November was marked by the decisive victory of Donald Trump and the Republican Party, who secured control of both the White House and Congress. This political sea change rippled through financial markets, where investors sought to assess the potential impact of new policies on economic growth, inflation, and corporate profits. The month ended with key stock indices posting gains, interest rates rising modestly, and a renewed focus on the trajectory of economic data as a Republican-led Washington prepares to take the helm. The S&P 500 index rose nearly 6% and more economically sensitive indices like the Russell 2000 (small cap US stocks) rose more than 11%, a potential sign that investors are optimistic about the economy in 2025. Conversely, foreign and emerging markets stock indices declined, likely due to the threat of tariffs.
The potential for faster economic growth from tax cuts, deregulation, and enhanced household optimism has renewed concerns regarding inflation, which may be further exacerbated by tariffs. Tariffs are one area in which a president has unilateral power, but it is yet to be seen if threats like a 60-100% tariff on all goods from China or 25% tariffs on goods from Mexico and Canada will actually be imposed or if they are part of a broader strategy to get these nations to the negotiating table. Regardless, it is likely that 2025 inflation will be larger than was originally expected by market participants and the US Federal Reserve prior to the election. Prior to the election, markets had previously been expecting the Fed to reduce interest rates to 3% by the end of 2025, but that has risen to 3.8% today.[1] This is important because even small changes in rates or market rate expectations can have a big impact on borrowing costs. For example, 1% lower mortgage rates (typically tied to 10-year Treasury rates) results in an extra ~$2,500 in the pocket of households with an 80% mortgage on a $400,000 home.
Economic data released during November provided a mixed but largely resilient picture of the U.S. economy. Inflation continued toward the Federal Reserve’s 2% target, with the Consumer Price Index rising 2.6% year-over-year in October. Declining energy prices have helped hold back overall inflation, a trend that could continue in 2025 should the Trump administration encourage more domestic energy production through deregulation and incentives. These figures underscored persistent price pressures, particularly in services and housing, even as goods inflation showed signs of moderation. The labor market showed resilience but also some signs of cooling, with the economy adding just 10,000 jobs in October but the unemployment rate remained at 4.1%. Wage growth moderated slightly, coming in at 4.0% year-over-year, reflecting a welcome deceleration in labor cost pressures. Importantly, wages have continued to rise faster than the consumer price index, meaning that households are generating real wage gains in excess of cost inflation.
Third quarter corporate earnings season was a mixed bag, reflecting the resiliency of US consumers in the face of uncertain economic conditions. Large financials like JP Morgan and American Express exceeded expectations and highlighted the strength of the consumers, describing overall retail spending patterns as solid and consistent. In the technology sector, enthusiasm and focus remains squarely on the rapid growth artificial intelligence, the effects of which are spilling over into broader categories such as strong demand for data centers and electrification.
On the other hand, macroeconomic uncertainty and weakness in the manufacturing sector has impacted global industrial companies, for example shipping giant FedEx, and driven weaker earnings growth in the energy and materials sectors. Many companies across a wide range of sectors cited the US election cycle as a source of apprehension for end consumers in Q3. Overall, while challenges certainly remain, S&P 500 companies have been able to deliver year-over-year earnings growth of 8.2%, on average. With the election behind us and the Republican administration planning to foster a pro-growth environment, optimism abounds in the equity market, and the year-over-year earnings growth rate for the S&P 500 is expected to increase to 12% for the fourth quarter of 2024. Improvement in earnings growth is expected to be driven by banks, technology companies, and pharmaceuticals.[2]
Against this economic backdrop, the incoming administration’s policy agenda looms large. A central pillar of the Trump campaign has been a renewed focus on tariffs and trade protectionism, which, while politically resonant, introduces significant uncertainty for sectors reliant on global supply chains. Technology and automotive companies, in particular, may face headwinds if tariff policies lead to higher import costs and retaliatory measures from trading partners. At the same time, the administration’s commitment to deregulation is poised to benefit industries such as financial services, energy, and healthcare, potentially unleashing capital investment and boosting profitability in these sectors. The interplay of these policies is likely to create a complex and dynamic economic landscape. On the one hand, tax cuts and deregulation could fuel corporate earnings growth and extend the economic expansion. On the other, heightened inflationary pressures from tariffs and increased fiscal spending could force the Federal Reserve to slow its pace of interest rate reductions, creating potential headwinds for interest-rate-sensitive sectors. Moreover, the prospect of escalating trade tensions with key economic partners adds a layer of geopolitical risk that could weigh on investor sentiment, particularly for foreign stocks.
Many of our client portfolios are diversified across many asset classes, sectors, and industries, which we believe provides the ability to withstand volatility and uncertainty in pursuit of long-term objectives. Some key themes that pervade many of our portfolios are an overweight to value, small cap, and biotechnology companies. We believe these themes remain well-positioned for the potential environment ahead that should include stable and rising economic growth as well as the potential for more corporate acquisitions resulting from lower interest rates and deregulation.
Thank you for allowing us the privilege to steward your wealth. We remain committed to providing you with thoughtful, data-driven insights as we navigate an ever-changing and exciting world of opportunities.
Perceived Winners & Losers of a Republican-Controlled Washington
Note that there remains a significant amount of uncertainty regarding the pace and likelihood of various legislative changes in 2025, and the chart below is meant to be illustrative of a handful of potential outcomes that have been frequently discussed so far.
[1] Bloomberg as of December 2, 2024
[2] FactSet as of November 22, 2024
Important Information
Past performance may not be representative of future results. All investments are subject to loss. Forecasts regarding the market or economy are subject to a wide range of possible outcomes. The views presented in this market update may prove to be inaccurate for a variety of factors. These views are as of the date listed above and are subject to change based on changes in fundamental economic or market-related data. Please contact your Advisor in order to complete an updated risk assessment to ensure that your investment allocation is appropriate.
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