Applied Materials produces semiconductor fabrication equipment, including products used in deposition, etching, ion implantation, metrology, wafer inspection and mask-making. Acquisitions expanded AMAT's presence in flat-panel display fabrication equipment and in the solar semiconductor market (since exited). The $4.9 billion Varian acquisition enabled AMAT to build share in high-performance and low-power applications processors.

First-Quarter Review: Waiting for Tariff Impacts With the second quarter of 2025 now underway, adverse reaction to President Trump's 'Liberation Day' tariffs sent the Nasdaq Composite and the S&P 500 into bear-market territory. (Editor's Note: This article was finalized for publication in advance of breaking news on Wednesday afternoon, April 9, that many of the recently-imposed tariffs were being paused for 90 days.) Investors are fearful that the proposed tariffs, along with retaliatory tariffs from trade partners, will pitch the U.S. economy and perhaps the global economy into recession. The administration has issued a blanket tariff of 10% on all imports, while also imposing added tariffs on a per-country basis. Simultaneously, the administration is seeking to make tariff-reducing deals with a multitude of nations. This has created a situation of flux whereby modeling the exact impact of all tariffs is nearly impossible. A blanket, one-size-fits-all tariff would enable companies to assess projected impacts and get on with business planning. The unsettled and ever-changing state of the tariff agenda is contributing to business stasis. The first quarter began with optimism but ended with investor foreboding. A review of markets, interest rates, and the economy in the first quarter of 2025 underscores the strengths and weaknesses that the U.S. economy will bring to bear as the world adjusts to the trade war. First-Quarter Review The S&P 500 advanced in every quarter of 2024, resulting in a 23%-plus gain for the year, although momentum was beginning to fade by 4Q24. The U.S. stock market failed to extend positive 2024 momentum into 2025, with the S&P 500 declining 4.8% in the first quarter. In January, the S&P 500 rose by 2.7% on expectations that the re-election of President Trump would usher in an era of loosened regulation and lower taxes. The index fell 1.4% in February, however, and then tanked by 5.8% in March. The broad market shifted into a worsening trend as the quarter progressed when consumer and business sentiment fell on DOGE job cuts, tariff uncertainty, and geopolitical concerns. Reflecting rotation away from growth and toward defensive and rate-sensitive, the Nasdaq more than doubled the S&P 500's decline and fell 10.1% in 1Q25. The blue chip DJIA relatively outperformed with a 1.3% decline for the first quarter. In 2024, solid economic growth and falling inflation gave the Fed room to cut interest rates by 100 basis points across its fall 2024 FOMC meetings. Fears that tariffs could rekindle inflation and concerns that economic growth may be stalling complicate the Fed's agenda in 2025. The Fed remained on the sidelines at its two meetings in 1Q25. Following the March FOMC meeting, the post-meeting statement added language that 'uncertainty around the economic outlook has increased' and deleted language that 'risks to achieving employment and inflation goals are roughly in balance.' The central bank reduced its GDP growth forecast for 2025 to 1.7% from a prior 2.1%; raised its unemployment rate forecast to 4.4% exiting 2025 from 4.3%; and forecast core PCE inflation of 2.8% exiting 2025, up from 2.5%. The Fed's preferred inflation gauge, the core PCE price index, rose 0.4% in February, after rising 0.3% in January and 0.2% in December, and was up 2.8% from February 2024. The annual change has hardly moved from 2.7% in July 2024. Fed caution on rate-cut timing and stalled inflation caused long-maturity interest rates to move higher into year-end 2024. Long rates have come down in 2025, however, on safe-haven investing in Treasuries as investors exit growth stocks. The 10-year Treasury yield was 4.27% as of the end of March 2025, compared with 4.57% as of the end of December; the cycle peak was 4.9% in October 2023. The two-year Treasury yield was 3.89% as of the end of March, down from 4.25% as of the end of December and well below the peak level of 5.2% in October 2023. The U.S. employment economy was solid in the first quarter of 2025, generating a surprising 228,000 new jobs in March. Revisions to prior months pushed three-month average jobs growth to 154,000, about in line with the full-year 2024 average of 166,000. Average hourly earnings continue to grow around 4.0% year over year, above the annual change in inflation. The unemployment rate was 4.2% for March compared with 4.1% for February and 4.0% for January. Economists characterize the U.S. employment economy as being in a 'low-fire, low-hire' phase. Industrial production increased 0.7% in February from 0.3% growth in January. Between February 2024 and February 2025, overall industrial production increased 1.4%. Capacity utilization of 78.2 for February 2025 was 1.2% below the long-run average. The ISM Manufacturing PMI came in at 49.0% for March 2025, moving back into contraction territory (below 50) for the twenty-seventh time in the past 29 months. ISM's Services PMI slipped to 50.8 for March 2025 from 53.5% in February. Services PMI has indicated expansion in 55 of 58 months since recovery from the COVID-19 pandemic began in June 2020. However, the Services PMI employment index dropped into contraction territory. The NFIB's Small Business Optimism Index reached a six-year high of 105.1 in December 2024 in anticipation of a change to a more business-friendly administration. That optimism has been dented somewhat as the index fell to 102.8 in January 2025 and further to 100.7 in February. Overall U.S. retail sales for February rose 0.2% month over month, recovering from a 1.2% decline for January, and were up a below-consensus 3.1% annually. The University of Michigan Consumer Sentiment Index for March 2025 fell to 57.9, down from 64.7 in February and down 22 percentage points from December 2024. Calendar fourth-quarter 2024 earnings from continuing operations rose in mid-teen percentages from 4Q23, representing the strongest growth since 4Q22 and marking a sixth consecutive quarter of annual EPS growth. Over 75% of companies exceeded consensus EPS expectations for 4Q24, and the magnitude of the beat was at the upper end of the 5%-9% historical range. Fourth-quarter 2024 GDP grew 2.4%, following growth of 3.1% in 3Q24, 3.0% in 2Q24, and 1.6% in 1Q24. Personal consumption expenditures (PCE) growth of 4.0% for 4Q24 was the strongest in any quarter of 2024. Nonresidential fixed investment rose 1.5%. Together, these two components make up over 80% of GDP. Investors began to rotate away from growth and toward defensive and rate-sensitive areas of the stock market in 2024. That rotation intensified in the first quarter of 2025 as all of the traditional growth sectors declined in the January-March 2025 period. Energy was the surprising sector leader in 1Q25, based on 'wealth in the ground' as an inflation hedge and on President Trump's pledge to encourage domestic energy production. Other leading sectors in 1Q25 included Healthcare, Utilities, Financial, and Consumer Staples. Seven of 11 sectors were up year to date as of the end of 1Q25. The overall market decline reflects the fact that the three growth sectors representing about 50% of total market weight fell sharply in the first quarter. Conclusion We have expressed our concern that tariffs could hit differently in 2025 than in 2017. Consumers have been battered by inflation for the past several years, and many may be at the edge of their spending limits. In 2017, by contrast, consumers were coming off a decade of below-trend inflation. Businesses and consumers in that earlier period were better able to absorb tariff-induced price increases, and the economy chugged along. In the decade (2008-2017) preceding the first round of tariffs, the U.S. Consumer Price Index (CPI) grew at a 1.5% CAGR -- a full half-percentage point below the Fed's 2% long-term target range. Consumers and businesses were able to absorb that first round of tariffs relatively painlessly. U.S. GDP grew 2.5% in 2017, 3.0% in 2018, and 2.5% in 2019. COVID-19 impacted growth in 2020. The second Trump administration may be basing its trade policies on the relatively benign impact of that first round of tariffs, which were preceded by unusually low inflation. The period following 2017 included the supply-chain crisis and a global pandemic, and by contrast has been characterized by withering inflation. Between 2018 and 2024, the U.S. CPI grew at a 3.6% CAGR. Many consumers, particularly in lower economic tiers, are tapped out and may be unable to absorb further price hikes. The chief concern among investors has been that tariffs would rekindle inflation. But to get inflation, you have to have spending. If consumers sharply reduce their spending due to tariff-driven price hikes, their contribution to GDP (70% of total) could be diminished, leading to below-trend economic growth or possibly recession. Our base case remains that the U.S. can avoid recession in 2025, but we acknowledge that the situation is highly dynamic within an ever-shifting risk environment.

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This pick list highlights constituents of the Morningstar US Large Cap Index that we believe offer investors the best risk-adjusted return prospects. Stocks of large-cap companies where neither growth nor value characteristics predominate. Stocks in the top 70% of the capitalization of the U.S. equity market are defined as large cap.