As Warren Buffett said at last weekend’s 2025 Berkshire Hathaway (BRK.A) Annual Meeting, “nobody knows what the market is going to do tomorrow, next week, or next month. Nobody knows what business is going to do tomorrow, next week, or next month. But they spend all their time talking about it because it’s easy to talk about, though it has no value.” We can make investing very complicated by watching the daily news, trying to figure out the macro environment, and trading, or we can buy companies we like, at reasonable prices, and hold them.
The Tarriff Tantrum
The start of 2025 was rather ordinary. The S&P 500 was positive and reached an all-time high in January. The positive performance continued through most of February. On February 21, famed hedge fund manager Steve Cohen said, “It’s definitely a period where I think the best gains have been had and [it] wouldn’t surprise me to see a significant correction,” citing proposed tariffs’ potential negative effect on the economy, as well as government’s cost-cutting efforts.1 It turns out, he was right, as the Russell 2000 Growth proceeded to fall 18% through April 3, which was the day after President Trump’s “Liberation Day” tariff speech. The market fell further, totaling a 30% fall. We call this the market’s “Tariff Tantrum.” Steve Cohen may have been able to successfully trade that move; however, it is doubtful many people did. We, on the other hand, did not trade it—that’s not what we do. Rather, we look to create wealth for long-term investors and to do so with long-term holdings.
Market Sentiment
There aren’t many other ways to state it. It is bad. The Investor’s Intelligence survey shows the highest level of bearishness since November 2008.2 With this level of bearishness, we could be one X or Truth post away from a market rally. We started writing this Growth Factor on April 24. Since then, the S&P 500 has been up almost every day. While this may have negated some of the market negativity, we note that the S&P 500 is still 8% below its 2025 highs3 and uncertainty remains high. Additionally, the Atlanta Fed’s GDPNow is calling for -2.7% GDP growth in 1Q25.4 However, 120 bps of that decline is a result of the negative effect of gold imports, which has little to do with the real economy. Again, anecdotal sentiment seems quite negative.
It’s unlikely to be the end of the world
We believe that, as bad as things may seem, if you look out five years, things will be alright. It is unlikely that this is the time that the United States is going to collapse.
As Warren Buffett wrote in his 2021 letter, “[d]espite some severe interruptions, our country’s economic progress has been breathtaking. Our unwavering conclusion: Never bet against America.”5
To be an equity investor means that you are a long-term optimist, even though there will be periods of trouble. After April 2 , “Liberation Day,” we feared significant impact on some of our companies and attempted to model the impact of tariffs and quickly realized the difficulty. There were just too many unknowns.
What do we see from our companies?
Let’s start with the fundamentals. Even our smallest companies are international businesses. They sell, source, and manufacture all around the world.
So far throughout this earnings season, our companies have communicated several important points:
- Seem able to meet demand in China with products made in China or elsewhere, outside the United States.
- Seem able to manage with tariffs over 10%. As “picks” and “shovels” companies, they may have higher gross margins than companies in other sectors. Tariffs are only applied on the value-added in a country. They are a part of “Cost of Goods Sold” (COGS).
- May increase prices in the low to mid-single digits, which the customers may absorb.
- Improved their supply chains during COVID, adding geographic diversity and resilience.
- Are run by managers who adapt.
- Companies in low margin or commodity businesses, such as the toy industry, may have difficulty absorbing tariffs on China-made products.
The unknown is demand destruction. However, at least for now, we don’t believe there has been a lot of demand destruction.
We see opportunities in our “picks and shovels” companies
Over the 15 years that I’ve managed the Needham Aggressive Growth Fund, we’ve been focused on “picks” and “shovels” companies that help provide the infrastructure that consumer facing companies require. We define infrastructure broadly to include traditional, such as roads and bridges, technology, such as data centers and semiconductor manufacturing, life sciences, such as labs and manufacturing, and security, including cyber and national defense. This infrastructure focus has become even more important in the era of nationalization of manufacturing and trade. We may see expanded opportunities for “picks” and “shovels” companies not only in the United States but also in many regions around the world.
We highlight a few sectors below.
Autos/Industrials – The Automotive and Industrial industries have been in a slump for several years. These markets experienced supply chain shortages and disruptions during the COVID years. We believe we may finally have worked through the COVID inventory build-ups and have the chance to see growth rates that mirror end market demand. The tariffs are designed to encourage a build-up in manufacturing capacity in regions around the world that are outside of China, which has been the world’s factory. Companies that supply the “picks” and “shovels” to build and automate these manufacturing plants could do well.
Engineering & Construction – We recently listened to the podcast, DCD Zero Downtime – Episode 77 featuring Cathy Kunkel of the Institute for Energy Economics and Financial Analysis. She analyzed the expansion plan filings of utilities in the southeast. She found that there are 25GW of natural gas generating capacity in the planning stages. This is as much capacity as the largest utility in Virginia, Dominion Energy (D), has today. Ms. Kunkel did point out that some of this capacity may not get built.
Plants of this size require years of planning, supply chain procurement, and construction. For example, these plants require pipelines, transmission lines, steel, and gas turbines. These products have inputs that are subject to tariffs and have long delivery times. Gas turbines, which are made by GE Vernova, Inc. (GEV) and others, have several year backlogs. Finally, they need architecture, engineering, and construction companies that require skilled labor for construction and long-term operations.
While much of this demand is driven by data centers, there is also the electrification of transportation. Although Electric Vehicles (EVs) may not be as rapidly adopted as we may have thought a few years ago, they provide a great driving experience and the long-term trend is in their direction. We believe upgrades and maintenance of the electrical grid are key long-term trends.
Artificial Intelligence/Data Centers – The bears are concerned that AI is a bubble and that the investments in model training will have been for naught in pursuit of a commodity market. Further, they believe real-world uses won’t generate a return on investment for model developers.
We believe AI is in its early stages. In a recent note, Morgan Stanley (MS) noted that AI token generation, which is a good proxy for inference or application use, is up over 5x since the beginning of 2025.6 Google’s (GOOGL) Gemini 2.5 Pro and DeepSeek are seeing explosive growth.7
Emphasizing this point, Amazon (AMZN) CEO Andy Jassey seems to agree, stating in his 1Q 2025 earnings call in regards to AI application roll out, “I would say we’re not even at the second strike of the first batter in the first inning. It is so early right now.”
In the short-term, the stock market is concerned about the lack of availability of nVidia’s (NVDA) Blackwell processors and Microsoft’s (MSFT) deferral or cancellation of some data center projects (mostly in Europe). On its April 30 conference call, Microsoft addressed those concerns by saying it is short of data center capacity and power and that it is always adapting its data center plans. Microsoft said that the market should not be focused on the quarter-to-quarter changes in its data center plans.
One could have gotten all worked up about these cancellations and traded them by exiting Microsoft and other AI beneficiaries. We find life to have a lot less angst, and the investing results to be better, if we focus on the long-term trends and ignore the noise of the day-to-day news. Morgan Stanley also highlighted recent X posts from OpenAI, Google Cloud, Microsoft, xAI, and Lambda Labs.
Semiconductors and Semiconductor Manufacturing – We have long believed in the ever-steady march of advanced technology for semiconductor manufacturing. The smaller the transistor, the less power it uses. Less power used means longer battery life for expanded functionality in our phones. Today’s leading-edge manufacturing requires advanced packaging, metrology systems used for measurements to ensure product quality, and data analytics software. There’s a lot going on. There’s also the regionalization of advanced semiconductor manufacturing as the world recognizes the need to diversify the supply chain away from Taiwan. For semiconductors, AI and automotive are two important industries. PCs and phones will be doing AI inference and will need high power processors to handle the workload. EVs have a lot of electronics. All vehicles are adopting safety systems, which require image sensors, cameras, radars, communications and networking, and processing. My personal dream is that these systems will dramatically reduce the carnage of almost 50,000 deaths each year on United States roads. This is the equivalent of a 9-11 attack every 2 weeks. Technology can help bring this to an end.
Conclusion
We can make investing very complicated by looking at the daily news and trying to figure out macroeconomics, or we can buy companies we like, at reasonable prices, and hold them. We are enthusiastic about the opportunities in companies that supply “picks” and “shovels” for infrastructure, broadly defined. Regardless of tariffs and the current troubles, we believe these trends provide investment opportunities today. After this market pull-back, we believe there may be compelling valuations in our universe of companies supplying “picks” and ”shovels” for U.S. infrastructure.
About Needham
The Needham Group, Inc. is an independent, employee-owned firm with consistent leadership for 38 years. Needham has two subsidiaries, Needham & Company, LLC and Needham Investment Management, LLC. Needham & Company was co-founded by George Needham in 1985 as an investment bank focused on small and midcap companies, with deep sector expertise in technology – namely semiconductors, software, and life sciences. Needham & Company offers investment banking, sales, trading and publishes equity research on over 450 public companies in 20 sectors. Needham Asset Management was founded in 1992 to invest long-term in small and mid-cap companies. Today, Needham manages over $1 billion across three 1940 Act mutual funds and two hedge fund limited partnerships.