Weekly Investment Update (04/18/2025)

Stocks were generally stable this week, sitting 9.6% above this year’s intraday low as of this writing. Trade headlines were a major driver of markets, with a mix of positive and negative implications — many of which remain fluid. Although light on details, President Trump described “big progress” in trade talks with Japan. If realized, a deal with Japan will likely serve as a framework for negotiations with other large trading partners, particularly Europe. Additional positive signals included temporary tariff exemptions for electronics (and potentially autos), stabilization in the bond market, and bank earnings reports that highlighted a still healthy consumer — further supported by better-than-expected March headline retail sales.

On the downside, China-U.S. tensions continued to ratchet higher. Most notably, the U.S. announced new export restrictions on Nvidia chips destined for China, raising additional questions around the trajectory of trade negotiations and the ongoing economic decoupling of the U.S. and China. Interestingly, Nvidia’s less powerful H20 chip already faces serious competition from Chinese chip make Huawei’s CloudMatrix 384 chip. This calls into question the national security justification for the export restrictions, as China is already producing an arguably comparable chip to power its AI development.

As has been the case in recent weeks, the persistence of various market-moving narratives remains highly variable. As a result, our focus is on investing in quality companies that we believe can thrive over a multiyear horizon.

Treasury Market Fundamentals Remain Sound Despite Volatility

What is happening: Treasury markets have experienced an unusual bout of volatility in the last few weeks. During the week of April 11, yields rose 30 to 50 basis points across the curve — the sharpest weekly rise since 2001. Notably, long-term yields rose more than shorter-dated yields, suggesting heavier selling pressure at the long end of the curve.

Several technical factors contributed to the selloff in longer-dated Treasuries, with positioning dynamics offering some explanation. Notably, institutional investors entered April with their largest long-duration positions in nearly 15 years. Some quickly sold these positions as rising uncertainty around U.S. policy increased the term premium — the extra yield investors demand for holding long-term bonds — likely accelerating the jump in yields. Additionally, recent weakness in the stock market has likely caused broader deleveraging as market participants pared back positions in risk assets.

Why it matters: While technical factors can introduce short-term fluctuations in Treasury markets, fundamental drivers — which are linked to the real economy — ultimately determine the prevailing level of yields over the medium term. Despite the historic price action, the fundamental drivers of yields remain broadly intact. Long-term real-interest-rate expectations from the Federal Reserve remain materially unchanged, and long-term inflation expectations remain well anchored. This suggests that recent moves have been driven more by technical factors than by a change in economic fundamentals.

Given ongoing uncertainty around tariff policy, concerns also emerged about foreign governments selling Treasuries and future demand from foreign buyers. We believe these concerns were overstated, particularly as the majority of foreign government holdings of Treasuries are concentrated in shorter-dated securities. Despite recent volatility, longer-dated Treasury yields have declined year-to-date, and bonds continue to offer traditional downside protection in diversified portfolios.

Earnings Provide Insight Into Economic Conditions and the Consumer

What is happening: First-quarter earnings season has begun, giving us an early insight into the health of corporate America. Thus far, 12% of S&P 500 companies have reported results, with 71% beating earnings expectations — slightly below the five-year average of 77%. Overall earnings growth currently stands at 7.2%. While half of the companies that have reported results have maintained their full-year guidance, market reactions have been more volatile compared to history, reflecting heightened investor uncertainty.

Some companies, such as Delta Airlines, have withdrawn full-year guidance altogether. Others, such as United Airlines, have taken the unusual step of issuing two profit forecasts — one if the environment remains stable and one factoring in a potential U.S. recession.

U.S. banks, often a bellwether for the broader economy, have painted a mixed picture. They indicated that consumers remain healthy, though spending among lower-income households has been softening. In response to a weakening in overall conditions, large banks are increasing their reserves as a precaution should the macroeconomic outlook further deteriorate. Trading revenue has emerged as a bright spot across earnings — JPMorgan and Morgan Stanley both recorded trading revenue growth of over 40% for the quarter, boosted by elevated market volatility from policy uncertainty. The combination of elevated trading activity paired with subdued deal making seen this quarter is likely to persist throughout the remainder of the year.

In contrast, consumer discretionary companies are feeling pressure. Echoing commentary from banks, consumers are becoming more discerning with their spending patterns and pulling back on larger ticket purchases, a trend that will weigh on growth if it continues.

Why it matters: First-quarter earnings have revealed insight into the complex economic landscape. We expect to see elevated volatility as companies adjust their guidance to match current challenges. While consumers generally remain supportive of economic conditions, shifting behaviors suggest they may be pulling forward purchases ahead of expected tariffs — a trend visible in both retail sales and JPMorgan’s earnings results. Luxury companies have announced price increases in response to tariffs, but slower growth may dampen the inflationary effects.

Banks are navigating these crosscurrents cautiously, balancing strong trading revenues with increased provisions for potential credit losses. As trade policy remains uncertain and consumer sentiment shows signs of change, we expect further guidance revisions — and potentially more market volatility.

Bessemer portfolios are overweight financials and underweight the consumer discretionary sector. Exposure is concentrated in well-capitalized banks such as JPMorgan, while positions in companies more reliant on mergers and acquisitions, such as Blackstone, have been trimmed. Notably, as consumers have shown some signs of pulling back in spending, 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.