Weekly Investment Update (11/22/2024)

Our next Weekly Investment Update will be published on December 6. We wish you and your families a warm and joyful Thanksgiving.

Markets took a somewhat cautious tone this week as investors digested key earnings reports from several large retailers as well as the latest outlook from AI bellwether NVIDIA. In addition, reports of escalation between Russia and Ukraine, as well as uncertainty around key cabinet positions for the incoming Trump administration, drove some risk-off sentiment earlier in the week. The 10-year Treasury yield fell from its recent high of 4.49% back to 4.39%, and gold showed some signs of life, up over 4% as of this writing.

Taken together, both earnings and macroeconomic data have been positive but mixed. Although NVIDIA’s earnings guidance fell short of lofty expectations, the AI story maintains strong momentum as the company described demand for its new Blackwell product as “staggering.” On the retail side, Walmart reported results well ahead of forecasts; however, Target highlighted a heightened focus on value from its customers that significantly weighed on results and guidance.

We believe this backdrop will support an additional rate cut in December, even as the Fed emphasizes a careful approach to further policy easing.

Solid Third Quarter Earnings Shed Light on Consumer Bifurcation

What is happening: Ninety-five percent of S&P 500 companies have reported third quarter earnings, and overall results are solid. In aggregate, earnings growth reached 8.8% year-over-year, surpassing the July estimate of 8.5%, while top-line growth increased 5.3%. This quarter is on course to be the third consecutive quarter that earnings beat estimates, supporting the notion that this year’s strong market performance is reinforced by profitability. At the company level, 76% of companies exceeded their earnings estimates, higher than the 30-year historical average but lower than the previous two quarters. The strongest contributors were communications, technology, and utilities while the largest detractors were energy and materials.

Within the consumer discretionary and staples sectors — barometers for consumer spending — results were mixed. Walmart beat Street estimates supported by stronger than expected revenue growth and robust margins from higher store traffic and purchase-ticket size. Additionally, the company raised its financial outlook to reflect expectations for a robust holiday season. Management partly attributes Walmart’s strong results to its ability to continue to capture market share among upper-income households. In contrast, Target fell short of expectations and lowered its earnings forecast for the year. The earnings miss was attributed to its core middle-class customer base pulling back on discretionary goods, which dominate its merchandise mix, in favor of groceries and other essentials.

Why it matters: While Walmart has effectively capitalized on higher-wage earners aiming to stretch their dollars, Target’s struggles likely reflect a few of the cracks appearing in segments of the U.S. economy. From September 2021 to September 2024, real personal consumption expenditures steadily grew 7.9% in conjunction with a volatile inflation environment. However, data from the Census Bureau's Advance Monthly Sales for Retail and Food Services reveal consumer bifurcation, as average retail spending rose 14.7%, primarily driven by middle- and high-income households, whose real average spending was up 13.3% and 16.7%, respectively, while low-income households trailed at 7.9%.

Ultimately, consumer resilience rests on the consumer’s ability to sustain and improve its financial wellbeing with employment being a key component. Over the past two years, the U.S. labor market has transitioned from imbalanced to balanced; job openings per unemployed workers contracted from the 2022 peak of 2.0 to 1.1 as of September 2024, and unemployment reached 4.1%. Maintaining the existing equilibrium remains the Fed’s top priority. Consequently, it’s our belief that the Fed will likely cut its policy rate 25 basis points during the December FOMC meeting to advance closer to the neutral rate. However, much of the decision will depend on the December 6 Employment Situation Summary.

Bessemer’s All Equity portfolio is underweight the consumer discretionary and staples sectors relative to the benchmark, with a focus on the higher end consumer. Furthermore, we continue to focus on high quality businesses such as Walmart, which we believe remain resilient in an increasingly bifurcated consumer backdrop.

Bitcoin Surges to an All-Time High After Trump’s Election Victory

What is happening: The price of Bitcoin has increased nearly 45% since Trump’s election victory on November 5. Trump has recently expressed a supportive stance toward cryptocurrencies and is anticipated to help shape a regulatory environment that is more favorable to Bitcoin. In addition, on Monday, it was reported that Trump Media & Technology Group, a social media platform majority owned by Donald Trump, is planning to acquire crypto trading platform Bakkt Holdings. The announcement fueled more enthusiasm and showed further evidence of Trump’s interest in cryptocurrencies. Bitcoin hasn’t been the only cryptocurrency to benefit from the recent price surge. Popular competitors such as Ethereum and Solana both appreciated approximately 25% over the same period.

Why it matters: While cryptocurrencies have had a strong bull run, they remain volatile investments that are prone to wild swings driven by sentiment and regulatory news. Over the past 12 months, Bitcoin had a realized annualized volatility of approximately 53%, more than four times that of the S&P 500 index.

At Bessemer Trust, we maintain no exposure to cryptocurrencies within our traditional asset class portfolios and limited strategic exposure in our private asset investment offerings. We continue to maintain a cautious approach due to several unresolved long-term structural dynamics, namely regulatory uncertainty and inability to custody assets at traditional banks.

Despite Trump’s victory, there are still very few details on actual cryptocurrency policies, and we would imagine there will be many factors influencing the regulatory backdrop overall. In the U.S., there are many ongoing court cases regarding the classification of cryptocurrencies investments and the types of organizations that are allowed to act as dealers for the asset class. Global governments are also grappling with cryptocurrency regulation with no definitive consensus view. While currently there are no international laws that prevent the use of Bitcoin, several countries have already banned the cryptocurrency, most notably China and Saudi Arabia. Reduced regulation under a Trump administration could also make cryptocurrencies more vulnerable to manipulation by large holders. The collapse of FTX is a prominent example of how a large insider can bankrupt all investors in a cryptocurrency. Similar to other cryptocurrencies, Bitcoin also has substantial concentration. Satoshi Nakamoto, the anonymous creator of Bitcoin, is estimated to hold more than 5% of all Bitcoins in existence. Additionally, cryptocurrencies continue to be susceptible to theft by hackers, who use a variety of methods including exchange breaches, wallet exploits, or phishing scams. Unlike traditional banks, lost funds in crypto markets are often irrecoverable. It is estimated that more than $1.7 billion worth of cryptocurrencies were stolen in 2023.