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Stock Selection Lights the Way Through a Murky Macro Environment
April 1, 2025
Brandon Nelson, CFA
Key Points:
- Small caps struggled under the weight of macro uncertainties during the first quarter.
- Although the economic backdrop could worsen, we don’t believe a recession is imminent.
- We are confident that we can navigate this environment. Stock selection always matters, and the Calamos Timpani funds emphasize companies that we believe have strong fundamental momentum and reduced vulnerability to tariffs and other macro headwinds.
Macro concerns relating to tariffs and DOGE created an economic growth scare during the first quarter that sent stock prices lower, especially during the quarter’s second half. Additionally, several AI-related winners from 2024 pulled back, primarily because of questions about the trajectory of data-center spending patterns.
The yield of the 10-year US Treasury fell during the quarter, and typically, that would be a positive for small-caps. However, in this case, the yield drop signaled macro uneasiness, and this discomfort proved damaging to small caps, which tend to be more economically sensitive. Small caps fell -9.48% during the quarter, lagging large caps by 499 basis points, as measured by the Russell 2000 Index and Russell 1000 Index, respectively.
We acknowledge that short-term economic risks have risen, but by how much? Although the macro is murkier than normal, we believe the risk of economic recession has only risen slightly. Historically, credit spreads (the yield difference between safe-haven US Treasury bonds and higher-risk corporate bonds) have been one of the best predictors of recessions, and they have barely budged.
Credit Spreads Suggest that a Recession Isn't in the Cards
High Yield Credit Spreads, Trailing 5-Years
Past performance is no guarantee of future results. Source: Bloomberg.
Even though we don’t see a recession on the near-term horizon, we acknowledge things can get worse, especially in the most vulnerable industries and sectors of the economy—namely, those directly exposed to tariff risk. In response to this rising risk, we have positioned the Calamos Timpani Small Cap Growth Fund (CTSIX) and Calamos Timpani SMID Growth Fund (CTIGX) portfolios to be less exposed to industrial companies (high tariff risk) and more heavily exposed to health care and consumer services companies (low tariff risk). This positioning aligns with our consistent effort to find stocks of companies with fundamental momentum (sustainably fast and underestimated growth profiles).
But, for us, portfolio management is not just about sector and industry positioning. It’s also about company-specific positioning—i.e., stock picking! This is our primary focus. It’s where we spend most of our time and have added the most value. Through our rigorous research efforts, we pride ourselves on finding company-specific fundamental momentum that doesn’t rely on ideal macro conditions. We believe our two funds are heavily populated with stocks with this profile and are excited about their upside potential.
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.
The Russell 1000® Index measures the performance of the large-cap segment of the US equity universe. The Russell 2000® Index measures the performance of the small-cap segment of the US equity universe. The Russell 2000® Growth Index measures the performance of the small-cap growth segment of the US equity universe. It includes those Russell 2000® companies with higher price-to-value ratios and higher forecasted growth values. The Russell 2500® Growth Index measures the performance of the small to midcap growth segment of the US equity universe. It includes those Russell 2500 companies with higher growth earning potential. Unmanaged index returns, unlike fund returns, do not reflect fees, expenses or sales charges. Investors cannot invest directly in an index.
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.
Morningstar Small Growth Category funds focus on faster growing companies whose shares are at the lower end of the market-capitalization range. Stocks in the bottom 10% of the capitalization of the US equity market are defined as small cap. Growth is defined based on fast growth (high growth rates for earnings, sales, book value, and cash flow) and high valuations (high price ratios and low dividend yields).
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 Timpani Small Cap Growth Fund and Calamos Timpani SMID Growth Fund include equity securities risk consisting of market prices declining in general, growth stock risk consisting of the potential increased volatility due to securities trading at higher multiples, and portfolio selection risk. The Fund invests in small capitalization companies, which are often more volatile and less liquid than investments in larger companies.
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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