Actively managed large cap growth strategy that relies on fundamental research and analysis to identify companies with strong and accelerating business momentum, increasing market acceptance and attractive valuations.
Key takeaways
- Markets are off to a good start to the year, as the underlying fundamental factors of the economy remain strong. Inflation is still above the U.S. Federal Reserve targeted mandate but has fallen sharply from its 2022 highs, and U.S gross domestic product (GDP) has significantly outpaced that of other developed economies.
- For the quarter, the Strategy outperformed its benchmark, the Russell 1000 Growth Index (the Index), on a net asset value (NAV) basis.
- Markets have thus far shrugged off any uncertainty brought on by it being an election year, although it remains to be seen if that will continue. Artificial intelligence (AI) continues to be a catalyst for growth, and markets are anticipating rate cuts to begin before year-end, which is all good news for equities.
Portfolio review
U.S. stocks enjoyed a strong first quarter as inflation’s downward trend continued and U.S. economic growth beat expectations. The S&P 500 Index reached a new high and advanced by 10.56% on a total return basis during the quarter and the Nasdaq Composite had a price return of 9.11%. The communication services, energy and information technology sectors led, while real estate and utilities lagged. Large-cap stocks outperformed small caps and growth beat value. The Federal Open Market Committee voted to hold interest rates steady for the fifth consecutive time at its March meeting; however, three rate cuts are still expected this year, with the first likely to happen in June.
U.S. bonds slipped during the quarter amid persistently tight credit spreads and a rising U.S. Treasury yield curve. The Bloomberg U.S. Aggregate Bond Index fell –0.78%. The 10-year U.S. Treasury yield rose from 3.95% in January to 4.20% by quarter end on early concerns that lingering high inflation could change the Fed’s rate cut plans; however, it remained essentially flat in March following favorable comments from Fed Chair Powell.
For the quarter ended March 31, 2024, the Strategy outperformed the Index on a NAV basis. Stock selection in the information technology, health care and communication services sectors contributed the most to performance. Unfavorable stock selection in the utilities sector detracted the most.
Key contributors to performance were Apple Inc., Tesla, Inc. and Meta Platforms Inc.
An underweight position in Apple Inc. (AAPL) contributed to performance due to a greater-than-expected decline in growth in China. While Apple reported strong earnings overall, the underperformance in the Chinese market had a negative impact.
An underweight position in Tesla, Inc. (TSLA) contributed to performance. TSLA reported weaker than expected results during the period and guided notably lower. The company has also lowered delivery estimates for 1Q24 from 475 thousand to 425 thousand due to supply chain issues, among other things. Rising competition and a lingering price war with electric vehicle (EV) competition in China remains a major concern for investors.
An overweight position in Meta Platforms Inc. (META) contributed to performance. The company reported another strong quarter during the period with revenue and operating income coming in ahead of consensus. Results exceeded expectations across all major lines of business along with better-than-expected forward guidance.
Key detractors from performance were Lululemon Athletica Inc., Adobe Inc. and Roblox Corp.
An overweight position in Lululemon Athletica Inc. (LULU) detracted from performance. Lulu reported strong results during the period but softer than expected trends quarter to date led to disappointing FY2024 guidance.
An overweight position in Adobe Inc. (ADBE) detracted from performance. The company reported a solid quarter, but it was overshadowed by disappointing guidance around net new digital media annual recurring revenue (ARR). Investors are also skeptical about management’s belief that generative AI benefits will be felt more in second half of 2024.
An overweight position in Roblox Corp. (RBLX) detracted from performance. The company’s valuation is based on long duration cash flows, which are heavily influenced by changes in interest rates, and the uncertainty surrounding the Fed has hurt the share price.
Current strategy and outlook
The U.S. economy remains strong, with positive gains in payrolls and productivity. Consumer spending momentum appears soft but stable. Household net worth has increased significantly since the pandemic, but consumer confidence remains below long-term averages due to the lasting negative impact of higher prices on consumers’ psyches. The U.S. labor market remains robust but shows signs of softening. While inflation has fallen to more manageable levels, concerns about overheating persist. Interest rates may remain higher for longer than some participants expect.
The economic soft landing and easier financial conditions, coupled with anticipated rate cuts, should create favorable conditions for U.S. stocks. Although a lot of price appreciation has already taken place and a near-term pullback is possible, there is significant potential for further rally once the Fed starts cutting rates.
Holdings Detail
Companies mentioned in this report — percentage of Strategy investments, as of 03/31/24: Apple Inc. 6.14%, Tesla, Inc. 0.53%, Meta Platforms Inc. 5.72%, Lululemon Athletica Inc. 0.86%, Adobe Inc. 1.69% and Roblox Corp. 0.78%; 0% indicates that the security is no longer in the portfolio. Portfolio holdings are subject to daily change.
Key Takeaways
Markets are off to a good start to the year, as the underlying fundamental factors of the economy remain strong. Inflation is still above the U.S. Federal Reserve targeted mandate but has fallen sharply from its 2022 highs, and U.S gross domestic product (GDP) has significantly outpaced that of other developed economies.
For the quarter, the Strategy outperformed its benchmark, the Russell 1000 Growth Index (the Index), on a net asset value (NAV) basis.
Markets have thus far shrugged off any uncertainty brought on by it being an election year, although it remains to be seen if that will continue. Artificial intelligence (AI) continues to be a catalyst for growth, and markets are anticipating rate cuts to begin before year-end, which is all good news for equities.