quality consumer technology, the financial consequences of tariffs are at the forefront of the minds of company executives and investors alike.

President Donald Trump’s revived tariff policies have placed fresh strain on an already sensitive U.S.-China trade relationship. The proposed tariffs, aimed at reshaping American reliance on Chinese manufacturing, would have significant implications for the world’s largest tech companies, many of which are deeply connected to China’s sprawling manufacturing ecosystem. Tariffs on other Southeast Asian countries are a concern as well, as final assembly of goods often happens in places like Vietnam to bypass higher trade costs with the U.S., even though many core components are manufactured in China. Although electronics have so far been spared the full brunt of the 145% retaliatory tariffs on China, the uncertainty hanging over the supply chain will make it increasingly difficult for companies to plan, price, and deliver consumer products at the scale and speed American consumers expect.

China’s Grip On Electronics Manufacturing

The tech world’s dependence on China isn’t breaking news, but it’s often underestimated just how deeply entrenched this relationship has become. Over the last three decades, China has done more than offer cheap labor — it has built a vast, highly specialized manufacturing ecosystem tailored to the demands of modern electronics. Since the 1980s, China’s economic reforms and the creation of Special Economic Zones like Shenzhen — a hub for iPhone manufacturing — have attracted waves of foreign investment. These zones offer tax breaks, modern infrastructure, and regulatory flexibility, making China the go-to destination for labor-intensive manufacturing.

China’s building of a manufacturing base and expanding it to take on increasingly complicated projects is not an accident. Early on, the Chinese government recognized the leverage they could gain on a global scale if they became a manufacturing and export hub. Subsidies and incentives for manufacturers were plentiful, and businesses came in droves to take advantage of cheap supply chains. Today, the government not only supports manufacturing but supports companies across the country more broadly. In fact, 99% of publicly listed Chinese companies receive some form of subsidy each year. The breadth of state support — ranging from tax incentives to subsidized workforce training — gives China a significant upper hand in luring outsourced manufacturing operations. This level of support makes it difficult for other emerging market economies to compete with China, while also giving China’s more advanced companies the extra firepower they need to try to compete with more sophisticated competitors in foreign markets.

China’s manufacturing is also globally dominant because of its logistical efficiency. The country’s factories can source batteries, screens, and sensors from nearby storage facilities and ship finished products globally with minimal lag. This responsiveness allows companies to iterate quickly and launch products on tight schedules. For example, Apple designs its products in California and sources chips from Taiwan but still assembles over 90% of its iPhones in China due to the close proximity of necessary components for final assembly. Chinese manufacturers are flexible and capable of last-minute design tweaks that would cause delays in less coordinated systems.

Replicating China’s infrastructure and supplier network is a massive challenge. Decoupling from China is not something that will be done easily or quickly — if indeed it happens at all. Tariffs would need to be both high and permanent for companies like Apple to seek lasting alternatives to Chinese manufacturing.

Tariffs Threaten Consumer Electronics

President Trump’s goal for tariffs is twofold: to protect American industries from perceived unfair competition and to encourage U.S. companies to rethink their reliance on Chinese supply chains. On paper, the logic appears straightforward: If Chinese-made goods become more expensive, American firms will have no choice but to move production elsewhere.

The reality, however, is far more complex. Tariffs don’t automatically lead to domestic production. In the short term, they tend to raise costs for consumer tech importers, forcing businesses to make tough decisions: absorb the additional expense or pass it on to consumers through higher prices. While absorbing the cost sounds preferable, it often comes at the expense of layoffs and reduced economic output. For companies that thrive on razor-thin margins — especially in the hyper-competitive world of consumer electronics — neither option is attractive.

American households, which have grown accustomed to the relative affordability of smartphones, laptops, and tablets, are likely to feel the pinch first. The same iPhone or Galaxy device you bought last year could see its price jump by hundreds of dollars if tariffs on Chinese imports escalate. However, the extent of that price hike will ultimately depend on the tariff rates placed on countries like Vietnam and India. If the gap between those countries’ rates and China’s is significant — say 10% compared to 60% — then consumer tech companies are more incentivized to move manufacturing out of China and absorb the extra costs associated with relocating.

However, even relocating carries risks. Today’s tariff rates may not be the tariff rates of the future, so it’s difficult to justify significant upfront spending to relocate. The alternative, of course, is to bring manufacturing home. Building a factory in the United States ensures there won’t be any tariffs on final assembly. Unfortunately, manufacturing at home is likely cost-prohibitive. The U.S. has long outsourced final assembly to China in order to focus on other parts of the supply chain like innovation and design. Today’s workforce does not have the skills to do high-precision manufacturing, nor would it be a good allocation of skilled resources. Using survey data from the Cato Institute, the Financial Times reported that while 80% of Americans believed the U.S. would be better off if more people worked in manufacturing, fewer than 30% believed they personally would be better off. This major gap between personal and societal perspectives underscores the reality that the U.S. has evolved into a primarily services-based economy.

Tariffs Mean Electronic Components Will Cost More, Too

Additionally, what makes the smartphone and PC supply chain so challenging to unwind is its sheer complexity. Tariffs don’t just hit the final product. When imposed broadly, they also affect the flow of raw materials and intermediate goods, which can make even components manufactured outside China more expensive once they enter the Chinese assembly line.

While the final assembly of a device like an iPhone or Dell laptop may take place in China, its individual components are sourced from all over the world. The processor might be designed in California by Apple or Intel but fabricated in Taiwan at TSMC’s massive chip foundries. The display could be produced by South Korea’s Samsung or LG — or increasingly, China’s BOE. Memory chips often come from companies like SK Hynix or Micron, which manufacture across the U.S., South Korea, and Japan.

Even the smallest components — like resistors and capacitors, which are critical to controlling electrical currents in smartphones — often have winding production journeys that cross multiple borders numerous times before final assembly. Once these parts arrive in China, factories integrate them into a finished product, and the complete device is then packaged and shipped out. This intricate, interdependent system keeps costs low, lead times short, and quality high — but it also means any disruption, such as tariffs or sanctions, can cause cascading effects across the industry.

Simply moving final assembly from China doesn’t change the fact that all of the other components needed for final assembly are also being sourced from elsewhere. Unless we move the entirety of the supply chain to the United States, it’s likely that some components will end up facing tariff disruption of some sort.

If Not Made In China, Then Where?

President Trump’s tariffs have also laid bare the fault lines in global electronics production. Companies with deeply embedded Chinese operations face the harshest risks, while those that began diversifying early are positioned to capitalize on the disruption. Countries like Vietnam and India have emerged as alternative production hubs, especially for labor-intensive assembly work. Vietnam has steadily climbed the ranks in smartphone and wearable device manufacturing — particularly for lower-end models — but still doesn’t come close to China’s share of the market. India, on the other hand, has increasingly become a destination for high-end electronics, including iPhones.

Interestingly, in an attempt to sidestep potential tariffs, Apple’s suppliers in India reportedly shipped nearly $2 billion worth of iPhones to the U.S. in March alone — a clear signal of how seriously technology companies are taking the risk of higher costs. It’s worth noting that China’s exports of finished consumer electronics products have exceeded all other countries combined for more than 15 years. China’s share has remained well above 50%, while Vietnam hovers around 10% — a far cry from posing an immediate threat to China’s dominance.

Yet shifting production comes with trade-offs: fewer supplier options, higher costs for some components, and slower turnaround times during periods of high demand. While companies are beginning to rethink their strategies, China’s deep-rooted ecosystem will be difficult to replace entirely, especially for sophisticated products like smartphones and laptops.

Investment Opportunities Amid Tariff Uncertainty

For investors, the U.S.-China tensions present both risk and opportunity. Sharp tariff hikes can spark short-term stock market volatility, but they also open the door for long-term investment themes. American companies that face rising production costs due to tariffs may also benefit from federal subsidies and policy incentives aimed at bringing manufacturing back home — there are two sides to every coin.

Semiconductor companies like Intel (INTC), AMD (AMD), and Micron (MU) are clear examples. These firms not only have less exposure to Chinese assembly but are poised to benefit from government-backed efforts like the CHIPS Act. Intel, despite past operational challenges, has received significant U.S. government backing to expand its domestic manufacturing footprint.

Investors should also consider companies that enable advanced domestic production. Equipment suppliers like Applied Materials (AMAT) and Lam Research (LRCX) stand to benefit from the buildout of domestic semiconductor capacity, as their expertise in fabrication equipment is essential for next-generation chip architecture. Flex Ltd. (FLEX), which offers contract manufacturing outside China, may also benefit from a reorganized supply chain that needs short-term flexibility. Finally, firms specializing in automation and robotics could see a surge in demand, as companies seek to offset higher domestic labor costs with increased factory automation if onshoring comes to fruition.

Future Of Consumer Electronics

As tariff tensions escalate, the future of affordable consumer technology hangs in the air. For decades, affordable devices have been the result of a highly efficient, globally integrated supply chain — one that relies heavily on China’s vast manufacturing infrastructure. Disrupting this system with tariffs introduces friction into everything from production timelines to component sourcing and risks higher costs for consumers.

Investors should keep in mind that replicating China’s scale and expertise in manufacturing is a multi-decade undertaking. The era of cheap, seamless access to the latest technology may be giving way to a new normal — one where national security concerns and political agendas increasingly influence the affordability of consumer technology.

American Energy Dominance Doesn’t Necessarily Mean Producing More

Energy independence has been a focus during President Donald Trump’s second term in office. He has gone so far as to declare a National Energy Emergency. However, while promises of deregulation and the removal of export controls were initially greeted with enthusiasm, that optimism has since tempered into cautious pragmatism. Increasing production to drive prices lower may be good for inflation data, but oil and gas companies must operate above their breakeven price to maintain profitability. Said simply, satisfying campaign promises to consumers and making it easy for oil executives to do business are objectives that aren’t easily reconciled.

The Crossroads of Energy Policy and Business

One of the defining features of Trump’s energy policy is his commitment to energy dominance and decreasing our country’s reliance on foreign energy means we need to drill baby drill! This means increasing domestic oil and gas production, rolling back regulations that were perceived to inhibit fossil fuel extraction, and positioning the U.S. as a global energy powerhouse. Key to this strategy is the promotion of the U.S. shale industry, which has revolutionized domestic energy production over the past decade. The U.S. has surpassed Russia and Saudi Arabia to become the world’s largest producer of crude oil. But further increasing energy production may be a tough pill for oil executives to swallow. An increase in production puts pressure on prices and on existing oil infrastructure. Drilling a new shale well is not a huge cost in and of itself, but increasing production above current record levels may necessitate spending on transportation or storage systems – programs that require more up front investment with a longer payback timeline.

Perhaps more important, not everything the administration has done so far has actually streamlined the process for oil companies to invest and drill. While President Trump has been vocal about encouraging energy policy, the Department of Government Efficiency’s cuts to the Bureau of Land Management and Energy Department has slowed the process for attaining export licenses and permits.

Furthermore, Trump’s broader economic policies – specifically his tariffs on steel and aluminum – have had a significant impact on U.S. oil and natural gas production. These tariffs directly increase costs for producers, particularly in the construction of drilling rigs and pipelines. Steel pipe prices in particular are a significant line item in the construction of new oil and gas wells. Uncertainty around steel pricing invariably pushes the cost of production higher as it makes it more difficult for the engineering teams to accurately estimate future expenses. This in turn slows down expansion plans, especially in the offshore drilling sector, which requires heavy infrastructure investment.

Tariff uncertainty is also affecting the downstream U.S. oil and gas industry, particularly companies reliant on specific imported oil types. Decades of investment in transportation infrastructure and refineries designed for certain crude grades make continued imports essential, despite rising domestic production. As a result, much of the oil drilled in the U.S. is exported, while a significant portion of refined oil is imported.

Canada plays a crucial role here with 98% of its crude exports to the U.S., accounting for nearly 60% of U.S. oil imports. Alberta’s oil sands hold one of the world’s largest reserves, and their thick, heavy crude is a key input for Midwest refineries. Any tariffs on Canadian oil would likely be passed on to U.S. consumers, as these refineries do not have many other potential suppliers.

Energizing The US Shale Revolution

Horizontal drilling technologies have unlocked previously inaccessible reserves of oil and natural gas, particularly in the Permian Basin, which alone accounts for over four million barrels per day of oil production. This surge in production has made the US the largest producer globally. Perhaps more important, U.S. shale producers can move very quickly and are highly responsive to price signals compared to traditional drillers. When global oil prices rise, U.S. shale producers quickly ramp up production, often outpacing the ability of traditional oil exporters like OPEC member countries to adjust their output.

This toggling of production is possible because of how shale oil is extracted. Traditional wells take longer to develop but can produce oil for decades. In contrast, shale wells can be drilled in just a few weeks and typically last only two to three years, with most production occurring in the first 12 to 18 months.

This shorter lifecycle allows shale producers to respond more quickly to market volatility and policy shifts, optimizing capital allocation. However, shale production is relatively expensive, with high production costs and breakeven prices between $40 and $50 per barrel. Because of its price sensitivity and short investment horizon, shale acts as a global marginal producer. When oil prices rise, shale wells can be rapidly deployed; when prices fall, investments slow, and production declines, helping to stabilize supply and prices.

Disciplined capital allocation has become a primary feature of the oil industry since the oil boom and bust in 2015. High efficiency wells have allowed drillers to produce more with less. As of March 21, there were only 486 active rigs in the US, a significant decline from the 1,500-plus rigs in 2015. Technological innovation has pushed up production, minimized operational costs, and allowed drillers to be careful with their capital deployment during times of uncertainty.

The Natural Gas Transport Dilemma

Less discussed than the push to drill for oil is the potential for the US to become a dominant player in the global trade of Liquified Natural Gas (LNG.) Natural gas is often closely tied to oil drilling as both resources are commonly found together in hydrocarbon reservoirs. Natural gas has historically been harder to transport and a lower margin good. However, innovation in cooling technology has made the liquification and transportation of natural gas more viable. Liquification reduces its volume by about 600 times, allowing for more efficient storage and transport. LNG can be shipped via tankers or distributed through pipelines for use in power plants, industrial manufacturing, and even transportation.

The United States is the world’s largest LNG exporter, ahead of Qatar and Australia. And the world wants what we have to sell. While the focus for power in most developed countries has been on renewables, there is still insatiable demand for new power capacity beyond what renewables can deliver. Natural gas has the opportunity to compete with coal, diesel, and other inefficient power sources across the globe, delivering cleaner and cheaper power. While not necessarily a clean form of energy, natural gas emits far less greenhouse gases when burned compared to oil and coal and is helping to bridge the gap in the transition towards cleaner energy. according to the International Energy Agency, coal consumption reached a record high in 2024 at 8.77 billion tons!

The primary constraint on LNG today is transportation capacity. While liquefaction plants are under construction at U.S. ports, these projects take time to complete. Currently, natural gas is oversupplied. In 2024, prices at the Waha Hub in West Texas even turned negative due to limited takeaway capacity, forcing producers to pay to have their gas transported away.

New natural gas production is unlikely to expand significantly until more liquefaction infrastructure is completed and takeaway capacity improves.

Macro Factors Affecting Energy Production

While energy companies are balancing tariffs and supply/demand dynamics, there are also the macroeconomic variables like inflation and interest rate levels they need to keep in mind. While inflation has been inching its way back down to the Fed’s 2% target, rising costs for labor, materials, and equipment mean oil and gas producers face higher operational costs. The impact of inflation has been particularly evident in the upstream sector, where rising costs for drilling rigs and labor have made it more difficult to maintain production levels without significant increases in oil prices.

As it relates to interest rates, throughout much of Trump’s first term, low interest rates made borrowing cheaper, allowing oil and gas companies to finance new exploration and production projects. Now, the shift towards a more normalized rate environment has had a significant impact on shale oil producers, many of whom rely on debt to fund their capital-intensive operations. These companies now face higher borrowing costs than before, which may result in a slowdown in drilling activities.

Investing in Energy Independence

The upstream sector, which focuses on oil and gas extraction, remains the most volatile but also offers significant potential during periods of high oil prices. The rise in interest rates and inflation could dampen the growth prospects of shale oil producers, particularly smaller companies that are highly sensitive to borrowing costs. However, large-cap shale producers like ConocoPhillips (COP) or EOG Resources (EOG) are well-positioned to weather these challenges.

Investing midstream involves the transportation, storage, and distribution of oil and gas, and tends to be more insulated from commodity price fluctuations. Many midstream companies like Kinder Morgan (KMI) or Enterprise Products Partners (EPD) operate under long-term pricing contracts that can provide more stability in volatile markets.

On the other hand, refineries downstream regularly see big swings in their profitability. Large-scale refiners like Marathon Petroleum (MPC) and Phillips 66 (PSX), and independent refiners like Valero Energy (VLO) dominate the space, but the capital intensive and cyclical nature of the business is difficult to forecast for executives and investors alike. In fact, no entirely new large-scale refineries have been built in the US since the 70’s.

Wrapping it Up

The path to U.S. energy dominance involves balancing a variety of economic, geopolitical, and technological factors. While President Trump’s energy policy initially spurred optimism in the oil and gas sector, the realities of production costs, environmental regulations, and international trade uncertainty continue to create challenges for producers. The U.S. shale revolution, while impressive, has highlighted the volatility of the market, with factors such as fluctuating global demand and negative pricing episodes underscoring the difficulties in sustaining long-term growth. Despite these challenges, there are still opportunities for growth, especially for larger, well-capitalized producers who can navigate these complexities. Ultimately, achieving energy independence requires a delicate balancing act, and the ongoing adjustments made by both policymakers and industry leaders will shape the future of U.S. energy for years to come.

Serving The American Consumer

Building The Right Shopping Experience

Delivering The Goods

Investing In The Future

Checking Out

Bringing manufacturing back to the United States, colloquially known as nearshoring, is poised to significantly reshape trucking and rail networks across North America. The push for localized supply chains promises shorter delivery times and reduced geopolitical risks, but it also brings challenges in infrastructure and logistics. The companies solving these challenges are going to be critically important and could be an investment opportunity.

Nearshoring offers two big advantages and a few smaller challenges. First, it can help companies avoid tariffs and FX headaches. Second, it can shorten lead times and improve inventory management. Trump’s original push for tariffs and COVID-19’s supply chain shock have made a strong business case for bringing manufacturing back to the United States, but the cost of manufacturing domestically is higher than manufacturing abroad. However, having confidence that your supply chain can deliver and not having to deal with political spats carries significant value. Unfortunately, the higher costs associated with manufacturing domestically generally need to be passed on to the consumer. Higher prices for some goods are tolerable, but if it’s broad-based then it can be inflationary. An additional challenge is that the United States currently faces some constraints on manufacturing. Labor is one – we addressed it last month here – and transportation is another. Put simply, we need our domestic logistics to level up to accommodate a push for more manufacturing at home.

North American Trade

Mexico has become America’s largest trade partner, recently overtaking China as the top exporter to the United States. It is well positioned geographically and broadly has lower wage costs and a greater supply of labor for factory-level jobs than the United States. U.S. companies have invested significant capital in Mexico over the past several decades and many companies send parts back and forth from the U.S. to Mexico for different parts of the manufacturing process.

Canada’s geographic proximity has also made them a critical trade partner for the U.S., but mainly in the realm of natural resources. Crude oil, liquefied natural gas, lumber, and other mined commodities consistently supply US markets.

North American trade has become increasingly interwoven and has accelerated as scrutiny on China has mounted. According to the Brookings Institution, the U.S. imported $472.5 billion of goods and services from Mexico while Canada imported $15.6 billion worth of goods. The United States also accounts for over 40% of Mexico’s imports. This partnership is bidirectional and has led to gains for both the United States and Mexico. Generally speaking, Mexican manufacturing shouldn’t be seen as a direct competitor to American manufacturing but rather as a complement. Mexican factories use parts imported from the U.S. and vice versa; corporations have allocated capital across both countries to drive manufacturing efficiencies in an attempt to remain competitive with low-cost goods from China. While investing in Mexico means navigating complicated labor laws and exposure to cartel crime, the low-cost labor makes it a necessary input for effective North American manufacturing.

The degree to which companies can nearshore and access cheap labor in Mexico is important because it impacts the mix of goods that can be effectively manufactured outside of China. High-value goods like electronics and automotive components can be manufactured and sold domestically with cheaper labor in Mexico and capitally intensive factories in the United States combining to offer a competitive product. Potential shifts in U.S. import policy, specifically with regards to tariffs on Mexico and Canada could jeopardize this balance. The ability to manufacture efficiently in the United States could actually take a hit if we make trade with Mexico and Canada more difficult.

Consequently, while we are broadly optimistic on North American manufacturing, we’d shy away from trying to pick winners or losers who might be impacted by tariffs or trade disputes. Instead, we would suggest focusing on investment opportunities in companies who facilitate trade and transport unfinished components and final goods to their points of sale. The economy is strong and nearshoring has momentum, so the space is probably worth a look.

Nothing Is More American Than Trucking

The value of U.S. freight by truck with Canada and Mexico has steadily increased since the mid-2000’s and amounts to over $70 billion as of December 2023, according to the Bureau of Transportation Statistics. With nearshoring comes shorter supply chains, and an increase in the need for valuable truck space, meaning trucking fleets need to navigate the shifting trade landscape to accommodate retailers’ just-in-time inventory approach. With trucking, the two general approaches to shipments are full truckload (FTL) and less-than-truckload (LTL) – the latter meaning a single truck carries shipments from multiple customers and the former meaning all goods in the container are destined for the same location for the same customer.

Generally, LTL shipments are more expensive on a per-unit basis but offer manufacturers greater flexibility in getting finished goods to retail customers or storage warehouses. Instead of committing and paying up for larger shipments that take up entire truckloads, companies can have goods shipped with smaller, more frequent LTL runs which allow for quick inventory adjustments. These quicker adjustments are helpful during labor strikes or supply chain disruptions. LTL shipments account for just about 10-15% of the industry’s volume today, but the rise in e-commerce and necessary shorter transit times presents a compelling investment opportunity for trucking firms down the road.

Companies like FedEx Corp. (FDX) and Old Dominion Freight Line Inc. (ODFL), who specialize in LTL shipping, dominate the market and offer solutions to small and medium-sized enterprises that don’t have the scale to fill up whole truck beds with raw materials or finished products. Conversely, the FTL industry is highly fragmented and relies heavily on brokerage firms to match shippers with small and mid-size carriers.

According to RXO Inc (RXO), the top 15 FTL carriers combine for less than 10% of total market share. More than 95% of carriers operate 10 trucks or less! Although still critically important for the food, pharmaceutical, and consumer goods industries, it’s a heavily diluted market with minimal barriers to entry.

Innovating American Trucking

Artificial intelligence and technological innovation are coming for the trucking industry. Something as simple as improving routing could lead to significant cost savings. Technology enabling the real-time tracking of vehicles, predictive maintenance, and dynamic route adjustments based on traffic or weather conditions could all lead to bottom line improvements. Better routes and more well-maintained trucks reduce fuel consumption, repairs, and idle/empty drive times. Firms with enough capital to own trucking fleets and invest in technology, like XPO Logistics (XPO), can also integrate trucking fleets with warehouse management systems to streamline order processing and reduce downtime.

Technology can also help tackle regulatory complexity. Importing goods from Mexican maquiladoras, factories that import materials and export the finished goods, requires expertise in customs and border clearance. Facilitating the clearance of goods through U.S. customs and navigating documentation, duties, and inspections means third-party logistics firms like C.H. Robinson (CHRW) with integrated customs brokerage services are crucial for nearshoring to succeed.

Finally, the United States is facing an acute shortage of truckers, especially those who are interested in long haul journeys. The adoption of automated driving for semi-trucks would be huge for the industry. Regional routes often involve repetitive patterns and well-defined paths, making them ideal candidates for early implementation of autonomous driving systems. These systems can handle highway driving and reduce driver fatigue, while allowing human operators to focus on more complex urban or last-mile navigation. Currently, according to the American Journal of Transportation, the U.S. has a shortage of more than 80,000 truck drivers, a deficit expected to double by 2030. This is compounded by the composition of the trucking labor force – the average age of truck drivers exceeds the median labor force age in the U.S

Companies focusing on autonomous driving are therefore going to be crucial if nearshoring momentum is going to keep picking up. Companies like Aurora Innovation (AUR) have teamed up with technology giants like Nvidia (NVDA) to mass produce its integrated driverless systems. Furthermore, companies like Tesla have been working on Semitruck technologies for years.

Railroads Are Essential Too

There is no one-size-fits-all approach to tackling the logistics of nearshoring, and trucking is not the only solution. Intermodal transportation, the integration of tracking and rail, is set to grow substantially as trucking routes shrink and the just-in-time approach to inventory management continues to permeate American manufacturing. Intermodal transportation isn’t a novel idea, but the relationship between the two transportation methods will have to deepen to accommodate nearshoring and the current demographics of the trucking labor force. Intermodal transportation relies heavily on strategic partnerships between railroads and trucking companies to optimize the process of getting FTL shipments onto rail cars and shipped across North America. All of the big players in FTL trucking are attached to the hip with Class I railroads like BNSF Railway, Union Pacific (UP)and Norfolk Southern (NSC), so the ability to leverage scale and in-house logistics is of utmost importance.

Rail hasn’t seen the same levels of growth as trucking over the last 20 years but is still well-suited for transporting large volumes of goods over long distances, making it a cost-effective option for long transports. Although the actual volume of rail freight is less than that of trucking, rail networks are essential to shortening trucking routes and reducing congestion on highways. Investments in rail infrastructure, including expanded rail yards, upgraded tracks, and digitization of intermodal facilities are all going to be essential in the years to come. However, investing in infrastructure is expensive and scale brings advantages in safety standards and cost efficiency. We wouldn’t be surprised to see M&A activity in the space pick up as nearshoring continues.

Even if there’s no M&A, we still expect the space to have significant funding needs. Any build-out of intermodal transportation networks is going to be capital intensive. Electrification, new tracks, and new freight cars all have significant upfront costs with long payback periods. Specialized lenders and private credit shops will have opportunities to engage in asset-backed lending against those hard assets in the years ahead.

American Investors Will Make Nearshoring Possible

Nearshoring is poised to uplift the significance of both rail and trucking industries. As manufacturing moves closer to home, the demand for efficient, localized logistics will only grow, requiring substantial innovation and capital. The integration of rail and trucking through intermodal transportation will be critical to maintaining the speed and flexibility needed for just-in-time delivery systems. Meanwhile, the trucking sector will see increased demand for less-than-truckload and third-party logistics as businesses continue to seek more agile, responsive supply chains.

Technological advancements will also play a pivotal role in reducing operational costs for shippers. For investors, this evolving landscape presents opportunities in the picks and shovels needed for transporting goods from point A to point B. As nearshoring continues to gain momentum, the future of U.S. freight transportation will be defined by innovation, collaboration, and a renewed focus on North American trade, and is worth keeping a close eye on.