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Growth Team Weekly Investment Insights
Last week was very busy from a macroeconomic and equity performance standpoint.
Recession fears continue to make headlines, including the latest Atlanta Fed GDPNow Q1 estimate that sharply dropped into negative territory. However, looking at the data, much of the drop is due to net exports, which is mainly attributable to importers increasing orders to front-run tariff risks.
The ongoing back-and-forth on tariff policy remains top of mind for companies. In fact, the number of S&P 500® Index companies mentioning “tariffs” on earnings calls has skyrocketed.
However, multiple data points throughout the week pointed to an economic environment that is not as bad as people fear.
First, while the Institute for Supply Management’s (ISM) manufacturing survey missed consensus expectations, it remained in expansionary territory (>50) for the second straight month.
After a concerning deceleration last month, the ISM’s services survey beat expectations and accelerated compared to January.
And last, the February nonfarm payrolls data showed the economy added 151,000 jobs, which was slightly lower than the 160,000 expected but above a downwardly revised 125,000 figure in January. The Average hourly earnings growth of 0.3% MoM and 4% YoY shows the labor market remains tight enough to keep wage growth running above inflation but not so tight that prices get out of control again.
The 10-year US Treasury yield turned back up amid the better-than-feared macro data.
However, equity markets had another challenging week, especially US growth and momentum stocks. The NASDAQ Composite Index® is now in a ~10% drawdown (and getting worse at the time of writing).
Companies leveraged to the artificial intelligence (AI) trend felt notable pain, propelled last week by Marvell Technology’s financial results. To back up a bit, one of the themes in the back half of 2024 was the emergence of “custom accelerator” chips offered by Marvell and Broadcom. NVIDIA graphic process units (GPUs) are powerful but energy-hungry, making them expensive to operate at scale. This has opened an opportunity for Marvell and Broadcom’s custom accelerators, which are optimized for specific tasks (such as AI inferencing), consume less power, and reduce operational costs in cloud data centers.
Marvell reported results that looked solid on the surface, asits data center business ended the year with 78% growth. However, this was only in line with investor expectations, which sent shares falling ~20% in the fragile market environment.
Switching to a more optimistic view, areas of the market continue to perform quite well in the volatile environment. First is the aerospace and defense industry, which is still up 19% this year.
Within the industry, European defense companies are faring particularly well, which recently had the best day in over four years. The companies have surged this year due to rising defense budgets. For example, Germany is considering a €400 billion military modernization fund. Investors expect continued growth as Europe prioritizes military self-reliance.
China also has bucked the trend this year. A recent catalyst has been the country’s recent announcement of a 5% GDP growth target in 2025. Investors are speculating that more stimulus could be on the horizon. Given the geopolitical tensions, China’s weak property market and a consumer spending slowdown, the 5% growth target seems out of reach without government measures.
Meanwhile, two of the country’s largest stocks rallied on positive developments, helping buoy the broader market. JD.com beat quarterly estimates and posted its best revenue growth in 11 quarters, citing “healthier consumption trends” domestically. Also, Alibaba unveiled its new AI model (QeW-32B), which it says has “exceptional performance, almost entirely surpassing OpenAI-o1-mini and rivaling the strongest open-source reasoning model, DeepSeek-R1.”
The Artisan Growth Team manages portfolios that hold securities issued by Marvell Technology as of 12/31/24. Portfolio securities are subject to change.
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