Weekly Investment Update (02/23/2024)

Artificial intelligence (AI) continues to be a dominant market theme, pushing U.S. and European equity markets to reach all-time highs. This week, NVIDIA reported another strong quarter with sales and earnings per share beating consensus estimates by 8% and 12%, respectively. Expectations were lofty heading into the report, but once again, the company was able to exceed consensus. We believe tailwinds from AI will be a persistent market driver for years to come. A replay of our Virtual Wealth Management Event, which discusses themes such as AI and broader market events in more detail, is now available here. 

We continue to focus on how best to benefit from these trends from an investment standpoint. First, the rise in interest rates has led to a shift in investor psychology. As the bond market can now more readily compete for investment dollars, equity investors are seeking higher quality businesses that generate cash flow and profits today versus promised future growth. Within the equity market, we see two sets of winners. The first set are the companies that have good data, engineering expertise, and products where AI can enhance core offerings and deliver an immediate competitive advantage; such companies include Microsoft, Alphabet, Meta, and Amazon, in our view. The second set of winners are the advantaged players in the supply chain. They are primarily semiconductor companies that have a technological advantage and comprise the underlying AI infrastructure.  For these companies, it doesn’t matter who the leading end market players are — they will be supplying technology to all of them. Bessemer portfolio managers own companies such as Marvell (leading edge networking chips) and ASML (semiconductor equipment), as examples, in addition to NVIDIA.

Fourth Quarter S&P 500 Earnings See Continued Growth

What is happening: S&P 500 companies have nearly completed reporting fourth quarter earnings, which on an aggregate basis came in stronger than consensus expectations. Thus far, around 90% of S&P 500 companies have reported earnings with 75% of companies beating consensus estimates, landing slightly above the 10-year average of 73%. Aggregate S&P 500 reported earnings so far have increased 3.1% year-over-year in the fourth quarter. If the 3.1% growth rate holds, it would mark the second consecutive quarter that the index has reported positive year-over-year earnings growth following three consecutive quarters of negative earnings growth.

Companies highlighted several key earnings drivers, including artificial intelligence (AI) and infrastructure spending. NVIDIA, a leading semiconductor company, beat consensus earnings estimates and noted surging demand for its AI semiconductor chips. United Rentals, a leading equipment rental company for the construction and industrial markets, similarly beat consensus earnings estimates and noted that industrial end markets continue to see healthy growth.

Why it matters: While above-trend nominal GDP growth and secular trends supported company earnings in the fourth quarter last year, we expect economic growth to slow from these levels as elevated interest rates continue to permeate the economy. Consequently, cyclically oriented businesses may find their earnings more impacted by an economic deceleration. Therefore, Bessemer’s portfolio managers are focused on profitable companies that they believe are positioned to benefit from secular trends, including AI and infrastructure spending, among others. Companies exposed to these secular trends should find their earnings less impacted by an economic deceleration. For example, Bessemer’s portfolio managers believe that AI and infrastructure spending can provide multiyear earnings tailwinds for companies exposed to these trends given continued adoption of AI technology and the revitalization of domestic infrastructure. Bessemer’s All Equity Portfolio maintains overweight exposures to both NVIDIA and United Rentals. 

China’s Central Government Signals Greater Willingness to Ease Policy

What is happening: On Tuesday, the People’s Bank of China (PBOC) reduced the 5-year loan prime rate (LPR) by 0.25% to 3.95%. The 0.25% rate cut exceeded expectations and was the largest one-time cut in history. As the LPR is a key benchmark used for determining mortgage rates, this latest move can be interpreted as another government attempt to stabilize the struggling property markets. The recent easing of monetary policy also closely follows other government efforts to support the capital markets. Just before the Chinese New Year holidays, Central Huijin Investment, China’s sovereign wealth fund, announced intentions to buy more Chinese equity ETFs to bolster the domestic stock market. Concurrently, government officials also encouraged Chinese corporations to commit more capital to stock buybacks. The Shanghai Composite index has rebounded more than 10% since those announcements and is now close to flat for the year.

Why it matters: China’s economy is currently facing a combination of headwinds, including struggling property markets, falling consumer confidence, and ongoing deflation, not to mention international pressures to diversify supply chains away from China. The LPR reduction should help the Chinese housing market on the margin, but rate cuts alone are unlikely to reverse the property sector downturn. First, given the increasing number of developers with financial difficulties, Chinese homebuyers are more concerned about whether construction projects will be completed than purchase prices or interest rates. Additionally, on average, Chinese homeowners have larger downpayments and home equity percentages compared to their Western counterparts, so lower mortgage rates have less of an impact on their monthly payments. 

All else being equal, the government’s greater willingness to loosen monetary and fiscal policy should dampen the deceleration of the country’s economy and reduce global spillover effects. However, the government is also tightening regulations in high technology industries, which could stifle China’s long-term growth potential. Bessemer’s portfolios maintain an underweight position in Chinese equities, and the investment team will continue to monitor developments in the region, more so for their impact on the global economy and on multinational companies that have a meaningful percentage of revenues coming from China.