Welcome to this week's edition of The AI Equity Update. We're diving into key market trends and evaluating some solid stocks to help you navigate the investing landscape. Let's get right into it.
What You'll Get Every Week
Macro Trends: A snapshot of big-picture economic indicators and how they might affect stocks.
How to Understand Our Efficiency Score: A simple guide to our CES-Pro rating system for investments.
Stock Evaluations: In-depth looks at 4-5 promising stocks, with actionable advice.
Quick Portfolio Overview: A summary table of the featured stocks for easy comparison.
Macro Trends
The US economy grew at a 3.0% annual rate in Q2 2025, rebounding from a 0.5% contraction in Q1. Unemployment rose to 4.2% in July, up from 4.1% in June. Inflation accelerated to 2.7% year-over-year in June, up from 2.4% in May.
The 2s-10s yield curve spread is at +51 basis points in August, remaining uninverted, which could signal continued growth. Markets expect 1-2 rate cuts in 2025, possibly starting with 25 basis points in September due to softening labor data. Investment-grade BBB credit spreads are at 1.02%, stable but slightly widened, while high-yield spreads are around 2.95%.
The trade deficit increased 38.3% year-to-date compared to 2024. Recent news: President Trump's new tariffs took effect on August 7, 2025, with rates up to 50% on countries like India and Brazil, and 35% on Canada.
These trends point to caution for importers and rate-sensitive sectors like banking (wider spreads could squeeze lending), but opportunities in defense (from geopolitical tensions) and healthcare (resilient demand). Potential rate cuts could support growth stocks, while tariffs might benefit domestic manufacturers.
Here's a quick table of key indicators:
Indicator | Latest Value | Change | Stock Impact |
|---|---|---|---|
GDP Growth (Q2 2025) | 3.0% annual rate | Up from 0.5% contraction in Q1 | Positive for cyclical stocks; boosts earnings outlook. |
Unemployment (July 2025) | 4.2% | Up from 4.1% | Could prompt rate cuts, aiding growth-oriented firms. |
Inflation (CPI, June 2025) | 2.7% YoY | Up from 2.4% | May delay cuts; tariffs could push it higher, hurting consumers. |
Yield Curve (2s-10s Spread, Aug 2025) | +51 bps | Uninverted | Signals growth; good for equities overall. |
Fed Rate Cuts Expected | 1-2 in 2025 | Signals easing | Lifts valuations, especially in tech and pharma. |
Credit Spreads (BBB OAS) | 1.02% | Slightly widened | Stable financing for quality names; favors strong balance sheets. |
Credit Spreads (High Yield OAS) | 2.95% | Slightly widened | Tougher for riskier firms; stick to high-quality picks. |
Trade Deficit (YTD 2025) | Up 38.3% | Widening | Tariffs may help exporters/defense but pressure global chains. |
How to Understand Our Efficiency Score
Our Efficiency Score evaluates how well an investment uses capital over 18-30 months. It factors in expected returns, risks like tail events, liquidity, skew, and portfolio fit. Higher scores mean better efficiency—great for deciding between buying shares outright or using options.
Score Range | Verdict |
|---|---|
>3 | Top-decile |
1.5–3 | Good |
1–1.5 | Marginal |
<1 | Inefficient |
Stock Evaluations
Lockheed Martin (LMT): Leading Defense Contractor with Massive Backlog
Key Stats
Q2 2025 sales: $18.16 billion; diluted EPS: $1.46.
Backlog: $166.5 billion, with 38% recognizable in the next 12 months.
Dividend: $13.20 annual run-rate (yield ~3.1% at current price).
Efficiency Score: ~1.2× for equity (Marginal); <1× for Jun 2027 $400 call options (Inefficient).
The Story
Lockheed Martin is a top aerospace and defense firm, making fighter jets, missiles, and space systems. Its segments include Aeronautics (F-35 jets, ~28% of sales), Missiles and Fire Control, Rotary and Mission Systems, and Space. In Q2 2025, sales grew but profits dipped due to $1.6 billion in program charges on classified projects and helicopter programs. Still, a huge backlog provides visibility, and acquisitions like Amentum boost tech capabilities. Strengths include a high moat from government contracts and steady demand amid global tensions. Weaknesses: Execution risks on fixed-price deals, inflation pressures, and an ongoing IRS tax dispute (~$4.6 billion potential liability).
What Could Spark a Rise
Successful backlog conversion and program re-baselining, unlocking cash flow.
Increased defense spending from allies and multi-year procurements.
Resolution of IRS issues or positive policy changes like acquisition reforms.
Action Plan
Price Range | What to Do with Stocks | Options Idea | Max Portfolio Weight |
|---|---|---|---|
≤ $400 | Buy | Sell $400 puts (3-6 months) | 8% |
$400–$440 | Accumulate | Write covered calls $460–$480 (3-6 months) | 8% |
$440–$500 | Hold | N/A | 8% |
≥ $510 | Trim | Replace with ratio-call spread | 8% |
Fair value: $401–$505 per share. From current price of ~$426, this implies potential upside of up to 19% (midpoint +6%).
Key Stats
Q2 2025 net income: $14.99 billion; diluted EPS: $5.24.
CET1 capital ratio: 15.1%; deposits: $2.56 trillion.
New buyback authorization: $50 billion effective July 1, 2025.
Efficiency Score: 1.5× for equity (Good); 1.2× for Jan 2027 $240 call options (Marginal).
The Story
JPMorgan Chase is a leading bank offering consumer banking, investment services, and asset management. Q2 showed robust earnings with EPS at $5.24 and high capital levels, supporting $7.5 billion in Q2 buybacks. Deposits grew, but credit provisions rose due to wholesale and card growth. Strengths: Diversified revenue, fortress balance sheet, and strong ROE (~18%). Weaknesses: Rising criticized loans in CRE (6.68%) and potential regulatory hits from Basel rules or legal matters.
What Could Spark a Rise
Execution of $50 billion buyback program amid high capital.
Easing credit trends and macro improvements reducing provisions.
Fee income growth from investment banking and wealth management.
Action Plan
Price Range | What to Do with Stocks | Options Idea | Max Portfolio Weight |
|---|---|---|---|
≤ $235 | Strong Buy | Sell $200 puts (Jan 2027) | 5% |
$235–$255 | Buy | Buy Jan 2027 $240 call | 5% |
$255–$295 | Hold | Call spread Jan 2027 $240/$300 | 5% |
≥ $295 | Trim | N/A | 5% |
Fair value: $235–$295 per share. From current price of ~$272, this implies potential upside of up to 8% (midpoint -3%).
International Paper (IP): Packaging Leader Scaling Up with Acquisition
Key Stats
Q2 2025 sales: $6.80 billion; adj. EBITDA: $733 million.
Dividend yield: 4.0%; net debt/EBITDA: ~3.1× post-DS Smith.
FY25 adj. EBITDA guidance: $3.5–$4.0 billion.
Efficiency Score: 2.1× for equity (Good); 3.4× for Jan 2027 $40 call options (Top-decile).
The Story
International Paper produces packaging and cellulose fibers, serving food, e-commerce, and hygiene markets. The DS Smith acquisition adds scale in Europe, with $514 million in synergies expected. Q2 saw stable volumes but some softness; margins held amid costs. Strengths: High yield, funded pensions, and flexibility in downturns. Weaknesses: Cyclical demand, integration risks, and leverage post-deal.
What Could Spark a Rise
Realization of DS Smith synergies and EBITDA goals.
Rebound in box demand and pricing power.
Debt reduction using FCF ($2–2.5 billion targeted).
Action Plan
Price Range | What to Do with Stocks | Options Idea | Max Portfolio Weight |
|---|---|---|---|
≤ $45 | Buy | Sell Jun 2026 $35 puts | 7% |
$45–$55 | Hold | N/A | 7% |
≥ $55 | Trim | Jan 2026 $60 covered calls | 7% |
Fair value: $50–$60 per share. From current price of ~$46, this implies potential upside of 8–29%.
H&R Block (HRB): Reliable Tax Services Provider with Steady Growth
Key Stats
TTM revenue: $3.71 billion; EBITDA: $0.96 billion.
Dividend yield: 2.74%; net debt/EBITDA: 1.2×.
Q3 FY25 revenue: +4% YoY to $2.28 billion.
Efficiency Score: 0.07× for equity (Inefficient); 0.34× for Jan 2027 $55 call options (Inefficient).
The Story
H&R Block offers tax prep, financial products, and small business services. Revenue grew on pricing, with adjusted EBITDA up 5%. Buybacks ($400 million YTD) support shareholders, but equity is negative from returns. Strengths: Pricing power, dividend growth (≥10% policy), and mid-single-digit EPS CAGR outlook. Weaknesses: Regulatory risks like IRS Direct File, competition from TurboTax, and recession sensitivity.
What Could Spark a Rise
Continued dividend hikes and EPS growth through FY27.
Mitigation of regulatory threats via lobbying.
Strong FCF (~$900 million) funding buybacks.
Action Plan
Price Range | What to Do with Stocks | Options Idea | Max Portfolio Weight |
|---|---|---|---|
< $50 | Buy | Sell $50 puts; buy $55 calls (27 months) | 5% |
$50–$55 | Accumulate/DRIP | Long $60 calls | 5% |
$55–$66 | Hold/Trim | Write covered $70 calls | 5% |
> $66 | Trim -20% | Close calls; open $55–$70 spreads | 5% |
Fair value: $58–$65 per share. From current price of ~$55, this implies potential upside of 6–19%.
Eli Lilly (LLY): Pharma Innovator Dominating Weight Loss Drugs (Subscriber Pick)
Key Stats
Q2 2025 revenue: $15.56 billion (+38% YoY); non-GAAP EPS: $6.31.
FY25 guidance raised: Revenue $60–$62 billion; EPS $21.75–$23.00.
Gross margin: 84.3%; dividend yield: ~0.9%.
Efficiency Score: ~1.7× for equity (Good); ~1.3× for Jun 2027 call options (Marginal).
The Story
Eli Lilly develops drugs for diabetes, obesity, oncology, and more. Hits like Mounjaro and Zepbound drove massive growth, with cardiometabolic sales at $11.34 billion in Q2. Margins expanded on efficiency, and the pipeline includes orforglipron and retatrutide. Strengths: Leadership in GLP-1 drugs, strong R&D ($3.3 billion in Q2). Weaknesses: Supply constraints, policy risks like IRA pricing, and competition from Novo Nordisk.
What Could Spark a Rise
Positive clinical data from orforglipron/retatrutide and CVOTs.
Supply chain ramps and label expansions boosting sales.
Acquisitions like Verve enhancing pipeline.
Action Plan
Price Range | What to Do with Stocks | Options Idea | Max Portfolio Weight |
|---|---|---|---|
≤ $650 | Accumulate | Sell cash-secured puts $550–$600 | 10% |
$650–$950 | Hold/Add on dips | Covered calls $950–$1,050 | 10% |
$1,050–$1,150 | Trim | Debit spreads on calls | 10% |
> $1,150 | Hedge/Reduce | Collar or roll to spreads | 10% |
Fair value: $900–$1,050 per share. From current price of ~$641, this implies potential upside of 40–64%.
Quick Portfolio Overview
Stock | Ticker | Efficiency Score (Equity) | Fair Value Range | Potential Upside (to Midpoint) | Max Portfolio Weight |
|---|---|---|---|---|---|
Lockheed Martin | LMT | Marginal (~1.2×) | $401–$505 | +6% | 8% |
JPMorgan Chase | JPM | Good (1.5×) | $235–$295 | -3% | 5% |
International Paper | IP | Good (2.1×) | $50–$60 | +19% | 7% |
H&R Block | HRB | Inefficient (0.07×) | $58–$65 | +13% | 5% |
Eli Lilly | LLY | Good (~1.7×) | $900–$1,050 | +52% | 10% |
Weighted Expected Return (to Midpoint, based on max weights): ~21%
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Important Legal Notices and Disclaimers
The information in this newsletter is for informational purposes only and does not constitute investment advice, financial advice, trading advice, or any other sort of advice. Past performance is not indicative of future results. All investments involve risk, including the possible loss of capital. You should do your own research and consult with a qualified financial advisor before making any investment decisions. We are not responsible for any losses incurred based on this content.
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