Market Commentary & Forecast

In our 2025 Outlook a few months ago, we noted that the U.S. remains a relative bright spot within a decidedly mixed global macro backdrop. While significant economic data over the past three months continues to support this view, more recent signals have suggested important shifts on the horizon, sending market volatility rising and some major U.S. equity indices briefly into “correction” territory. While we welcome the measure of resilience markets have shown in some recent trading sessions, the anxiety investors have felt for weeks is hard to dismiss as the result of normal wariness over valuations, earnings or economic fundamentals. Instead, we must contemplate the possibility that we are witnessing the beginning of profound structural changes for markets, the world economy, and even the global political order.

The past year has been marked by significant transitions: technological disruptions, geopolitical realignments, and a delicate recalibration as we continue to redefine the post-pandemic global economy. This presents a complex tapestry of challenges and opportunities as we enter 2025.

The past few months have seen continued anxiety over the health of the U.S. and global economy, diverging monetary policy paths across the developed world, human suffering and military action in Europe and the Middle East, and the pace of Artificial Intelligence (“AI”) growth and its impact on economies and communities. In a long-awaited nod to softening macro conditions, the U.S. Federal Reserve cut rates for the first time since Covid-19 wracked the world in March 2020. Just days ago, China announced a panoply of stimulus measures in an attempt to jump-start its ailing economy. Despite these many crosscurrents, markets survived a bout of volatility in early August to end the quarter with equities up, bond yields down and gold hitting all-time highs. U.S. large caps continued to make smart gains in this environment, with the S&P 500 better by 5.4% in Q3 and 21.6% YTD. As many had long hoped, equity performance also broadened in the quarter: in contrast to the extraordinary concentration of gains in a handful of megacap tech stocks that we’d seen in preceding quarters, all S&P 500 sectors are now in positive territory for the year. (To the surprise of many observers, the Utilities sector is now outperforming all other sectors on a YTD basis, benefiting from expectations of lower interest rates and surging demand for electricity; more on these trends below.)

As we cross the threshold into July, many of the tensions that have defined the year so far seem poised to come to a head. The U.S. Federal Reserve kept interest rates higher for much longer than most expected, which has helped bring inflation down steadily; the question now is how much growth will suffer, and whether the Fed will cry “Uncle!” in time to avoid a swing to recession. Indeed, despite a surprisingly strong first half, recent consumer and manufacturing data has been decidedly mixed. While investors are vigilant for signs of an economic downshift at home, they are equally wary of escalating geopolitical tensions and diverging monetary policies abroad. They also perceive that interest rates have peaked for the cycle—an important consideration for those who allocate to multi-asset-class portfolios. What is the best way forward in such an environment?

As I write, major U.S. stock indices are again posting new highs. Thankfully, earnings in today’s hottest sectors are real, suggesting little of the purely speculative fever of 1980s Japan (or the 1990s dot-com bubble, for that matter). Still, this moment of seemingly invincible enthusiasm for equities is a good time to remember that prices can fall fast, hard, and without warning. In fact, it is the “unknown unknowns” of, say, a global pandemic that tend to prompt the sharpest declines. Better-recognized fears—these days, of recession or a rate change coming at the “wrong” time or in the “wrong” direction—warrant attention, but often end up as mere bricks in the “wall of worry” that investors must invariably climb.

2023 may one day be seen as having quietly marked the end of an investing era—and with some relief. Already, few market participants yearn for the financial meltdowns, monetary blowouts, unchecked (and unfunded) fiscal stimulus, and far-reaching pandemic fallout that defined the past fifteen years. It is good to see positive interest rates and discussion of organic economic forces return to the fore, and evidence of renewed investor discipline now that money once again carries a cost. Nevertheless, history has neither stopped, nor restored some mythic, pre-2008 simplicity. Sovereign debt levels stand at staggering records, and political, demographic and technological change guarantee that past performance will not guide us to the future. Perhaps most of all, the mechanics of responsible asset allocation are, if anything, even more important now that equities must compete with bonds for investor attention. Indeed, recent data suggests a range of plausible scenarios to consider for both asset classes as we look toward 2024.