Quarterly Perspectives

April 1, 2024

Equities rose in the first quarter driven by strong corporate profits and anticipation of a reduction in the Federal Funds Rate this year. Fixed income returns were muted as healthy economic data and higher-than-expected inflation lifted interest rates modestly, though yields are below their peak in 2023. Global economic conditions remain mixed, with healthy momentum in the U.S. but unabating geopolitical tensions and tight monetary policy presenting risks to the outlook.

Economic Backdrop

The U.S. economy continued to stand out on the global stage with strength that endured in the first quarter. Consumer spending remained robust supported by wage gains that exceeded inflation. Economic growth was augmented by still elevated levels of government spending, which helped offset the full impact of rising interest rates. Hiring remained steady, with immigration contributing to job gains, and data suggest tightness in the labor market has eased. The unemployment rate of 3.9%, still healthy by historical standards, increased from its five-decade low of 3.4% last year. There is no strong evidence of widespread layoffs, though it has become harder for sidelined workers to get rehired. The Consumer Price Index grew 3.2% in February, well off its 2022 peak of 9.1%.

Though the rate of improvement plateaued in recent months, some disinflationary forces remain in place including a contracting money supply and easing wage pressures. Accelerating productivity, partly the result of ongoing supply chain restoration also aided inflation trends over the last year. A dichotomy among U.S. consumers has surfaced in recent quarters. Higher-end consumers have had their net worth bolstered by stock market gains and real estate prices, while lower income consumers have been disproportionately pressured by higher prices. Rising credit card and auto delinquencies suggest certain consumer cohorts are strained. Overseas, Europe continued to contend with higher interest rates, weak export demand, low labor productivity and its proximity to geopolitical turmoil. Growth in Japan remained sluggish, but having emerged from a decades-long deflationary spiral, its central bank ended its negative interest rate policy. China’s property slump persisted with no clear path to a resolution. Foreign investment in the country has meaningfully receded and demo-graphic headwinds pose a structural challenge to China’s long-term growth. In the face of dynamic global crosscurrents, the U.S. economy remained resilient, but the lagged impact of higher interest rates may temper growth in the periods ahead.

An Industry in Transition

Semiconductors are the foundation for all modern technology and are an essential contributor to improving living standards. Advancements in manufacturing, capable of manipulating silicon at the atomic level, have driven exponential improvements in chip cost and performance over the last several decades. The proliferation of semiconductor content across myriad applications, from artificial intelligence, electrification, robotics and internet-connected devices, is expected to double revenue in this vital industry to $1 trillion by the end of the decade.

The strategic significance of the semiconductor industry has increased in recent years due to supply chain and geopolitical risks. The COVID-19 pandemic wreaked havoc on global logistics and highlighted the vulnerabilities of the semiconductor ecosystem. The considerable specialization and capital requirements of the industry have resulted in high market share concentration across firms and geographies which creates the condition for potential bottlenecks. Perhaps the most precarious chokepoint is Taiwan, whose Taiwan Semiconductor Manufacturing Company (TSMC) produces over 90% of the world’s most advanced semiconductors. Governed independently of China since 1949, Taiwan is still viewed by China as part of its territory. Any loss of access to Taiwan’s manufacturing capabilities due to territorial disputes would have broad and severe implications for the global economy.

Geopolitical considerations have compelled U.S. politicians to pursue two intertwined bipartisan solutions to reshape the semiconductor landscape, an initiative that has only been heightened by the emergence of generative artificial intelligence. First, the U.S. and its allies are attempting to curtail China’s ability to acquire advanced semiconductors and develop domestic manufacturing capability. Export restrictions were enacted as early as 2019, initially targeted at Huawei, but have since broadened to include a range of equipment and semiconductors. These constraints will make it more difficult for China to compete with today’s state-of-the-art chips and manufacturing methods, but also motivate Beijing to accelerate the development of their local supply chain. China has retaliated by issuing guidelines for government agencies to replace American processors and operating systems with domestic alternatives. The second objective of the U.S., which is shared by policymakers around the world, is to promote various reshoring efforts with government incentives aimed at localizing manufacturing capacity to build supply chain resilience. The U.S. CHIPS and Science Act, passed in 2022, commits over $50 billion to stimulate domestic production of chips. Even with government support, it will be a multi-year journey for the U.S. to approach parity with the sophisticated manufacturing techniques that TSMC has accumulated over decades of investment. The evolution of the global semiconductor industry is of critical consequence to investors as it will have sweeping repercussions across technology, the economy and national security.

Fixed Income

Bond portfolios were little changed in the first quarter. Yields on ten-year U.S. Treasury notes inched higher from 3.9% at the start of the year to 4.2% at the end of March, but remained well below the 5.0% reached last October. The rise in rates resulted from sustained economic strength and slightly higher-than-expected inflation which postponed the anticipated start of Fed rate cuts. The spread between yields on corporate and municipal debt relative to risk-free government issues remained very narrow, indicating that bond investors do not view an economic downturn as an imminent threat. However, the inversion of the yield curve, a condition in which long-term interest rates on U.S. government bonds fall below their short-term equivalent, continues to reflect restrictive monetary policy and potential for a weaker economy. The current inversion has persisted for nearly twenty months, the longest stretch in over forty years. With the Federal Reserve poised to re-duce short-term rates this year, the attractive yields on money market funds are likely to wither and the yield curve may normalize before long. We continue to gradually extend the duration of client fixed in-come portfolios while maintaining high credit quality should economic conditions deteriorate.


The S&P 500 Index gained 10.6% to finish the first quarter at an all-time high. In contrast to last year, the rally extended beyond the technology sector as a broad group of industries contributed to gains. Stocks were propelled by a combination of earnings growth and expanding valuation multiples.

Companies continue to deliver strong profits due to sturdy demand and pricing power complemented by an emphasis on operating efficiency. Artificial intelligence holds promise to extend these productivity gains longer term, though adoption of the technology remains very early. The forward price-to-earnings multiple of the S&P 500 Index has expanded to the high end of its historic range. This is partly explained by the increasing composition of technology stocks, with strong growth and profitability characteristics, within the index. Consequently, major stock indices have become uniquely concentrated. The valuations of most stocks appear reasonable, underpinned by strong fundamentals, but their appeal relative to interest rates is lower than in recent history. Stock prices reflect investor optimism for a continued economic expansion and lower inflation. Sanguine expectations may make stocks vulnerable in the near term should economic data deteriorate, warranting modestly defensive positioning in client portfolios. We remain committed to our process of identifying high-quality businesses with superior growth, profitability and balance sheets, which we expect to deliver strong returns over the course of a full business cycle.