In 2024, markets gained greater certainty regarding the Federal Reserve’s direction, inflation and the results of the U.S. presidential election. The Federal Reserve embarked on highly anticipated interest rate cuts, while inflation continued its downward trajectory. Here is a summary of how our Model Portfolios adapted to these themes over the year, along with a glimpse of our outlook as we move into 2025.
Equities: U.S. Large Cap Equity
- Macro: Central bank easing, resilience in the U.S. consumer and continued strength in earnings provided tailwinds to U.S. equity markets through 2024. As of the 3Q24 earnings season, U.S. large cap companies reported 5.8% growth in earnings, marking the fifth consecutive quarter of earnings growth.1 Moreover, corporate guidance remains positive, with over 50% of the S&P 500 increasing their forward earnings guidance.
- Tactical positioning: We held an overweight to U.S. equities of 2%-4% over the course of the year, with a preference for large cap equities. In 1H24, we maintained a growth bias in portfolios, and we incrementally added to core and value equities to balance styles in anticipation of market broadening. More recently, we diversified our market capitalization exposure by adding to small and mid cap equities. We remained underweight international developed markets as the macroeconomic environment remains challenged given weak growth, consumer demand and corporate earnings.
- Strategic positioning: We held a modest overweight to U.S. equities over the past year, with a preference for large cap equities. These portfolios remained balanced in style exposure throughout the year and leveraged active managers to find opportunities. Like the tactical models, we remained underweight in international developed markets.
- Outlook: We expect an extension in the U.S. business cycle, which supports a broadening out of earnings growth within U.S. equities beyond the Magnificent 7 and across market capitalizations. According to our Guide to the Markets, the S&P 500 ex-Mag 7 is expected to deliver 13% earnings growth in 2025 vs. 3% in 2024.2 Moving forward, our conviction in U.S. exceptionalism remains intact and we continue to prefer high-quality U.S. equities while diversifying across styles and size.
Fixed Income: Extended Credit
- Macro: The high yield bond market has seen a rise in credit quality since 2008, and this year we’ve seen more upgrades than downgrades and low default rates.3 This favorable environment has supported credit markets, leading to tighter spreads while maintaining relatively stable yields of approximately 7%-8%. Further, as seen below, only ~2% of high yield issuances are set to mature in 2025, presenting a favorable backdrop for the asset class.
- Tactical positioning: We positioned our portfolios to lean into extended credit, expressing an overweight of about 10%-14%. Throughout the year, credit spreads continued to tighten, suggesting that the market perceived low risk in the asset class given its stronger fundamentals. Despite the lower perceived risk of the asset class, yield levels remained consistent with the historical average, providing higher risk-adjusted returns. Our high yield and multi-sector income strategies provided flexibility to access a diversified opportunity set within extended credit.
- Strategic positioning: We positioned portfolios to remain balanced in the fixed income market. As interest rates remained elevated versus the prior decade, core bonds continued to provide a steady stream of income and diversification. Our active positioning allows us to access high-quality traditional bonds while also benefiting from exposure to the securitized and credit markets.
- Outlook: Broadly, across our portfolios, we believe that fixed income continues to be important for diversification. We continue to monitor the interplay between interest rates, labor market conditions and inflation as we consider our exposure to longer-duration assets. In the meantime, investors may continue to benefit from clipping a still-attractive coupon.
Overall, with the federal funds interest rate now lower than it was a year ago, holding cash and money market instruments have become less appealing, as reinvestment risk is an important factor to consider. Multi-asset portfolios offer a compelling long-term return within this environment: our 2025 Long-Term Capital Market Assumptions forecasts a 6.4% annualized return for a global 60/40 portfolio, while cash is expected to deliver 3.1% annualized return over the next 10-15 years. In our outlook, every major asset class stands to outperform cash over this time.