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Quality Growth Holds Its Appeal as Economic Pressures Mount

Matt Freund, CFA, Michael Kassab, CFA

We believe:

  • Mixed economic signals warrant vigilance.
  • Companies with exemplary balance sheets and attractive cash flows offer the best prospects for near-term outperformance.
  • We see long term upside in AI and the benefits it can bring to a vast array of businesses.

The third quarter started off with significant momentum. The economy had managed to digest the earlier banking disruptions without a hitch, the consumer was still spending at a healthy pace, and energy prices were well behaved. Stocks across all sectors generally rose through the end of July.

That optimism quickly faded as a growing list of concerns came into focus. Energy prices began a steady climb and are now once again approaching $95 a barrel. Interest rates have become increasingly problematic (despite the Fed pause) as 10-year Treasury rates rose to levels not seen since the 2008 recession. At the same time, the market is growing increasingly concerned about the outlook for corporate earnings (which were expected to show significant growth in the second half of the year) as higher rates, labor costs, a stronger dollar, and weakening consumer expectations become more widespread.

Our confidence in “fortress” growth stocks persists although many gave back some of their strong gains in the third quarter. Importantly, within the US equity market, as measured by the S&P 500 Index, there were only two positive sectors in the quarter (energy and communication services), while traditionally defensive sectors, like utilities and consumer staples, underperformed. Smaller companies fared even worse.

The economy continues to flash mixed signals. The current trend of positive but tepid growth will likely continue for the next couple of quarters. However, a surprising number of factors are pointing toward further softening: the inverted yield curve, tighter lending standards, higher energy costs, increasing labor costs, and higher financing costs. These all add up to growing profit pressures on the private sector. In addition, the rest of the world remains weaker than the United States and, therefore, unlikely to provide a boost to domestic growth.

In an environment where growth may prove increasingly scarce, we believe asset-light companies with the flexibility and financial strength to continue funding their growth initiatives—regardless of the economic backdrop—should be able to outperform. As a result, we continue to favor quality growth companies with stellar balance sheets and attractive free cash flows. We believe these companies are better positioned to capitalize on the opportunities that volatile markets provide, as seen in the largest companies’ first-mover advantage of AI. On the other end of the spectrum, we are increasingly cautious about the outlook for unprofitable technology companies.

Although some of the euphoria surrounding AI stocks has abated in recent weeks, we have maintained considerable exposure to this investment theme through our positioning in semiconductor, cloud infrastructure, and software stocks. Undoubtedly, investor enthusiasm around AI will ebb and flow over time, but we remain confident this technology will bring new applications and widespread benefits to a vast range of businesses beyond the technology sector. As always, we remain committed to a selective and thoughtful approach as we sort through what lies ahead for this exciting innovation.

Before investing, carefully consider the fund’s investment objectives, risks, charges and expenses. Please see the prospectus and summary prospectus containing this and other information which can be obtained by calling 1-866-363-9219. Read it carefully before investing.

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.

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