Turning Challenges Into Durable Success
Apr 23, 2025
Jennison Associates outlines their outlook on the long-term prospects for growth stocks amid the fluid market environment.
FOCUS ON RESILIENT OPPORTUNITIES
On April 2, President Trump initiated a series of tariffs impacting countries exporting to the United States, building upon existing trade measures with nations such as Canada and Mexico. These new tariffs raise the overall weighted average to approximately 25%, a level unseen in nearly a century. This policy shift, more aggressive than anticipated, elicited a negative market reaction, with equity prices losing significant value following the announcement, signaling concerns about US economic growth, and rising inflationary pressures.
As we look forward into 2025, challenges continue to intensify. The staggered deadlines for implementation of tariffs, which involve a phased rollout of duties on specific goods and trading partners, provide an opportunity for countries to negotiate; however, should negotiations fail, retaliatory measures, as demonstrated by China, are increasingly likely. The existing trade relationship with Mexico, now further strained, introduces additional vulnerabilities given the interconnectedness of supply chains.
Immediate concerns centre on the potential impact on overall consumer demand, inflation, input costs, margins, and profits. The magnitude of this policy change requires careful monitoring of how our government’s actions will influence trading partners, as retaliatory measures could pose a significant headwind to economic expansion while simultaneously fuelling inflation.
The administration’s aggressive and antagonistic approach to global trade is without precedent in our lifetimes. While acknowledging that the landscape is rapidly evolving, we are focused on navigating its complexities. We anticipate that economic growth will slow, with inflation likely to rise. Companies will likely face mounting pressure on profit margins, depressing earnings and valuation assumptions. Against this evolving backdrop, we are integrating these dynamics into our portfolio construction activity.
SECTOR VIEWS
During the quarter, large cap value was the only major style group with a gain in the quarter. Large and small cap growth had the steepest losses while small caps lagged for all longer times periods.
Reflecting this market volatility, there was significant disparity among sector returns in the quarter. Energy and defensive sectors like health care, consumer staples, and utilities were the best performing. However, growth sectors – consumer discretionary, information technology, and communication services all lagged.
We remain focused on identifying resilient opportunities in the face of the challenging trade landscape and the fluid market dynamics.
The first quarter of 2025 marked a challenging period for the technology sector, with the S&P 500’s information technology sector posting its worst quarterly performance since 2020. The Magnificent Seven - key tech giants Apple, Microsoft, Nvidia, Alphabet, Amazon, Meta, and Tesla - experienced sharp declines, with Nvidia leading the losses.
Despite these setbacks, technology remains a cornerstone of economic growth. Long-term fundamentals continue to be driven by innovation in artificial intelligence (AI), cloud computing, and generative AI hardware upgrades. Global IT spending should continue to grow, including investments in data centre systems, software, and devices.
Generative AI continues to influence spending patterns, particularly through hardware upgrades rather than direct investment in AI applications. Consumer technology spending is also rebounding driven by demand for PCs powered by next-generation AI capabilities, portable audio devices and digital health technologies.
The S&P Composite 1500 Health Care Index advanced 5.5% in the first quarter, outperforming the S&P 500, which declined 4.3%. Slowing global growth and tariffs impacting manufacturing and other cyclical sectors drove this outperformance.
Defensive large-cap health care companies with stable earnings yields and predictable cash flows have excelled. Recent leadership changes at HHS, CMS, and FDA have introduced uncertainty for innovative health care companies. Robert F. Kennedy Jr.’s restructuring of HHS, including workforce cuts and agency consolidation, raises concerns about delays in grantmaking and public health initiatives. At CMS, Dr. Mehmet Oz’s focus on Medicare Advantage reforms may shift insurer incentives, while Marty Makary’s appointment as FDA Commissioner following Peter Marks’ departure has sparked fears of regulatory instability, particularly in the biopharma industry. These developments challenge collaboration and stability, potentially slowing progress in health care innovation. However, this heightened—if not peak—uncertainty could, over time, benefit skilled professionals who can identify superior management teams, products, and services poised to thrive in this evolving landscape.
For the first quarter of 2025, the financials sector of the S&P 500 was up 2.9%, outperforming the S&P 500’s -4.3% return. This was a complete reversal of what we saw in the back half of 2024, especially post the November election.
Taking the tariff back-and-forth rhetoric out of the equation, we continue to see solid fundamentals across a broad range of business models, along with improving credit conditions. We are also seeing ongoing improvement in inflation expectations as we transition into 2025. Nevertheless, this could all be reversed by a possible recession due to excessive tariffs by the current US administration. There is significant uncertainty around the future structure of the tariffs, the response from our trading partners, and then the implications around confidence and sentiment for both the consumer and businesses. Complicating this are the additional unknowns around the forward direction of the Federal Reserve, inflation and the financial health of the average consumer.
Overall, the large money centre, consumer finance, and superregional banks are significantly better positioned today across a broad range of balance sheet, capital and risk management metrics. Valuations in the sector have normalised. We believe tailwinds for future earnings growth will be primarily driven by solid revenue trends and credit controls; growing net interest margins; ongoing expansion of their fee-based business opportunities; and continued efficiency improvements through better use of technology and AI. We are also seeing opportunities with solid fundamentals and attractive valuations in global alternative asset management firms, P&C insurance companies, and several digital payment and financial technology companies.
For the full three-month period, the Alerian Midstream Energy Index (AMNA) was up 6.3%, outperforming the -4.3% return of the S&P 500 Index. Oil prices continued to decline during the quarter, having faced the headwinds of weak demand, particularly from China.
Natural gas spiked off multi-year lows as seasonal electricity demand expectations along with the long-term need for new electricity generation will benefit natural gas—the most environmentally friendly fossil fuel. Long-term natural gas demand growth and high cash returns to shareholders remain positive tailwinds for the sector and recent bolt-on investment projects have the potential to drive accelerated cash flow growth over the next three to five years.
We believe that, over the longer term, midstream energy companies will play an important role in our energy future. The global energy transition will require multiple sources of energy to be successful and hydrocarbons—especially natural gas—will continue to have a role, driving future demand, not just for the commodities, but for the essential logistical systems that move them. With physical steel in the ground, midstream energy infrastructure companies have difficult-to-replicate asset networks with high barriers to entry, and whose adaptability to transport other energy sources is underappreciated. Management teams are increasingly aware of the role they will play in our energy future, focusing not just on the environmental impact of their operations but also on how their asset bases can and will be part of a greener future.
The utilities sector of the S&P 500 index increased during the first quarter, outperforming the broader market. US utility stocks performed well as rising concerns about the Trump administration’s escalating tariff policies causing a potential recession in the US, contributed to investors rotating into “safe haven” securities such as utilities, particularly those whose performance had lagged during 2024.
After a strong start to the year, power generation companies as well as data centre stocks performed relatively poorly during the first quarter as DeepSeek, a Chinese AI company, triggered a meaningful selloff in AI-related stocks. This sharp reversal in investor sentiment regarding AI-related stocks served as a strong headwind for US-based power generators and data centre companies that had rallied throughout 2024 as key beneficiaries of strong demand due to accelerating AI-related capex. We believe strong long-term fundamentals and still-reasonable valuations underscore the opportunity in the utilities sector. The S&P 500 Utilities Index increased by 4.9% in 1Q25, outperforming the -4.3% return of the S&P 500 Index.
Continued solid execution, along with the potential growth opportunities from renewable energy investments, should help to drive the sector’s earnings going forward. Strong fundamentals and macro factors underscore the opportunity in the sector, especially given what remains a lower-than-average interest rate environment.
Alerian Midstream Energy Index is a broad-based composite of North American energy infrastructure companies and is a capped, float-adjusted, capitalisation-weighted index whose constituents earn the majority of their cash flow from midstream activities involving energy commodities. Alerian MLP Index is the leading gauge of energy infrastructure Master Limited Partnerships (MLPs) and is a capped, float-adjusted, capitalisation-weighted index, whose constituents earn the majority of their cash flow from midstream activities involving energy commodities. S&P 500 Index is an unmanaged index of 500 common stocks of large U.S. companies, weighted by market capitalisation. It gives a broad look at how U.S. stock prices have performed. S&P 500 Financials Index comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) financials sector. S&P Composite 1500 Health Care Index comprises those companies included in the S&P Composite 1500 that are classified as members of the Global Industry Classification Standard (GICS) healthcare sector. S&P 500 Technology Index comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) technology sector. S&P 500 Utilities Index comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) utilities sector. Indices are unmanaged and an investment cannot be made directly into an index.
References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. The securities referenced may or may not be held in the portfolio at the time of publication and, if such securities are held, no representation is being made that such securities will continue to be held.
The views expressed herein are those of PGIM investment professionals at the time the comments were made, may not be reflective of their current opinions, and are subject to change without notice. Neither the information contained herein nor any opinion expressed shall be construed to constitute investment advice or an offer to sell or a solicitation to buy any securities mentioned herein. Neither PFI, its affiliates, nor their licensed sales professionals render tax or legal advice. Clients should consult with their attorney, accountant, and/or tax professional for advice concerning their particular situation. Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. The manager has no obligation to update any or all such information; nor do we make any express or implied warranties or representations as to the completeness or accuracy.
Any projections or forecasts presented herein are subject to change without notice. Actual data will vary and may not be reflected here. Projections and forecasts are subject to high levels of uncertainty. Accordingly, any projections or forecasts should be viewed as merely representative of a broad range of possible outcomes. Projections or forecasts are estimated based on assumptions, subject to significant revision, and may change materially as economic and market conditions change.
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