Brian Price

Looking ahead to 2025, a new administration will be in the White House. As the Investment Management and Research team, we are viewing this from an economic and market perspective. Chris, I’d be curious if you could share some of the conversations that you’re having with our advisors about how they’re thinking about the election, as well as asset allocation.

Chris Fasciano

So, Brian, in the back half of 2024, much of the conversations I was having with advisors was dominated by the election and the headlines it was producing. And our answer at that point was to vote in the booth, not in your portfolio, because the economy drives markets over the long term. But that’s not to say that a new administration and the policies that they want to implement can’t impact asset classes and sectors going forward. So, broadly speaking, we believe you want to be balanced and diversified to navigate uncertainty, both in the economy and from a political standpoint. But it’s important to note that any new administration brings with it some level of uncertainty when they enter office. This one is a little different because we had four years of a President Trump administration, and the market thinks that they have some insight into what he wants to do. But there’s a long way from campaign rhetoric to actual policy proposals to what ultimately gets signed into legislation and gets through the House and the Senate. So, I keep coming back to the economy drives markets over the long term, and right now, the economy is in pretty good shape. Expectations for earnings growth are pretty high, and that should be supportive for markets as we begin to understand what the priorities of the Trump administration will be in January.

Rob Swanke

Yeah, I think one thing you mentioned right there, there’s a big difference between coming into 2016 when Trump got elected to now we’re going into 2025. So, a much stronger position we’re coming into, people have expectations much higher. One big thing is valuations. So valuations are close to 22 times. That’s something we only saw in 2020, and you saw that in 1998. It gives you a lot of time for the markets to continue appreciating. And one thing we have to look forward to is those huge growth expectations. So, a couple of subpar years, 2021, 2022, we started to see an inflection point in 2023, and now we’re looking at 15 percent growth going into 2025. So, that’’ something that helps justify those expectations, but it is still a cause for concern when you’re looking at valuations where they are. So, investors really have to be cognizant of that. But really, the economic environment is pretty good. So, one thing we really have to look forward to is margins—high margins really helping companies going forward. And things that are really going to be causes for concern are some things like high interest rates, which I know Tom has really taken a look at here, that could really crimp margins in 2025 or be a risk to the downside for companies at least.

Brian Price

Tom, I’d be curious to get your perspective on interest rates. This year has been interesting, to say the least, the 10-year right now around 4.2 percent. Maybe just walk us through how you’re thinking about interest rates and the path forward there.

Tom Scarlata

Absolutely. It’s been anything but easy for fixed income investors with interest rates. You know, since September of this year, we saw the Fed make their first cuts in their policy rate, and we’ve seen some subsequent cuts. Since that point in time, we’ve seen the interest rate curve really start to steepen, with the short end coming down and the long end starting to move higher. It really creates a challenging situation for investors, to our point about if inflation comes back, can the Fed continue to cut? And what this means for investors is: keep it simple, keep it high quality, and think about what you own and what are those impacts going to be. With that Treasury curve moving higher, investors have a great opportunity to move further out on the interest rate curve, lock in some very strong yields compared to what we’ve seen in the past, and hopefully be able to capture, you know, any volatility we see in the fixed income markets.

Brian Price

Sam, I’d be interested to get your perspective just on what, you know, we’ve seen inflation come down quite a bit over the last 12 months. You know, what are some expectations with the new administration, just as it relates to the U.S. economy?

Sam Millette

Inflation is going to be a story that is really going to drive a lot of the fixed income markets in 2025. You know, when we talk about where we’re going with inflation, I think it’s really important to talk about where we’ve been, right? A couple years ago, we saw consumer prices peak at just over 9 percent year-over-year growth. Since then, we’ve come back down. We’re just a little over two and a half percent now, which is pretty good progress over the course of just a couple of short years. However, there are signs that we might be in for a slightly more inflationary environment ahead. I think if you ask most economists, they would say that the idea of additional tariffs and potentially deportations could, in fact, be inflationary, or at the very least contribute to already inflationary pressure. The problem with forecasting that, however, is we don’t have a lot of clarity on what exactly those new policies will be, but also when exactly they’ll be implemented, which makes forecasting inflation, something that typically is done with a lag, relatively difficult. And to put that in perspective, I’ve seen some good analysis from various think tanks and third parties looking at sort of the inflation impact on some of these proposed policies. And on the tariff front, I’ve seen estimates as low as one and a half percent increase in inflationary pressure. I’ve seen estimates as high as 5 percent. And I’d say, if we are in a world where we’re seeing 5 percent additional inflation pressure, at some point next year, markets and the Fed are going to have to react to that.

Chris Fasciano

I think what Tom’s talking about where rates are today and what Sam mentioned about the new administration are really important as they go together, right? Because the landscape is much different today than it was when President Trump took office in 2017. And on the campaign trail, he was very specific about what he wanted to do in terms of tariffs and deportations. But inflation is at a much higher level, and interest rates are at a much higher level than they were when he took office the first time. And I think that could ultimately factor into how they prioritize the campaign rhetoric as they acknowledge the different landscape we have today.

Rob Swanke

I think you bring that back to equities and thinking about 2022 when we went into that inflationary environment, and the Fed had to raise rates, what that did with equities, especially when you consider value versus growth. You look at growth companies just really took a hard hit when the Fed had to start raising rates and inflation started roaring back. And I think that’s coming up a risk again, as value companies are valued at a pretty significant discount to growth companies. So yes, growth companies are expected to see some significant growth in their earnings. But if you look at, you know, if things happen where value companies are valued at a much discount, the risk is a little bit less there. You can find some values in either value companies or outside the large-cap companies, which have really dominated the whole environment for the last few years and are expected to in 2025, especially from an earnings perspective. But you can really look in small-cap, mid-cap, and maybe even if I bring up the word “international,” some people might even consider it, but there’s still a lot of things that are going on there, which, you know, geopolitical risks are affected by the U.S. and elsewhere.

Brian Price

Let’s talk about geopolitical risks. What’s the outlook? How does it impact core portfolio construction and asset allocation decisions as we go into 2025?

Chris Fasciano

What we’re talking about is uncertainty in U.S. policy and geopolitical risk are somewhat related, right, because clearly, tariffs are aimed at foreign countries, potential trade wars, or trade policies. International stocks are really cheap. They are. They have been for a long time. They continue to get cheaper. I think one of the important things when you look at any investment opportunity is that cheap alone is not enough reason for it to outperform. You need fundamentals that are good to improving that will ultimately attract interest and drive those valuations higher, and fundamentals have been much better over here, and that’s why U.S. stocks have acted better. So, you need something to change on the fundamental side overseas. And, at this point, it’s hard to see that European economy is going to grow faster than the U.S. Then when you put on top of that, that there are a number of geopolitical hot spots that are impacting international markets more than U.S. markets—Russia/Ukraine, Israel/Hamas, anything involving China—whether it’s economic or trade policy, there are other areas over there that are percolating that are worth watching. I just think that all argues for currently the value discounts are probably justified and will stay that way until you get to a scenario where the economies start to act better over there. You could come up with a scenario like that, right? If tariffs are implemented and the Fed either has to stop cutting rates or begin to start at a time the EU’s cutting rates, maybe you get into their turn in the economy and better fundamentals over there faster than you do over here.

Brian Price

Sam, is there anything from a global economic perspective, you know, in response to what Chris said, I guess as it relates to tariffs?

Sam Millette

In general, the idea of free trade and global cooperation seems to be on the back burner nowadays, right? I think we’ve reached this point where the idea of protectionism and retaliatory tariffs is probably going to be how we’re discussing trade, at least over the course of the next year. The question really depends on how much of that is going to be talk and how much of that’s actually going to go into action. You know, as Chris alluded to before, it seems that the administration, including the new Secretary of the Treasury nominee, Scott Bessent, appear to be willing to use tariffs as a negotiating tool, right? And we saw that with calls for 25 percent tariffs on Mexico and Canada, which were followed almost immediately by reports of productive calls between the incoming administration and the heads of those two countries. So, I think there’s going to be a lot of noise. I think that there’s going to be a lot of potential for disruptions to the global trade system. However, at this point in time, it’s really difficult to ascertain what exactly the specifics will be, and because of that, I think it’s really difficult to try to position around those types of scenarios. And that’s why I really like kind of Chris’s point earlier of grading portfolios that are well diversified and can withstand periods of short-term uncertainty, because I truly think that’s probably where we’re heading, at least in the short term.

Brian Price

Tom, would you say a diversified portfolio from a fixed income perspective makes sense? Because I know I’ve had several conversations with advisors who’ve said, “I’m just going to allocate to cash.” I don’t have to take duration risk.” Maybe talk through a little bit about some of the conversations that you’ve had with advisors on this topic.

Tom Scarlata

I would say that cash discussion is probably the most common one I’m having with our advisors. But as we’ve seen over the last couple months of 2024, the Fed has begun their cutting cycle. And as you’ve seen that take place, we’ve seen yields on money markets and the short end of the curve come down pretty considerably. And as you start to think about what that means for your opportunity set, that short end has come down, but the long end has also moved a bit higher. And so, for investors sitting in a lot of cash, there’s first an opportunity to, of course, lock in some higher rates for longer, further out on the curve. But to everyone’s point here about this uncertainty with the election and policy going forward, it’s not a great time to put all your eggs in one basket. It’s better to think about diversifying, finding the pockets of value to have both strong fundamentals and attractive valuations. So, diversifying out from cash is definitely key, as there’s this period of uncertainty around policy, both of the Fed and the government.

Brian Price

Rob, let’s bring you back into the conversation from an equity perspective. Are we starting to see, I guess, a broadening out of the rally, right? Like everything has been so Mag Seven focused. Since the election, we’ve seen mid- and small-cap rally. Would you expect that to continue? What are you seeing from an earnings and valuation perspective, particularly as you go down cap?

Rob Swanke

Yeah, so small-cap in particular, you see a lot of companies that are either low growth or no earnings, and now starting to turn over and see some really significant growth expectations coming into next year, especially coming off a really low bar. So small-cap is seeing some really high expectations. Valuations are still at a good spot. They’re not too, too much higher than they have been historically. And then mid-cap, our valuations are pretty much on par with large-cap, but typically you see them trade at a higher valuation. And mid-cap companies are also seeing earnings growth expectations that are in line with large-cap. So you get, you know, the same growth expectations at a cheaper valuation for mid-cap, and then you get higher growth expectations for small-caps with a little bit higher valuations. But, you know, those two areas, you can really find some value relative to the Mag Seven. And if you even look at the Mag Seven, or just the large-cap companies in general, you really see a bifurcated market there, too, because those top 10 companies are really the ones that are driving the high valuations for the index, and then you got 493 other companies in the S&P 500, which are trading at lower valuations. So, there’s really a lot of places to find value outside those top 7, top 10 companies, and mid-cap, small-cap are certainly good places to look for value.

Brian Price

Sam, I’d like to get your perspective on the muni landscape today. Is there anything of note that you’re seeing out there?

Sam Millette

No, in general, I would say the muni space is a solid space to be in. Valuations are relatively in line with what we would be expecting. And frankly, I think that the fundamentals have continued to remain very solid over the last few years. One of the concerns I’d say we’ve had has been sort of the relative value in some sectors of the muni world compared to the taxable equivalents that are out there, especially on the shorter end of the curve. Nowadays, you know, it seems like that’s coming more into balance and more in line with historical ratios. So, no major concerns there. I still think that for folks with high levels of tax-exempt income, that space can make sense. However, I do always recommend looking at it from an individual level and looking at your own individual tax situation because, as you can imagine, tax-exempt investments do tend to make more sense for folks with higher taxable income levels.

Brian Price

Obviously, we spend a lot of time meeting with portfolio managers. Are you hearing anything different as it relates to the election, as it relates to the economy, as we go into the new year? Any particular insights that are being shared from the portfolio managers that we meet with on an ongoing basis.

Chris Fasciano

I don’t get the sense that anyone’s going to make wholesale changes to their portfolio, given the change that’s coming in Washington for a lot of what we’ve talked about. And it’s hard to argue with the fact that the economy is on a pretty good footing right now. Growth is solid. It has a lot to do with the consumer, right? The consumer has driven this economy for a number of years now, and I think portfolio managers are comfortable with that. I would say we are hearing a lot of what Rob alluded to, looking for opportunities outside the big 10 stocks in the market are large-cap growth. I think small- and mid-cap managers are quite comfortable with where their portfolio is today, and the trade-off they’re seeing in valuations and earnings growth are fundamentals. So, I think people feel pretty good about where we are, but they’re certainly watching to see what the new administration implements.

Tom Scarlata

Yeah, I would just add on the fixed income side to what we talked about, the uncertainty and to all Chris’s points, managers are really pushing that they need to be selective right now. It’s not about buying the market. It’s about picking your battles and making sure you’re being compensated. And, you know, they’re spreading out their risk. They’re not using their full risk budgets, but they’re trying to position themselves to be ready for what could happen. Whether the outcome is positive or negative, they don’t want to be all in on one trade or the other.

Brian Price

Thank you, gentlemen, great conversation, and thank you for watching our 2025 Outlook. For more insights, please download the full commentary.