Weekly Investment Update (02/06/2026)

Recent volatility in AI and software stocks has been driven by investor concerns over rising capital expenditures and slowing free cash flow at several major technology companies. Microsoft, Alphabet, and Amazon all posted strong cloud and AI-related results, but heavy spending plans weighed on sentiment. Software stocks were particularly pressured after Anthropic’s Claude launch intensified competition concerns. Still, fundamentals remain solid: Microsoft’s commercial cloud backlog continues to expand, Google Cloud grew 48% year over year, and Amazon’s AWS reported triple-digit growth in custom chips supporting AI workloads. With technology sector valuations already down from 28x to 23x forward earnings, much of the reset may now be behind us.

Importantly, improving economic data are laying the groundwork for broader market participation. Recent inflation readings have cooled, and while labor market signals have softened, they remain stable enough to keep recession risks low and rate cut expectations on track. Consumer sentiment is rebounding, and key manufacturing indicators have surprised to the upside. Together, these trends suggest the economy is transitioning into a more balanced and sustainable phase.

This backdrop supports our diversified portfolio positioning. With AI and software valuations still adjusting, we see growing opportunities in sectors such as industrials and healthcare, where fundamentals are strengthening and relative valuations remain compelling. Broader earnings contributions across sectors should help reduce market concentration risks and reward well-diversified investors in the quarters ahead.

Kevin Warsh Nominated to Become Next Fed Chair

What is happening: Last Friday, President Trump nominated Kevin Warsh to be the next chair of the Federal Reserve’s board of governors. Warsh previously served as Fed governor from 2006 to 2011. While Warsh is expected to secure enough votes to be confirmed by the Senate, his nomination must first be approved by the Senate Banking Committee. Republican Senator Thom Tillis, a member of the banking committee, has stated he will oppose any nomination until the Department of Justice’s (DOJ) investigation into Chair Jerome Powell is resolved. Unless Democrats on the committee support Warsh’s nomination, Tillis’ opposition would be sufficient to block senate approval. As a result, there is some uncertainty regarding the timing of Warsh’s potential confirmation and entry onto the board of governors.

Warsh has been nominated to fill Stephen Miran’s temporary seat, meaning there will be an additional open seat when Powell eventually steps down from the board. While it is traditional for a Fed chair to step down as a governor when their term ends, Powell has been noncommittal about his plans. The DOJ investigation has increased the likelihood that he could remain on the board longer as a means of protecting Fed independence. If Powell chooses to stay as a governor, his current term runs through January 2028. 

Market reaction to the nomination has been limited so far, with small fluctuations in 10-year U.S. Treasury bond yields and a slight appreciation of the trade-weighted U.S. dollar index.

Why it matters: Kevin Warsh is viewed as an advocate of monetary discipline, with longstanding skepticism toward the Fed’s balance sheet policies. We do not anticipate major changes to Fed policy in the near term. On the margin, however, the Fed could lean toward additional interest rate cuts if Warsh is able to persuade other committee members that AI-related productivity gains allow for lower rates without sparking inflation. Warsh has recently acknowledged that policy rates remain restrictive. Fed funds futures markets are now pricing in slightly more than two rate cuts in 2026, compared with slightly fewer than two prior to the announcement, though this shift is not considered a dramatic change in expectations. Warsh is also viewed as less dovish and a stronger supporter of Fed independence than some other candidates previously under consideration, such as Kevin Hassett or Rick Reider. 

Warsh has been a proponent of shrinking the Fed’s balance sheet in non-emergency environments, which in isolation could place upward pressure on long-term bond yields. That said, we do not expect a significant reduction in the balance sheet, as Warsh’s views differ from those of many current governors who favor maintaining ample reserves to implement monetary policy effectively. Moreover, Warsh has supported banking deregulation, which could help offset yield pressure from a smaller Fed balance sheet. For example, changes to the liquidity coverage ratio, net stable funding ratio, or supplementary leverage ratio could free up some bank capital and reduce the need for reserves at the Fed.

We will continue to closely monitor these developments as the composition of the board of governors remains in flux given the possibility of another Trump nomination later this year. Our fixed income portfolios are maintaining a slight overweight to duration for the moment as we believe the Fed will continue to be data dependent in the near term.

Manufacturing Rebounds as Labor Market Remains Cool

What is happening: U.S. manufacturing data this week pointed to better-than-expected momentum at the start of the year, with the ISM Manufacturing Index surprising to the upside and returning to expansionary territory for the first time since February 2025. Notably, this also marks the strongest reading since 2022, with gains across all major subcomponents, led by improvement in the new orders component, while inventories remain low. Typically, an increase in new orders alongside relatively low inventory levels is a constructive signal for future production, suggesting manufacturers may need to increase output to meet improving demand.

Despite the improvement in headline indicators, comments from survey respondents continue to reflect lingering uncertainty about the outlook for future business conditions. This aligns with trends seen much of last year, when survey responses often did not reflect the resilience of broader economic data.

While the nonfarm payrolls report was delayed this week because of the partial government shutdown, the Challenger’s layoff survey showed a meaningful increase in announced job cuts in January, rising by 118% year-over-year. However, the headlines suggest a far more dire picture of the labor market than the underlying data support. Almost half of the increase in announced job cuts was from three companies — Amazon, United Parcel Service, and Dow Inc. — and do not reflect broad-based layoffs. At the same time, the ADP employment report came in lower than expected, showing private payroll job growth increasing by 22,000 in January, indicating that job growth continues to moderate but by not as much as headlines may suggest.

Why it matters: Overall, the economic data this week reinforce our view that the U.S. economy is generally stable. We expect economic growth to remain robust this year as the effects of monetary and fiscal stimulus continue to work their way through the economy, providing ongoing support for areas that were under pressure in prior years, including industrial and housing activity. From a positioning perspective, Bessemer equity portfolios are overweight the industrials sector given these tailwinds, and recently increased exposure to J.B. Hunt.

Separately, we continue to believe that downside risks to the labor market outweigh upside risks to inflation, with this week’s data adding to evidence of a labor market that is cooling but not rapidly deteriorating. Importantly, economic growth is a residual effect of monetary policy, which means that even with solid economic activity, the Federal Reserve still has scope to lower interest rates later this year.