Growth stocks continued their strong recovery in the second quarter. With lingering concerns about the economic impact of higher interest rates and tighter lending standards following the March bank failures, investors gravitated toward the relative safety of mega-cap companies with reliable growth profiles and fully funded capital needs. Against this backdrop, the largest seven market-cap companies in the S&P 500 Index (often called the “Magnificent Seven”) accounted for 80% of the index’s year-to-date gains.
The economy has remained surprisingly resilient throughout the Federal Reserve’s aggressive rate hike cycle, which may finally be close to its conclusion. Fears of a significant slowdown in bank lending have mostly faded and the much-anticipated recession continues to get pushed out. While the lagged effects of higher rates may weigh on growth in 2024, employment data is holding remarkably steady with historically low layoffs and consumer spending remains healthy. Americans of all income levels continue to play “catch-up” on the activities they skipped during the pandemic lockdowns, including family vacations, concerts, and dining out.
As we look ahead, we see reason for caution given economic uncertainties and believe the broad markets may find it difficult to repeat the first half’s strong performance. At the same time, we see opportunities for continued strength in certain investment themes. One of the true bright spots the past few months has been the growth of artificial intelligence (“AI”). Although AI has been around for years, it reached an inflection point in early 2023, when a new application brought the technology to the mass market along with the stunning realization of its capabilities—AI could not only answer questions, but also write literature and create images.
Investing in companies at the forefront of innovation can be highly rewarding but extremely volatile. We have significant positions in strong technology companies that are now viewed as key AI players. There is little doubt that artificial intelligence has the potential to be game-changing for the global economy, in much the same way that the internet has been over the past 20 years. But as we learned through those early days of the internet, the list of potential winners and losers can change frequently and rather abruptly.
Semiconductor, cloud infrastructure, and software stocks have been the primary beneficiaries of the “AI euphoria” so far. However, the ultimate winners will likely include a wide array of businesses across many sectors. At the current pace of development, artificial intelligence could soon be deployed by companies both large and small to make their workforces much more efficient by automating everyday tasks and streamlining more complex processes. This, in turn, may help rationalize workforces and benefit cost structures, but at a potentially high cost to society overall. Time will tell how this all plays out.
Although the broad equity market may see more modest gains in the second half, we believe active management with a discipled risk-management approach will prove beneficial. We expect the current market run to broaden beyond the Magnificent Seven but will continue to reward companies with consistent cash flow generation and strong balance sheets. This group of growth-oriented companies may prove to be more “defensive” than the traditionally defensive segments of the market (i.e. consumer staples and utilities) that are richly priced and may not provide the protection that investors expect. As always, we remain committed to a selective and thoughtful approach as we sort through the next exciting phase of technological innovation.
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Diversification and asset allocation do not guarantee a profit or protect against a loss. Alternative strategies entail added risks and may not be appropriate for all investors. Indexes are unmanaged, not available for direct investment and do not include fees and expenses.
Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. The views and strategies described may not be appropriate for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations.
Important Risk Information. An investment in the Fund(s) is subject to risks, and you could lose money on your investment in the Fund(s). There can be no assurance that the Fund(s) will achieve its investment objective. Your investment in the Fund(s) is not a deposit in a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. The risks associated with an investment in the Fund(s) can increase during times of significant market volatility. The Fund(s) also has specific principal risks, which are described below. More detailed information regarding these risks can be found in the Fund’s prospectus.
The principal risks of investing in the Calamos Growth Fund include: equity securities risk consisting of market prices declining in general, growth stock risk consisting of potential increased volatility due to securities trading at higher multiples, mid-sized company risk, foreign securities risk and portfolio selection risk.
Foreign security risk: As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities, including fluctuations in currency exchange rates, increased price volatility and difficulty obtaining information. In addition, emerging markets may present additional risk due to potential for greater economic and political instability in less developed countries.