Review the latest Weekly Headings by CIO Larry Adam.
Key Takeaways
- The U.S. economy is on track for a soft landing
- The global easing cycle will continue in the months ahead
- Positive shareholder-friendly activity to continue
The more things change, the more they stay the same. As we enter the post-election period, it is natural to have strong feelings about the outcome. While some may be disappointed, and others elated – one thing we can agree on is that it is a relief to know the outcome and begin the process of moving forward. Sure, some big changes are coming in Washington (as they do every two to four years), but it is important to maintain perspective – particularly when it comes to your investments. And remember, while we incorporate politics into our investment framework, it ranks only eighth in order of importance (things like the economy and fundamentals are bigger drivers). So, with the outcome of the election now known (still waiting to learn the balance of power in the House), we will continue to assess how policy changes impact our broader view. But in the meantime, we reiterate below the critical drivers of our views that were expected to remain in place, regardless of the outcome.
Key ‘Themes’ That Remain In Place After The Election | With the election results now behind us, the market is quickly assessing what the longer-term implications of a Trump presidency are for the economy and the financial markets. While it is easy to react emotionally to the outcome, here is a quick reminder of multiple positive long-term trends that will remain in place in the months ahead:
- The US Remains The Most Dominant Economy In The World – The term ‘American Exceptionalism’ refers to the U.S. economy’s relative dominance against its developed market peers—a trend that has been ongoing for well over a decade. This has been captured by the strong outperformance of US equities relative to its developed market peers, where the S&P 500 has climbed nearly 800% since 2009, while the Nikkei 225 and the MSCI Europe Index are only up 254% and 229% (in USD terms), respectively. The reason: the U.S. has a more dynamic labor market, and our companies are more innovative and profitable. That has led to higher earnings growth, and the economy also benefited from a bigger fiscal and more proactive monetary policy response after the pandemic. These trends are likely to continue.
- Soft Landing Remains On Track – While the Fed’s aggressive tightening cycle sparked fears of a recession, the economy has held up better than expected—thanks to the government’s fiscal stimulus efforts. And right now, the US economy remains on track for a soft landing with our economist expecting 2.7% growth in 2024 and 2.1% in 2025. The Fed’s easing cycle should prolong this expansion, which has been ongoing for 14 consecutive quarters—well below the average expansion of the last 40 years, which lasted 28 quarters.
- Global Monetary Policy Easing Cycle Continues – Although 2024 has been a big year for global elections, with over 40 countries holding elections in 2024, politics has not upended the global easing cycle. Case in point: 76% of the 33 central banks that we follow have lowered interest rates this year—a level rarely seen outside of recessionary periods. This synchronized easing cycle, which we expect will continue over the next 12 months, should be supportive of growth going forward.
- Fiscal Tailwinds Supportive Of Growth – The U.S. economy is benefiting from fiscal tailwinds from the CHIPS, IRA, and Infrastructure and Jobs Acts. Our political analyst estimates that nearly 75% of the combined $1.7 trillion stimulus has not been spent yet and will provide a long tailwind of support for the economy in the months and years ahead.
- Positive Shareholder-Friendly Activity – Flush with ~$1.8 trillion of cash on their balance sheets, S&P 500 companies have increasingly focused on returning cash to shareholders in the form of stock buybacks (which can help boost share prices) and dividends. Case in point: dividend growth is running at an 8% pace in 2024 – that’s up from a 5+% pace in 2023 and nearly 2% higher than its 30-year average. Buybacks also topped $232 billion in 2Q24 – the highest level since 1Q22. We expect these trends to continue.
- Continued Investment In AI – Companies are investing aggressively in AI which helped to boost overall capex of S&P 500 companies to$258 billion in 2Q24, and above $1 Trillion over the trailing four quarters! While investors are increasingly focused on AI monetization, the big players in the industry are pouring billions of dollars into their AI buildouts. We expect this trend to continue in 2025 (and beyond), as the AI revolution remains in the early stages of adoption. This spending should continue to boost corporate profitability.
- Record U.S. Oil Production – The U.S. remains the largest energy producer in the world—producing nearly 13.5 million barrels of oil per day. And with President Trump back in office, there will be a focus on accelerating this trend by rolling back some of the less favorable regulations. The end result: increased supply should lead to lower oil prices, which would be beneficial for both consumers and businesses going forward. And with energy prices likely to move lower, this should keep a lid on inflation.
Bottom Line | Navigating political uncertainty can be challenging, particularly when emotions are involved. But don’t lose sight of the big picture when it comes to your investments. While politics is an important consideration, it is not the biggest driver of economic growth or market returns. Avoid making knee-jerk investment decisions – stay focused on the fundamentals and your longer-term objectives.
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