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We apply a business owner’s approach to investing in public equities. However, this bottom-up approach doesn’t relieve us of the responsibility of analyzing and understanding the implications of macroeconomic events, such as the 2024 U.S. presidential election. We need to understand if and how policy decisions could affect our businesses’ long-term earnings power and if those decisions will affect what investors are willing to pay for those earnings.
History suggests that markets trend upward regardless of who’s in the White House and who controls Congress. That said, given today’s geopolitical, economic, and social crosscurrents, we believe that selectivity will become increasingly important.
Different Parties, Similar Outcomes
Despite the seemingly extreme political polarization in the United States, several large areas of common ground are important for investors to consider.
A less globally integrated United States is one key area. Between hawkish stances on China and the seemingly shared embrace of industrial policy—with which governments direct resources to industries critical to the national interest rather than leaving things to the market—it seems clear that both candidates seek policies that result in a less globalized economy. We believe the candidates’ rhetoric toward China could lead to a bifurcation of trade between the United States and its allies versus China and its trading bloc, particularly in areas related to national security.
Related to this point is the presidential candidates’ support of policies that could result in higher structural levels of inflation and longer-term rates than what we saw pre-pandemic. Examples include both candidates’ courting of organized labor and their embrace of tariffs and measures that would increase the deficit.
Finally, regulation is a key risk that can derail a growth business, and we believe a continuation of antitrust cases against big tech is likely whether Vice President Harris or former President Trump is elected. Given big tech’s importance to the U.S. economy, it is worthwhile to continue to monitor the extent to which either administration is willing to investigate these companies and if those investigations could ultimately impair the companies’ earnings power. The most consequential case, in our view, is the antitrust case against Google, which claims the tech giant illegally monopolized the search engine market.
A Need for More Selectivity
We consider deglobalization, structurally higher inflation and rates, and more big tech regulation as secular shifts rather than discrete policy outcomes. They are shifts that have been in place for some time and seem apparent regardless of who wins in November.
Against this backdrop, we believe the importance of our criteria, as well as the types of businesses that meet our criteria, is apparent. For instance, we’ve long preferred emerging market businesses benefiting from local demand instead of relying on cross-border trade, and that’s likely to continue. Meanwhile, certain innovative businesses in China may become less of a fit, given national security concerns, and the ability of those businesses to commercialize their technology. Higher rates and inflation underscore the need for robust balance sheets and strong unit economics while more big tech regulation requires sober scenario analysis to separate impairment risk from opportunity cost.
Our Focus on Fundamentals
Equity investing is likely to become more volatile over the next four years and beyond, but we’re optimistic that our criteria-based approach and business model experience will help guide us toward the businesses well positioned for the long term.
Given the range of outcomes, we believe it is most important to continue our focus on companies with strong, above-average earnings growth that are leaders in promising business spaces. Selectivity and the ability for companies to “make their own weather” via differentiated products and services, leadership positions, competitive moats, financial strength, and strong management teams remain paramount.
Disclosures:
The views expressed are the opinion of Sands Capital and are not intended as a forecast, a guarantee of future results, investment recommendations, or an offer to buy or sell any securities. The views expressed were current as of the date indicated and are subject to change. This material may contain forward-looking statements, which are subject to uncertainty and contingencies outside of Sands Capital’s control. Readers should not place undue reliance upon these forward-looking statements. There is no guarantee that Sands Capital will meet its stated goals. Past performance is not indicative of future results. You should not assume that any investment is or will be profitable. All investments are subject to market risk, including the possible loss of principal.
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