Market Commentary
We have been highly constructive on U.S. large-cap stocks in our investment strategies since October 2023. We remain optimistic generally into 2025, but as we enter fall, we think it is prudent to be slightly more cautious as some facts have changed over the last several weeks.
First, our analysis of earnings surprises and estimate revisions has detected some cooling trends, suggesting potential moderation of the earnings advantages that catalyzed much of the rally this year so far. Our research also reveals the autumn period in October through mid-November in presidential election years has tended to be more volatile than usual, with increased vulnerability to downside moves. The elevated uncertainty surrounding the upcoming election adds additional complexity. Given the sharp divide in the parties’ expected policy and the expectations of a close race, many real economy actors are delaying major capital allocations and business-defining bets to after election night. In this state of uncertainty, any lack of market liquidity has the potential to trigger volatility. This may be compounded if the final outcome of the election is delayed, as we saw in 2020. Finally, recent changes in market temperament have also caught our attention and give us pause. Relatively tranquil gains in large-cap stocks for most of the year have been disrupted recently with larger single-day selloffs, rotations, and V-shaped snapbacks, which may be signs of a market more susceptible to headline-induced downdrafts. Given these factors, we are slightly more cautious with our investment positioning overall through mid-November.
However, as we look more broadly into 2025, we still think earnings and the economy are in good shape overall and any potential stock market volatility would likely be an opportunity as we think the odds of a recession remain low thus far. Additionally, we welcomed the Federal Reserve’s reduction in the Fed Funds Rate from 5.5% to 5% on 9/18, which should help cushion any potential weakness. Our slightly cautious positioning in the shorter term allows us to stay engaged with and exposed to market upside while giving us the flexibility to be opportunistic. By tempering our some of our U.S. large cap equity exposure now, we're not just playing defense but setting the stage to potentially capitalize on the opportunities that frequently emerge in the wake of uncertainty. Thanks for your confidence in our team this fall and through the election cycle.
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