By Chad Roope, CFA®, Chief Investment Officer
2024 was a great year for the U.S. economy and equity markets. A strong economy, led by strong labor markets and significant investments in Artificial Intelligence, equated to double digit corporate earnings growth and thereby strong equity market performance. The U.S. was the clear economic leader globally and was why we had a strong overweight to quality, U.S. large-cap stocks all year. This overweight and our focus on active asset allocation, fundamental research and timely trade communications led to solid performance in our client portfolios in 2024, with most of our strategies strongly outperforming their benchmarks. Our proven process and seasoned team of Chartered Financial Analysts stand ready to navigate what is likely to be a dynamic environment in 2025.
We think 2025 may prove to be a more volatile year given several uncertainties and rich starting valuation levels, but we think the year should prove to be a solid overall. Below are our key views:
- We expect U.S. outperformance compared to the rest of the world to continue amid solid economic growth, strong labor markets, lower inflation levels, a supportive Federal Reserve, and the potential for tax cuts and deregulatory policies.
- We continue to prefer large-cap, high quality U.S. equities as we think this is where the strongest overall earnings growth will continue to be. In fixed income, we are prioritizing higher income, shorter duration exposures than the broader market.
- Uncertainty associated with both trade and immigration policy could lead to slower growth, higher inflation – or both – over the course of 2025 and beyond. These are key areas we will continue to watch closely and make portfolio adjustments if needed as they evolve.
- The stock market enters 2025 with fairly rich valuation levels. The S&P 500’s forward P/E ratio of 21.5 is much higher than the 30-year average of 17. Should some of the aforementioned uncertainties turn out negatively, investors could call into question these valuation levels and create sudden pockets of volatility in 2025. Our diversification and fixed-income positioning should help during such periods. Still, we think any volatility is likely to be met with strong buying given the strength of the economy and given that cash holdings are near record levels as investors poured nearly $1 trillion into money market funds in 2024 alone. We think investors are likely to “buy the dip” with all this cash should pockets of volatility emerge.
Overall, we think 2025 will require investors to be more patient, disciplined and process focused than 2024 did. After strong equity market performance in 2023 and 2024, any volatility will undoubtedly feel bad. But we think a solid economy combined with our active asset allocation will lead to solid outcomes in 2025. John Meynard Keynes once quipped, “When the facts change, I change my mind”. For now, the facts have not changed enough with economic and corporate data for us to change our minds in favoring stocks over bonds, U.S. over international, large-cap over small-cap, growth over value. As facts around Washington and Fed policy, earnings, and the economy continue to evolve, we may change our minds and change our positioning. But for now, we maintain our positive equity positioning moving into 2025 while also positioning to capitalize on market volatility.
Sources: BlackRock, JP Morgan Asset Management, Factset