The current business cycle presents a peculiar paradox. Markets hover near all-time highs, credit spreads tighten, and gold reaches record levels, yet beneath this veneer of optimism lies an uncomfortable truth: we're operating with remarkably poor visibility on what comes next. The disconnect between Wall Street euphoria and Main Street uncertainty hasn't been this pronounced in recent memory.

The tariff question epitomises this uncertainty. Since Liberation Day the impact on economies and corporate earnings has been difficult to predict to say the least, with companies frantically front-loading inventory to beat rules that haven't been fully defined. The result? A massive inventory built across sectors—from luxury goods to industrial components—that hasn't yet shown up in reported numbers. This artificial buffer has temporarily masked the true economic impact, creating what feels increasingly like the eye of a storm.

What makes this cycle particularly challenging is the complexity of corporate responses. Companies are deploying sophisticated transfer pricing strategies, adjusting where profits are booked between entities to minimise tariff impacts. U.S. subsidiaries are importing at lower transfer prices to reduce the cost base on which tariffs are calculated. These tactical manoeuvres have helped contain inflation (to some extent) thus far, but they're temporary fixes, not structural solutions.

The reality is that we need at least one or two more earnings seasons to understand the true impact. Once inventory drawdowns complete and transfer pricing games reach their limits, the full cost of these policies will need to be either absorbed by corporations—unlikely given current margins—or passed through to consumers. The inflationary pressures that markets initially feared in April, then seemingly forgot by mid-year, probably haven't disappeared; they've merely been deferred.

In this week’s video we think Greg Dean, of Langdon Equity Partners, makes a compelling case for idiosyncratic small-cap opportunities, particularly those with specific and diverse characteristics. The most resilient companies in this uncertain landscape share several traits: underleveraged balance sheets that provide flexibility for opportunistic moves, pricing power to pass through cost increases, and business models that aren't hostage to interest rate movements or geopolitical chess games.

Consider the contrast with the broader market. The S&P 500's performance increasingly depends on multiple expansion, liquidity flows, and thematic momentum—a double-edged sword when sentiment shifts. Meanwhile, carefully selected smaller companies can march to their own drum, their fortunes tied more to execution and market position than to macro crosscurrents. This manifested itself around liberation day when the Langdon portfolio was relatively unaffected and we suspect that recent underperformance in an apparently liquidity driven and quite frothy market is the other side of that coin.

The key is selectivity. Greg argues that a portfolio of 30-40 smaller companies, each with robust fundamentals and clear competitive advantages, can provide resilience when the tide turns. These businesses often operate in niches where they enjoy pricing power, have direct customer relationships that larger competitors can't replicate, and maintain the operational flexibility to navigate disruption.

As we await clarity on tariffs, de-globalisation, and the true state of the economy, the widening dichotomy between financial markets and economic reality suggests caution is warranted. The companies that will thrive aren't necessarily those riding the current wave of optimism, but those with the balance sheet strength and business quality to capitalise when others struggle.

In uncertain times, boring can be beautiful. Underleveraged, cash-generative businesses with pricing power may not capture headlines, but they offer something invaluable: the ability to control their own destiny regardless of whether the next chapter brings inflation, recession or continued uncertainty. That's a characteristic worth paying for when visibility is this poor and this is a time and place where active management can add value.