Weekly Investment Update (01/03/2025)

A Preview of the Year Ahead

Last year brought upside surprises in terms of market returns and economic growth. The S&P 500 finished 2024 up 24%, including 57 record closes and the best back-to-back years for the stock market since 1998. We were more constructive on U.S. growth than consensus heading into 2024, and the expansion exceeded even our expectations. At the start of 2024, consensus estimates called for 1.3% GDP growth, yet through the third quarter year-over-year GDP growth had reached 2.7%. Corporate profits were also strong — rising by double-digit percentages in many sectors — driven by resilient consumer demand, improving margins, and moderating cost pressures. Throughout the year, we expected the combination of interest-rate cuts and an ongoing economic expansion to support the equity markets, bolstering our conviction in our overweight to stocks, which we maintain heading into 2025.

The macroeconomic environment for 2025 includes a new set of complexities. While many of the positive drivers that defined 2024 remain in place — such as declining interest rates and strong corporate balance sheets — key challenges are emerging. While we remain optimistic about the U.S. economy and maintain our overweight position in U.S. equities, we expect growth to trend toward its 2% potential. This should allow the Fed to reduce interest rates more than the two cuts currently priced in for 2025, while also supporting the earnings growth we believe is needed to drive stocks higher amid historically elevated valuations in many areas of the market. Volatility has been notably muted in recent years, but we believe the combination of policy uncertainty and generally optimistic forecasts may lead to an increase in near-term market fluctuations.

Markets thus far have reacted positively to the policy priorities of the incoming Trump administration. The administration’s pro-business agenda is expected to spur growth in areas that align with many of our key investment themes for the year: infrastructure, artificial intelligence, and overall dealmaking. While we recognize this strong foundation, we remain cautious about key risks, including large fiscal deficits, areas of stretched valuations, and geopolitical uncertainties.

Our outlook will be further detailed in our Quarterly Investment Perspective, which will be released next week.

Several Catalysts Are Supporting Energy Demand Growth in the U.S.

What is happening: The last time the U.S. experienced electricity demand growth was before the early 2000s; now, estimates see total energy demand growing ~15-20% in the next decade. The growth can be attributed to the emergence of new technologies and a shifting global landscape. The rapid adoption of artificial intelligence (AI) requires significant investment in data centers, the critical infrastructure to support AI’s growth. Data centers consumed 4.4% of total U.S. electricity in 2023 and are expected to consume 6.7% to 12% by 2028. As investment in AI grows, data center electricity consumption is set to follow at an accelerating rate.

Shifting policy preferences, with a focus on renewable energy and securing supply chains, are also revitalizing energy demand. Fiscal support from both the Inflation Reduction Act and the CHIPS Act should bolster the energy transition and reshoring efforts. The expansion of green energy infrastructure and resurgence of domestic manufacturing require significant energy capacity, creating long-term tailwinds for energy demand growth.

Why it matters: The global economy is fragmenting, while nations are increasingly concerned about national interests and autonomy from potential adversaries. Technological leadership and energy and supply chain independence are at the forefront of their priorities. The substantial investment in these themes not only reflects an effort by the U.S. to address immediate economic needs but also a long-term goal of promoting resilience. As these investments materialize, they will help the U.S. maintain its status as a dynamic and innovative economy able to deploy capital efficiently in a rapidly advancing space.

Bessemer has exposure to high-quality companies that it believes are poised to benefit from the growth in energy demand. Large technology companies are currently driving investment in AI, but there remains ample opportunity for companies across sectors to benefit from its adoption as well, in our view. Downstream, the buildout of data centers will require enhancements to the U.S. electric grid and significant industrial capacity. As data centers consume a greater amount of energy, renewable energy solutions are likely to play a role in mitigating their environmental impacts. Bessemer holds Quanta Services, a leading engineering and construction firm, well positioned to benefit from the demand for data centers. Overall, there are numerous tailwinds for sustained energy demand growth, and we continue to find opportunities to benefit.