GGS Outlook into 2025 – November 18, 2024

Now that the election is over, we wanted to share the main macro issues we will be watching into the new year, along with reasons to remain cautiously optimistic on equities.  

Key Issues to Watch

• Washington politics: While President-elect Trump has nominated candidates for many cabinet positions in the past two weeks, none of the main economic roles have yet been filled, most notably Secretary of the Treasury. It also remains to be seen which of his nominees will actually be confirmed by the Senate. In addition, financial markets await policy details on potential changes to key issues such as the tax code, tariffs, government bureaucracy/regulations, immigration, and foreign wars.  So despite the election being over and the Republican sweep being confirmed, there remains a great deal of uncertainty regarding the actions the US government will take in 2025.
• Corporate earnings: Q3 earnings season is largely behind us, and was solid for most companies, but there are still several industry bellwethers set to report this week, such as Walmart on Tuesday, Nvidia and Target on Wednesday, and Deere on Thursday. There are also several industry conferences this week that will see presentations from company CEOs and CFOs. Earnings growth of the “Magnificent 7” megacaps is expected to decelerate from 36% in 2024 to 18% in 2025, while earnings for the remaining 493 stocks in the S&P 500 Index are expected to accelerate from 3% in 2024 to 14% in 2025.¹
• Federal Reserve: The market is currently pricing in a roughly 60% chance that the Federal Reserve will cut interest rates again at its 12/18/24 meeting.² More importantly, the market is currently expecting the Fed Funds target rate to be roughly 1.0% lower than today by December 2025.

Reasons to be Optimistic on Equities

• Interest rate cuts: The Federal Reserve is expected to continue cutting interest rates through the end of 2025. As discussed in our 9/19/2024 blog post, periods of declining interest rates are usually a good time to be invested in equities. In the 12-month period following the first rate cuts across the Federal Reserve’s 14 past rate-cutting cycles since 1929, the S&P 500 produced an average return of 13.4%.
• Potential pro-market government policies: From 11/8/2016 to 2/20/2020 (pre-COVID), the S&P 500 rose roughly 17.3% annualized.³ Technology, Healthcare, and Small Caps were the best performing sectors during President Trump’s first term.⁴ Looking forward, the equity market is likely to react favorably to further cuts in the corporate tax rate and significant deregulation that lessens the rules for corporations and potentially encourages more mergers and acquisitions. In contrast, portions of the equity market may react unfavorably to initiatives that hurt globalization such as significant new tariffs, or a mass deportation policy that could stoke wage inflation.
• Favorable seasonality: Historically, November and December are two of the best performing equity months of the year, and this is especially true in years where the uncertainty of the election has been resolved. From election day 11/8/2016 to the 1/20/2017 inauguration, the S&P 500 rallied over 7.0% (through Friday the S&P 500 is up 2.8% since the 11/5/2024 election).

Reasons to be Cautious on Equities

• A different starting place: When Trump was elected in November 2016, the S&P 500’s forward price/earnings valuation ratio was 18-19x (vs. 22x currently), the equity risk premium vs. Treasuries was roughly 6.0% (vs. 3.5% currently), the US high yield bond spread over Treasuries was around 5.0% (vs. 2.6% currently), the corporate tax rate was 35% (vs. 21% currently), inflation was roughly 2% (vs. 3% currently), net US debt to GDP ratio was roughly 75% (vs. 97% currently), and the Federal Reserve’s balance sheet was around $4 trillion (vs. $7 trillion currently).⁵  In short, related to where we are now, in November 2016 there was much more room for improvement in valuations in risky assets relative to historic norms, and there was much more capacity to stimulate the economy without sparking inflation or government debt sustainability concerns.
• Investor sentiment is currently well above average, again leaving less scope for further improvement.⁶ Likewise, the equity percentage of financial assets currently held by households and nonprofit organizations is at an all-time high.⁷
• Corporate insider sales have recently been running well ahead of insider buys, signaling that they may think shares are fully valued.⁸

Bottom Line

It is well documented that historically, the US political party in power has had no statistically significant impact on market returns.³  Therefore, we continue to stress that clients take a long-term view and keep their portfolio risk level in a range that makes the most sense for their risk tolerance, risk ability, and unique personal circumstances.⁹ There are many reasons to be optimistic about the future both for the economy and equities, but we must not ignore that we currently sit at historically-elevated valuation and sentiment levels that could dampen future equity market returns. One of Warren Buffett’s most famous quotes is “to be fearful when others are greedy and to be greedy only when others are fearful.” ¹⁰  We plan to heed this advice in client portfolios by maintaining diversification and strict attention to potential downside risks. Overall, we remain cautiously optimistic and will continue to monitor macro and company-specific developments as they unfold.