Weekly Investment Update (02/28/2025)

Equity markets faced pressure this week despite highly anticipated Nvidia earnings beating expectations. Early in the week, a decline in consumer confidence dampened markets over concerns that a pullback in consumer spending could hinder economic growth. Although sentiment has fallen, stable job growth and a low unemployment rate are positive catalysts for consumers, in our view.

Tariff-related uncertainty continues to weigh on markets. On Thursday, President Trump announced that tariffs on Mexico and Canada will be implemented on March 4, yet we note that past deadlines have been postponed. Additionally, China is set to face an additional tariff hike of 10%, and President Trump also announced his intention to place 25% tariffs on imports from the European Union. This week’s incremental tariff news caused market volatility on Thursday before markets partly recovered Friday. While tariffs will likely be a rolling headline risk this year, the economic impacts remain uncertain. We expect some increases in tariff rates this year, especially focused on China, though overall, we believe it is likely that the final result of tariff negotiations will be less economically damaging versus initial headline announcements.

Yields on the 10-year Treasury have fallen about 60 basis points since mid-January as a result of lower growth expectations. Additionally, the Atlanta Fed’s “GDPNow” forecast for the first quarter of 2025 was revised negative. The revision was primarily driven by a spike in imports, likely as a result of efforts to get ahead of potential tariffs, causing net exports to fall sharply. However, as we have previously written, we expect the economy will continue to grow, albeit at a slower pace. Despite recent market nerves, our view remains unchanged that the economy will be resilient, and earnings growth will support the market.

Nvidia Delivered Solid Full-Year Results With an Upbeat Forecast Amid the Evolving Artificial Intelligence Landscape

What is happening: Nvidia reported stronger-than-expected full-year earnings, with revenue reaching $39.3 billion — up 78% year-over-year and 12% higher quarter-over-quarter. Net income rose sharply to $22.1 billion, an 80% year-over-year increase, driven by strong sales and solid margins. The data center division, which accounts for 85% of total sales, exceeded expectations by three percentage points, posting a 91% annual increase. The company’s latest artificial intelligence (AI) chip, Blackwell, generated $11 billion in quarterly revenue, representing the fastest product ramp in Nvidia’s history with Chief Executive Officer Jensen Huang describing demand for the chip as “extraordinary.”

Looking ahead, Nvidia provided an upbeat forecast for the coming year, prompting analysts to modestly raise their estimates. Although its results didn’t match some of the record-breaking results from recent years, the continued strong demand outlook for AI hardware helped ease immediate concerns about intensifying competition and market saturation.

Why it matters: Nvidia earnings have become a key highlight of the earnings calendar due to the company’s size and its broader impact on the technology sector, particularly in artificial intelligence. This quarter’s results were closely scrutinized amid a rapidly evolving competitive landscape. Notably, there were concerns that DeepSeek, a recent Chinese AI startup, could disrupt AI infrastructure spending by developing reasoning models at a fraction of the cost of established Western companies.

Addressing these fears during the earnings call, Jensen Huang noted that new reasoning models such as DeepSeek R1 consume significantly greater AI processing power than their predecessors. He highlighted that DeepSeek’s launch had “ignited global enthusiasm” for the technology rather than undermining Nvidia’s market position. Reinforcing this message, Nvidia’s largest customers — including Microsoft and Meta — have signaled their intent to continue investing heavily in AI infrastructure. With few viable alternatives for high-performance AI chips, we believe Nvidia’s dominant position in the market will likely continue.

Nvidia shares, which nearly tripled in 2024, are unlikely to replicate their strong gains of recent years. However, the company’s current valuation appears reasonable from a forward-looking perspective, with shares trading at 23 times next year’s expected earnings and profits projected to grow by 24%. By historical standards, this multiple appears undemanding, suggesting that Nvidia’s stock is unlikely to weigh on the broader market — assuming growth continues as expected. Bessemer portfolio managers have been trimming their positions in Nivida but remain overweight relative to the benchmark.

DOGE Actions Likely to Have Minimal Economic Impact

What is happening: President Trump and the newly established Department of Government Efficiency (DOGE) announced additional measures this week to cut government spending. DOGE has set its sights on major budget reductions, particularly in the Department of Education, U.S. AID, National Science Foundation, and National Institutes of Health, as well as a reduction in the federal labor force. The announced federal job cuts are estimated at roughly 100,000 positions, which falls short of DOGE’s goal to reduce the U.S. federal workforce by approximately 250,000 employees, or about 10% of the total federal employment.

Over the past year, government, education, healthcare, and leisure and hospitality have driven approximately 75% of job growth, largely due to post-pandemic recovery hiring. However, as this catch-up phase nears completion, hiring in these sectors was already expected to slow, independent of DOGE’s actions.

Why it matters: While notable, these federal layoffs are unlikely to disrupt the broader economy as federal employment accounts for only 2% of total jobs. However, nearly 100,000 layoffs in the coming months are expected to appear as a reduction in the nonfarm payroll report. While the overall labor market impact is expected to be limited, certain regions — particularly Washington, D.C., home to the largest concentration of federal workers — are likely to feel a greater strain than others.

Because discretionary non-military spending makes up only 13% of the federal budget, DOGE’s ability to significantly reduce overall government costs is limited. There are only a few areas within nondiscretionary spending that offer significant savings opportunities, given that entitlements such as Social Security and Medicare, key drivers of increased government spending, are not expected to be affected. As a result, the most likely outcome is minimal spending cuts relative to the overall federal budget, with reductions primarily coming from smaller agencies rather than major entitlement reforms.

Additionally, DOGE’s authority to cut appropriated funds faces legal uncertainty, with potential litigation over its ability to unilaterally defund programs. This legal ambiguity complicates the congressional outlook and raises concerns about how much of DOGE’s proposed cuts will translate into deficit reduction. The key legislative battle will center around the extension of the Tax Cuts and Jobs Act (TCJA) and the extent to which spending cuts will be included in the bill. Furthermore, DOGE’s actions have made bipartisan negotiations more challenging, increasing the likelihood of short-term continuing resolutions, a potential government shutdown this spring, and an extended timeline for budget reconciliation. This combination has the potential to prolong uncertainty for investors regarding tax and spending policies, which, in turn, could contribute to market volatility.

Despite strong rhetoric and numerous headlines, we expect the overall economic and market impact of DOGE to be relatively muted. However, DOGE-related risks, along with tariffs, could cause volatility in the near term. Investment implications are likely to be more industry-specific, affecting companies tied to specific federal programs and contracts targeted for cuts rather than the overall economy.