Ketu Desai
By Ketu Desai
Sometimes a month feels like a year, and March 2025 was one of those. The market was completely unprepared by the direction the administration has taken. They want to cool the economy down and reduce both yield and inflation. This appears to have initially succeeded.
Consumer and business sentiment is in a free fall and yields have backed off. GDP estimates for the first quarter are running at less than 1%. While there is initial success, the irony is that global financial conditions are easing. The US dollar is down nearly 4% YTD. The Fed put is starting to reassert itself, with the Fed tapering quantitative tightening and ready to cut rates if needed.
The America first policy has caused foreign countries to stimulate. The ECB cut rates. Germany passed a historic nearly $1 trillion stimulus bill for defense and infrastructure. China announced a broad range of stimulus ranging from rate cuts, lower reserve requirements, property market support, liquidity for the stock market, subsidies on goods, consumer stimulus, and fiscal expansion. The scope and depth of these stimulus measures will no doubt have a global impact. Copper rallying 25% YTD is a good indicator of the magnitude of the foreign stimulus. With plenty of domestic fiscal stimulus still in our pipeline, global financial conditions are now easing, and foreign countries are stimulating, prepare for the market to be caught off-guard again.
Positioning and sentiment have been reset. Bank of America’s Global Fund Manager Survey reported the biggest drop ever in US equity allocation and yet the biggest jump in cash allocation since March 2020. CTAs have gone from very net long to net short equities. According to Goldman, CTAs are now buyers in nearly all scenarios. Hedge funds have reduced at one of the fastest paces in history. Aggregate equity positioning is in the 26th percentile. Long/short hedge funds are the shortest in over five years even after a global pandemic. Sentiment gauges for both retail and institutional investors spent March at extreme fear levels.
The Conference Board survey of consumer stock market expectations showed the largest two month decline ever. We had the fifth fastest correction from a 52-week high since 1950. With this reset easing financial conditions, it will not take much to build back up as there’s plenty of fuel from all types of investors with over $7 trillion of cash on the sidelines.
The epicenter of the sell-off has been large cap technology which has had its biggest outflow since 2008. This presents an opportunity to buy the best companies in the world. They have the best balance sheets, resources, lowest cost of capital, highest free cash flow generation, margins, and earnings growth in the market. They are also at the forefront of nearly every technological shift ranging from A.I., cloud, digital advertising, autonomous driving, robotics, and quantum computing.
A.I. is still the next major technological paradigm shift as related spending will total over a trillion dollars over the coming years. Hyper-scaler CapEx guidance has gone up since DeepSeek. If the US wants to bring manufacturing back to the forefront, it will be highly unlikely to be globally competitive without A.I. and robotics. The regulatory and antitrust pressure on large cap tech is easing and now in a position to grow through acquisition, as we saw with Google buying Wiz.
Large cap tech hit bear market territory in March, but forward earnings estimates hit new highs. Nvidia can be bought for 24x for 52% growth. Compare that to McDonald’s at 25x for 5% growth. Meta is trading at 20x for 15% growth, compared to Clorox at 20x for 2% growth. Uber at 22x for 37% growth, compared to Walmart at 29x for 12% growth. Tech will benefit from a weaker dollar, lower rates, and if the economy slows, investors will look to these secular growers. From a technical perspective, we have shifted back to important support, have a MACD crossover, and a DeMark exhaustion signal. The market periodically gives you an opportunity to buy the best companies in the world, and this is one of those times.
Looking forward, the market will focus on the latest from Washington, the economic data, and first quarter earnings.
