Navigating Technology Transitions and Policy Uncertainties

Matt Freund, CFA, Michael Kassab, CFA

Summary Points:

• Our outlook for growth equities remains constructive; importantly, many of the Trump administration’s market-friendly policies are on the horizon.
• We believe the long-term material outlook for the Magnificent 7 and many other mega-cap tech leaders has not changed; after years of strong gains, the recent give-back reflects valuations that got a bit ahead of themselves.
• In our opinion, although the economy may encounter pockets of turbulence, US GDP sits on a stable foundation, and recession remains unlikely in 2025.

The first quarter of 2025 has been defined by the convergence of two powerful forces: a careful reassessment of future artificial intelligence (“AI”) spending needs, and a significant uptick in macro uncertainty due to ever-evolving tariff policies. These developments have materially altered the investment landscape and sparked intense selling pressure on certain pockets of the growth universe, with many market darlings of the past couple of years among the hardest hit.

The narrative shift started in late January when a relatively unknown Chinese start-up, DeepSeek, introduced a highly efficient, low-cost AI model. This unexpected advancement triggered questions about the level of ongoing demand for AI chips and related infrastructure buildouts. This new wrinkle accelerated a transition already underway: the migration of investor attention from pure infrastructure plays (i.e., chipmakers, data centers, power providers) to firms enabling AI implementation. In retrospect, this latter group could arguably benefit from the DeepSeek revelation, as lower costs will likely hasten overall AI adoption across a wide swath of industries. Calamos Growth Fund (CGRIX) will continue to seek opportunities among such beneficiaries, including healthcare robotics, cybersecurity solutions, and software platforms leveraging increasingly efficient models.

Rethinking within the AI trade was quickly followed by the onset of heightened tariff uncertainty, as the Trump administration’s “America First” agenda aimed to level the playing field with the country’s major trading partners. The imposition of significant tariffs on goods from Canada, Mexico, and China sparked concerns about retaliatory actions and potential trade disruptions. The on-again, off-again debate magnified the uncertainty for both businesses and investors.

The market’s reaction pushed the S&P 500 Index into correction territory. While unsettling, investors should remember that equity market corrections are not unusual historically. Corrections of around 10% occur, on average, every 18 months.

What happens next largely depends on the economy’s ability to withstand any short-term disruption in economic activity, as companies and consumers adjust to the new tariff changes. We believe the ultimate impact of tariffs must be considered in the context of many other changes currently being debated (especially export restrictions, tax policy, and monetary policy). Many economists have begun to increase the odds of a recession within their models. Some are concerned that the Atlanta Fed’s GDPNow forecast has turned negative for Q1 2025, though we would note that this forecast is heavily influenced by imports (which count as a temporary reduction in US GDP). These imports have likely been accelerated in anticipation of higher tariffs and should reverse in the coming quarters.

Also, a notable divergence has emerged between weakening “soft data,” such as consumer sentiment, and steadier “hard data,” including relatively stable employment trends and wage growth. The combination of these economic indicators suggests that while risks are rising, a recession remains unlikely in 2025.

Calamos Growth Fund’s all-cap growth strategy maintains significant exposure to the “Magnificent 7” stocks, which have given back some of their strong gains of recent years. In our opinion, the recent price decline for mega-cap stocks is more reflective of elevated valuations that got a bit ahead of themselves rather than a material change in the long-term outlooks for these market leaders.

Policy Landscape and Investment

While we recognize the opening months of 2025 have thus far brought more questions than answers, we maintain an overall constructive bias toward growth equities. In the months ahead, investors should begin to get the clarity they seek. It is important to remember that the more market-friendly elements of the Trump administration’s fiscal policy goals still lie ahead. These include the extension and likely expansion of the 2017 tax cuts as well as additional incentives to encourage more “onshoring” of manufacturing production back to the US by both foreign and domestic companies.

Although inflation is still above the Fed’s target, continued progress toward the goal should put the Fed in a position to end its quantitative tightening program (which was slowed dramatically at the March meeting) and resume cutting interest rates later this year. The economy may encounter short-term turbulence amid fast-changing trade policies, but we believe there is a stable foundation to keep GDP growth positive for 2025.

Investors often forget that technological change and innovation have a long and persistent history in the US equity market. We continue to seek companies with sustainable competitive advantages, strong cash flow generation, and valuations aligned with their growth prospects, focusing on businesses that can thrive across multiple potential scenarios. We believe these companies are the most likely to succeed in adapting to the inevitable changes that come their way.

In this environment, we will continue to focus on being well compensated for the risks we undertake in the funds and believe this discipline will generate strong risk-adjusted returns. Our cautiously optimistic view, however, comes with the understanding that elevated market volatility is unlikely to dissipate in the near term. For investors with a long-term horizon, the current environment offers attractive entry points into high-quality growth companies whose valuations have become more reasonable following the recent correction.