Weekly Investment Update (05/02/2025)

This week offered a refreshing shift in tone for investors, as attention moved away from relentless trade policy headlines and toward market fundamentals, with a focus on corporate earnings and macroeconomic data. While companies continue to cite policy uncertainty as a major challenge to providing reliable forward guidance, several high-profile earnings reports offered encouraging signs. Notably, Meta and Microsoft delivered results that not only beat expectations but also reinforced investor confidence in the ongoing AI investment cycle. Microsoft highlighted robust demand for its cloud-based AI services, while Meta emphasized strong engagement driven by AI-powered content recommendations — both serving as reminders of how deeply AI is becoming embedded in core business strategies.

On the economic front, data painted a more nuanced picture. The Q1 GDP report revealed a headline growth rate of just -0.3% quarter-over-quarter, softer than expected, and initial jobless claims edged higher, pointing to some emerging cracks in the labor market. However, beneath the surface, the GDP report was distorted by a surge in imports as companies front-loaded shipments in anticipation of potential tariff hikes. Stripping out trade and inventories, real final sales to domestic purchasers — a key measure of underlying demand — rose a solid 3.0%, underscoring continued consumer and business resilience. This divergence between headline numbers and underlying strength suggests that, while policy risks remain elevated, the foundation of the U.S. economy and key investment themes, such as AI, remain intact.

Earnings Provide Insight Into Tariff Uncertainty and Economic Conditions

What is happening: Companies representing 40% of the S&P 500’s market value reported quarterly results this week, providing insight into the health of the U.S. economy and the impact of shifting trade policy on earnings. With 70% of companies having reported first-quarter earnings, the index has posted annual profit growth of 13%, exceeding the 9% forecast at the season’s start.

Meta Platforms and Microsoft led the upside surprises among the large technology stocks this week. Microsoft’s shares jumped 8% after reporting robust demand for its cloud-computing and artificial intelligence services. Investors were also encouraged by the company reiterating its ambitious plan to spend $80bn on data centers this fiscal year and higher forecasts for next year. Meta, benefiting from AI-driven advertising tools, also surpassed expectations, with its shares rising 4%. Excluding the Magnificent 7 group of companies, S&P 500 earnings growth moderated to 5.1% year on year. This divergence underscores the sector’s outsized role in masking broader challenges in the global economy, including tariff-related cost pressures highlighted in General Motors’ results, where the company expected additional tariff-related costs of $4 to $5 billion.

Why it matters: Overall, this earnings season has highlighted trends that apply across the broader economy: strong in some places, vulnerable in others, with tariffs causing significant uncertainty about the future. The strong growth of corporate earnings and negative first-quarter GDP print highlight the crosscurrents the U.S. economy is facing. The divergence can be partly explained by businesses and consumers accelerating purchases, especially of imports, ahead of the tariffs, something that can benefit corporate earnings but penalizes GDP. In addition, approximately 30% of S&P 500 revenues come from overseas — figures not in GDP calculations — which have proved more valuable given the weakening U.S. dollar.

However, despite economic uncertainties, consumer spending overall remains resilient. Visa reported 6% growth in payment volumes across its U.S. network in the first quarter with management noting that "we have not seen any signs of overall consumer spending weakening.” However, weakness in consumer discretionary stocks — such as McDonald's, Starbucks, and Chipotle — points to increasing strain and caution by some households, especially with respect to the lower-income consumer.

Bessemer portfolios are overweight defensive sectors such as consumer staples, utilities, and financials, and underweight the consumer discretionary sector. Portfolio managers have reduced exposure to companies tied to big-ticket discretionary purchases, while increasing exposure to companies that can benefit when consumers trade down, such as Costco and BJ’s Wholesale Club.

First-Quarter GDP Modestly Contracts Given a Pull-Forward of Imports Ahead of Tariffs

What is happening: The U.S. economy shrank by 0.3% in the first quarter of 2025, marking its first contraction since early 2022. The decline was primarily due to a record drag from net exports as businesses rushed to import goods before new tariffs take effect. Federal government spending dropped sharply (down 5.1% annualized) as job and contract cuts from the Department of Government Efficiency took effect. Defense spending led the decline, falling by 8%.

Despite these drags, core domestic demand remained resilient: Real final sales to private domestic purchasers, a better measure of underlying economic strength, grew a strong 3.0%. This reflects solid consumer and business activity, likely influenced by firms pulling forward spending in anticipation of trade barriers. Consumer spending rose by 1.8%, stronger than expected due to robust services demand. Capital expenditures also surged by nearly 10%, especially in equipment, and inventories added to GDP, supporting the notion of pre-tariff stockpiling.

Why it matters: While the U.S. economy technically contracted in the first quarter, the headline GDP decline overstates the weakness due to a temporary surge in imports. The details of the report revealed strong demand with both investment and consumer spending coming in stronger than anticipated. In our view, the best gauge of underlying consumer strength can be seen on the services side, where there was no pull-forward effect; therefore, it is notable that this metric was resilient.

Looking ahead, the tariff-induced stockpiling that boosted first-quarter activity is expected to reverse. Second-quarter GDP could get a boost from a rebound in net exports as companies scale back early purchases and the import surge fades. Underlying private sector momentum will be key, and real final sales to private domestic purchasers will be indicative of the demand resilience of consumers and businesses amid increasing economic uncertainty. While policy risk and uncertainty remain elevated, April economic data indicate that activity is slowing, but not as sharply as feared. Notably, April’s labor market report indicates that the labor economy remained relatively healthy despite developments and volatility surrounding tariff announcements. Bessemer portfolios continue to focus on investing in quality companies with strong management teams that we believe can navigate trade-related uncertainty and thrive over a multiyear time horizon.