Weekly Investment Update (07/19/2024)

In our last Weekly Investment Update, we highlighted the year-to-date dominance of large cap equities, particularly large technology stocks. Acknowledging the extreme performance divergence, we noted, “Historically, large gaps between market cap and equal weight index performance eventually normalize and reverse. We have both overweight and underweight positions across the Magnificent 7 stocks, and we also have broad market cap and geographic diversification within our portfolios.” Although maintaining a properly diversified portfolio can be difficult when market gains become concentrated, the extreme reversal in market leadership this week underscores the importance of thoughtful long-term asset allocation. The technology-heavy Nasdaq was down over 12% versus the Russell 2000 small cap index in the last five trading days, while growth stocks have given back half of their 2024 outperformance versus their value counterparts. Moreover, technology outages today serve as a reminder of the growing dangers of cybersecurity vulnerabilities — an issue that has impacted several key technology stocks today and one that we will explore further in a webinar this fall. Investors have rushed to buy more cyclical areas of the market as a recession still appears unlikely (e.g., with better-than-forecasted retail sales this week) and inflation appears to be trending toward the Fed’s 2% target (various Fed officials now hinting at a September rate cut). It is important to note that technology stock fundamentals remain intact, and Bessemer portfolio managers continue to look for quality companies across equity market segments, ensuring we are not overexposed to extreme market concentration or dramatic style and sector leadership rotations.

Bank Earnings Show Evidence of a Still-Healthy Consumer and Pickup in Capital Market Activity 

What is happening: The largest U.S. banks have started to report earnings, kicking off the second quarter season with overall results so far slightly exceeding expectations. This quarter, earnings growth is expected to broaden beyond the Magnificent 7. While net interest income reports were mixed, a consistent area of strength was the investment banking division, with many large banks posting double-digit percentage increases in revenue, primarily driven by an increase in M&A and capital markets activity.

Overall, conditions for the consumer were stable, indicative of still-healthy consumption patterns. Despite a weakening in macroeconomic conditions, credit conditions have not materially weakened. JPMorgan reported that net charge-offs — debt owed that is unlikely to be recovered — slightly increased from the first quarter, but this was viewed as a normalization of credit conditions rather than a deterioration. Overall, spending trends remain solid, though they have slowed from recent robust levels. This dynamic was echoed by the stronger than expected retail sales report, indicating that although the consumer has weakened, consumer health — particularly for the high-end consumer — remains supportive of economic conditions. 

Why it matters: Earnings for the financial sector are an important area to monitor given their read on the economy and consumer. Looking ahead, growth for the S&P 500 ex. Magnificent 7 is expected to be positive for the first time since the fourth quarter of 2022, and results within financials are likely to serve as a gauge for reporting expectations more broadly in this earnings season. 

The pickup in capital markets and M&A activity bodes well for our exposure to private markets, which we discuss in more detail in our latest Quarterly Investment Perspective. Private equity exits have slowed in recent years, with higher rates and uncertain sentiment slowing activity in IPO markets, in particular. However, we have seen notable exits via IPO and M&A as activity begins to bounce back. Within public market portfolios, Bessemer has exposure to high-quality banks such as JPMorgan and Bank of America. Additionally, we have exposure to public alternative investment firms that are poised to benefit from this pickup in activity, such as Blackstone and KKR. Blackstone reported in its latest earnings call that deal activity materially picked up with deployment reaching the highest level in two years.

On the Back of Recent Momentum, President Trump Picks J.D. Vance as Running Mate

What is happening: Political developments have remained front and center in recent weeks given the first presidential debate, an assassination attempt on former President Trump, and the Republican National Convention (RNC) this week. Former President Trump has gained momentum given recent events, with betting markets currently predicting a ~60% chance that Trump will win. Meanwhile, the Democratic party has accelerated efforts to replace Biden as their nominee with prominent party leaders publicly calling for him to quit the race.

Additionally, ahead of the RNC, President Trump announced that J.D. Vance would be his running mate. J.D. Vance’s economic beliefs have differed greatly from traditional conservative views, aligning more with Trump’s version of conservatism. Overall, Trump’s choice appears to reinforce his commitment to a populist agenda.

Why it matters: While vice presidential candidates have not historically played a large role in election outcomes, they have the potential to influence voters and policy initiatives, on the margin. To the extent Vance could help the Trump-Vance ticket, he may be able to energize voters in key states given his appeal with working class and union workers in the Midwest (Wisconsin and Michigan) and Appalachian region (Pennsylvania) as well as veterans in key states, such as Arizona and Nevada. 

We view the choice of Vance as indicative of where Trump’s policy focus may lie as opposed to a factor that could dramatically influence Trump’s agenda. As a result, trade, immigration, and populist policies appear to be top priorities for a prospective Trump administration. Additionally, we believe a Trump-Vance Administration would look to support the oil and gas industry, limit government support for green energy, and could seek an immediate resolution between Ukraine and Russia. 

Taking a step back, it is important to remember that politics are rarely a key driver of markets in the long term as the state of the economy and companies’ earnings remain paramount. However, we expect political developments to drive uncertainty and volatility ahead of the November elections. The Bessemer investment team continually evaluates the impact of potential policy changes on portfolios and will be in touch with our thoughts on developments in the coming months.