{"id":223689,"date":"2025-05-12T10:30:00","date_gmt":"2025-05-12T14:30:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/campus\/?p=223689"},"modified":"2025-05-13T03:41:44","modified_gmt":"2025-05-13T07:41:44","slug":"qa-mid-cap-perspectives-on-market-volatility-tariffs-and-ai","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/macro\/qa-mid-cap-perspectives-on-market-volatility-tariffs-and-ai\/","title":{"rendered":"Q&amp;A: Mid-cap perspectives on market volatility, tariffs, and AI"},"content":{"rendered":"\n<h2 class=\"wp-block-heading\">Key takeaways:<\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>In today\u2019s uncertain environment, we believe companies with high gross margins, intellectual property, and pricing power could be more insulated from tariff impacts and market volatility than manufacturing-dependent businesses.<\/li>\n\n\n\n<li>We are hearing mixed responses on contingency plans. Some companies are adapting to tariffs by implementing the easier fixes they can make quickly, while others are deferring bigger capital investment decisions given the uncertain environment.<\/li>\n\n\n\n<li>Against this backdrop, we are prioritizing businesses that we believe will use challenging environments to strengthen their competitive position, take market share, and lean into the opportunities a downturn presents. Conversely, we are wary about exposure to overvalued defensive growth stocks and unproven tech stocks.<\/li>\n<\/ul>\n\n\n\n<p>How are you managing risk amid market volatility, particularly with continued uncertainty around tariffs and economic growth?<\/p>\n\n\n\n<p>No portfolio is immune to volatility, but we\u2019ve found that focusing on quality businesses can help manage risk effectively in this environment. Our approach centers on fundamental analysis rather than trying to predict policy or economic shifts. We prioritize companies with sustainable earnings growth, high-quality balance sheets, and experienced management teams.<\/p>\n\n\n\n<p>That doesn\u2019t mean these companies are exempt from downturns, but we want to own businesses that will use challenging environments to strengthen their competitive position, take market share, and lean into the opportunities a downturn presents. We remain disciplined in avoiding investments where valuations aren\u2019t fully supported by expected earnings growth.<\/p>\n\n\n\n<p>We\u2019re stress testing our models for tariff impacts and downturns, but always with the goal of thinking about where a stock will be three to five years from now, not six months from now. We don\u2019t want to overemphasize shorter-term earnings impacts unless we think they\u2019ll affect longer-term earnings power, such as with highly leveraged companies that might need to play defense.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-given-the-potential-impact-of-tariffs-on-corporate-profitability-how-are-you-evaluating-companies\"><strong>Given the potential impact of tariffs on corporate profitability, how are you evaluating companies?<\/strong><\/h2>\n\n\n\n<p>First, we look at gross margins and pricing power. As growth investors, our approach naturally leads us toward companies with higher gross margins, which provides insulation against tariff costs. For example, technology represents about 25% of the Russell Midcap Growth benchmark. Software businesses have 80% gross margins and don\u2019t import goods, so there\u2019s virtually zero tariff impact for them.<\/p>\n\n\n\n<p>In other areas like healthcare or industrials, while gross margins might not be 80% and there may be some raw materials involved, the majority of the value add is in the intellectual property. The raw materials percentage of the cost stack isn\u2019t big, so they can handle these challenges with a relatively modest impact.<\/p>\n\n\n\n<p>Pricing power is equally important: If a company can pass increases on to customers, they won\u2019t feel the impact as severely. But businesses with fixed pricing or pricing pressure may face a much different situation.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-are-you-hearing-from-companies-about-how-they-re-adjusting\"><strong>What are you hearing from companies about how they\u2019re adjusting?<\/strong><\/h2>\n\n\n\n<p>We\u2019re engaging with companies that are exposed to tariffs to understand their contingency plans. It\u2019s still early, but we\u2019re hearing a mix of responses. Many companies are implementing easier fixes they can make quickly even though they come with cost headwinds.<\/p>\n\n\n\n<p>For example, a company that recently reported earnings sells products from the U.S. to China but has a production facility in Taiwan. They\u2019re ramping up that facility, though it will take a quarter or so to reach desired capacity. Interestingly, this is a move they would make even if tariffs eased. In another example, a product manufacturer relocated certain processes from Canada to Tennessee to sidestep potential duties.<\/p>\n\n\n\n<p>Conversely, we\u2019re seeing some companies defer bigger capital investment decisions given the uncertain environment. There are also some directly impacted companies that are scrambling to figure out how to adapt.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-is-your-view-on-current-valuations-in-mid-cap-growth\"><strong>What is your view on current valuations in mid-cap growth?<\/strong><\/h2>\n\n\n\n<p>Despite the volatility year to date, there remain plenty of companies with valuations that are out of line with fundamentals. We\u2019ve seen a broader market correction, but there are still speculative names in pockets of the mid-cap universe that have performed well. This is particularly evident in certain software areas and what we call \u201cdefensive growth companies\u201d \u2013 moderate growers trading at exceptionally high multiples because they offer defensive characteristics the market continues to value highly.<\/p>\n\n\n\n<p>That said, the correction has created pockets of opportunity. We\u2019re selectively repositioning into higher-quality names where valuations are better aligned with fundamentals, but we remain cautious on areas where the market hasn\u2019t fully reset.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-russell-midcap-growth-index-forward-price-earnings-05-05-2024-05-05-2025\">Russell Midcap Growth Index Forward Price\/Earnings<br>05\/05\/2024 \u2013 05\/05\/2025<\/h3>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1100\" height=\"642\" data-src=\"https:\/\/www.interactivebrokers.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/05\/4Article-chart-Demain-0525_en-1100x642.jpg\" alt=\"Russell Midcap Growth Index Forward Price\/Earnings\n05\/05\/2024 \u2013 05\/05\/2025\" class=\"wp-image-223697 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/05\/4Article-chart-Demain-0525_en-1100x642.jpg 1100w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/05\/4Article-chart-Demain-0525_en-700x409.jpg 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/05\/4Article-chart-Demain-0525_en-300x175.jpg 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/05\/4Article-chart-Demain-0525_en-768x448.jpg 768w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/05\/4Article-chart-Demain-0525_en-1536x897.jpg 1536w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/05\/4Article-chart-Demain-0525_en.jpg 1973w\" data-sizes=\"(max-width: 1100px) 100vw, 1100px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 1100px; aspect-ratio: 1100\/642;\" \/><\/figure>\n\n\n\n<p>Source: Bloomberg, as at 5 May 2025. Forward P\/E based on blended forward 12-month estimates.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-ai-has-driven-significant-market-movements-so-far-in-2025-what-s-your-outlook-given-recent-shifts-in-sentiment\"><strong>AI has driven significant market movements so far in 2025. What\u2019s your outlook given recent shifts in sentiment?<\/strong><\/h2>\n\n\n\n<p>We\u2019re seeing a recalibration in AI market expectations. Broadly speaking, the market sentiment has shifted from predominantly optimistic to more nuanced, with investors asking what\u2019s next for AI.<\/p>\n\n\n\n<p>Recent developments \u2013 from DeepSeek advances to Microsoft signaling potential spending slowdowns \u2013 suggest frontier AI models may be plateauing. This changing landscape represents a significant shift in market dynamics and could remain a source of volatility going forward. And that volatility won\u2019t be limited to \u201cMagnificent 7\u201d stocks, as AI is a key driver for power, components, and software as a service companies.<\/p>\n\n\n\n<p>But it\u2019s important to maintain perspective. We believe AI remains a genuine innovation with meaningful implications for productivity and business models. Unlike the dot-com bubble, the companies financing AI development have done so primarily through operating cash flow rather than debt. These companies have generated earnings without creating balance sheet problems.<\/p>\n\n\n\n<p>Following a period of rapid investment, we\u2019re witnessing an inevitable deceleration in growth rates as the market awaits evidence of returns and successful commercial applications.<\/p>\n\n\n\n<p>In the mid-cap space, we favor companies with clear paths to monetization over speculative names trading at unsustainable valuations<em>.<\/em>&nbsp;And as the technology develops beyond the largest players, we believe some mid-cap companies represent the \u201cnext wave\u201d of AI opportunities.<\/p>\n\n\n\n<p>&#8212;<\/p>\n\n\n\n<p>Originally Posted on May 8, 2025 &#8211; <a href=\"https:\/\/www.janushenderson.com\/en-us\/advisor\/article\/qa-mid-cap-perspectives-on-market-volatility-tariffs-and-ai\/\" target=\"_blank\" rel=\"noreferrer noopener\">Q&amp;A: Mid-cap perspectives on market volatility, tariffs, and AI<\/a><\/p>\n\n\n\n<p><strong>IMPORTANT INFORMATION<\/strong><\/p>\n\n\n\n<p><strong>Equity securities<\/strong>&nbsp;are subject to risks including market risk. Returns will fluctuate in response to issuer, political and economic developments.<\/p>\n\n\n\n<p><strong>Technology industries<\/strong>&nbsp;can be significantly affected by obsolescence of existing technology, short product cycles, falling prices and profits, competition from new market entrants, and general economic conditions. A concentrated investment in a single industry could be more volatile than the performance of less concentrated investments and the market as a whole.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Mid Cap Portfolio Manager Brian Demain weighs in on volatility, trade policy, and artificial intelligence (AI) investment opportunities.<\/p>\n","protected":false},"author":551,"featured_media":223697,"comment_status":"open","ping_status":"closed","sticky":true,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[18,6,8,9,26,3],"tags":[632,19438,19437,11932],"contributors-categories":[13609],"class_list":{"0":"post-223689","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-macro","8":"category-north-america","9":"category-region","10":"category-securities","11":"category-text-articles","12":"category-traders-insight","13":"tag-ai","14":"tag-market-expectaitons","15":"tag-market-movement","16":"tag-mid-cap-growth","17":"contributors-categories-janus-henderson"},"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.9 (Yoast SEO v27.5) - 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