Weekly Investment Update (03/21/2025)

Although volatility continued this week, stocks are off their March lows as signs of oversold conditions were further supported by a lack of new trade headlines. April 2 looms large for tariffs, with the Trump administration widely expected to announce further details on U.S. trade policy.

In the markets, the latest Bank of America Global Fund Manager Survey recorded the sharpest decline in U.S. equity exposure on record, with allocations to U.S. stocks at their most underweight in nearly two years. This trend — which we view as a contrary indicator — bodes well for future equity returns, as investors are likely to reintroduce risk exposure in the coming quarters.

Beyond short-term market movements, Nvidia hosted its flagship GPU Technology Conference, a closely watched event where CEO Jensen Huang’s keynote address outlined the company’s future and key trends in the broader semiconductor industry. While there were no major surprises, the outlook remained positive, emphasizing an expected $1 trillion in annual data center capital expenditures by 2028 and stronger demand from Nvidia’s top four cloud customers. This should help alleviate concerns about GPU demand following the DeepSeek news earlier this year.

Stable Economic Conditions Allow the Federal Reserve to Remain on Hold Given Elevated Policy Uncertainty

What is happening: The Federal Reserve left its policy rate unchanged at 4.25%-4.50%, as widely expected. However, the most notable insights from the meeting stemmed from adjustments to the Summary of Economic Projections. Economic uncertainty led the Fed to modestly raise its inflation and unemployment projections while marginally lowering its growth forecast for the year.

While Fed Chair Powell acknowledged that tariffs could temporarily slow inflation’s progress toward the Fed’s 2% target, core inflation projections for 2026 and 2027 remain unchanged, indicating that tariff-driven inflation is being viewed as short term. Powell noted that the changes to growth and inflation projections largely offset each other from a policy standpoint, underscoring the unchanged federal funds rate projections.

Why it matters: Markets interpreted the pause as dovish and reacted favorably. Powell noted that the rise in inflation expectations has not been widespread across inflation indicators. Notably, long-term market inflation expectations have declined since mid-February, even as tariff fears have become more pronounced. If long-term inflation expectations remain anchored, we believe the Fed is likely to maintain an easing bias.

We believe the Federal Reserve is exercising additional caution due to heightened policy uncertainty, with stable economic conditions allowing for this approach. As the growth and trade policy outlook becomes clearer, we expect the Federal Reserve will have room to cut interest rates more than the market is currently pricing. In our view, tariffs pose a greater risk to economic growth — as prolonged uncertainty can dampen business activity — outweighing the upside risks to inflation.

Yields declined following the FOMC meeting, and Bessemer’s fixed-income portfolios maintain an above-benchmark duration. This reflects our view that growth risks will have a greater influence on the market than inflation, leading the Fed to retain its easing bias.

German Parliament Approves Historic Fiscal Spending Package

What is happening: In a historic shift from its longstanding fiscal conservatism, Germany's Bundesrat approved a substantial spending package aimed at revitalizing its economy and strengthening national defense. The legislation, proposed by Chancellor-in-waiting Friedrich Merz and supported by his coalition partners, relaxes the constitutional "debt brake," allowing for increased government borrowing. The bill allocates up to €1 trillion for military and infrastructure investments.

Why it matters: The passing of the spending bill signifies a pivotal moment in Germany's economic strategy, ending decades of fiscal orthodoxy and underinvestment in the country’s infrastructure. The move to embrace proactive fiscal policies is intended to address economic stagnation and respond to heightened geopolitical tensions, particularly concerning Russia's assertiveness and evolving U.S. foreign policy.

Renewed optimism regarding economic growth across Europe has caused recent economic statistics to exceed market expectations. In addition, measures of economic confidence are also surging with the ZEW economic institute survey seeing its highest reading since February 2022, just before the Russia-Ukraine invasion.

Against this backdrop, European equities have posted strong gains this year, with German stocks rallying sharply in anticipation of the bill’s passage. The DAX index has risen 16% year-to-date, while European defense stocks have recorded substantial advances. Rolls-Royce, a Bessemer holding, has rallied over 40% since the start of the year. Bessemer portfolio managers have been increasing their exposure to European equities in recent months.