U.S. stock markets finished higher in February, with the S&P 500 +5.2% for the month. Gains were driven by the underlying strength of the economy evidenced by economic data and better-than-expected earnings results, expectations for interest rates, and hype surrounding Artificial Intelligence.
In terms of the broader economy, jobs and growth data remain strong, and seemingly every inflation data point leaves investors having to reevaluate their outlook regarding policy rates. The January Consumer Price Index (inflation) report released mid-month fueled a sell-off when it came in hotter than expected, +3.9% excluding the volatile food and energy categories, and expectations fell dramatically for a Fed rate cut at the upcoming March and May meetings. However, the Personal Consumption Expenditures price index, the Fed’s preferred measure of inflation, came out on the final day of the month and showed an increase of +0.3% monthly and +2.4% yearly. The Fed prefers PCE over CPI because the expenditure weights in the PCE can change as people substitute away from certain goods and services toward others, and the PCE includes more balanced coverage of goods and services compared to CPI. While 2.4% remains above the Fed’s goal for 2% annual inflation, the Core reading (ex-food and energy), was the lowest since February 2021, indicating inflation continues to head in the right direction. Markets are now pricing in a 64% probability of an interest rate cut by June and a total of three 25bps rate cuts this year. But as we have seen in 2024, stronger-than-expected economic growth may change these assumptions quickly.
In Artificial Intelligence, Nvidia has earned the title “AI Darling” as the leading producer of graphics processing units (GPUs) essential for driving AI applications. There are direct and indirect beneficiaries of AI in nearly every pocket of the market. AI is accelerating innovation across all industries, and many companies are already realizing efficiency gains across their businesses. Every day people are seeing AI become more prevalent in their daily lives – from offering reminders to schedule appointments, to personalizing recommendations for shows to watch or products to buy, to instant customer support via chatbots, to professionalizing an e-mail – and we are just scratching the surface. The point is, while Nvidia rightfully commands attention for its prominent role in the AI landscape, it is important to recognize the vast opportunity set available to gain exposure to AI across companies in more nascent stages of implementation and benefit realization. We believe several names in our portfolio are currently improving their offerings and economics using AI technology without the valuation risks of a Nvidia, allowing us to capture the transformative power of AI while effectively managing risk.
–Laura G. Andersen, CFA