“Even with its rate cuts, the Fed today is still in a restrictive monetary stance and likely believes that it is already sufficiently positioned to fight inflation,” says Haworth. “The labor market is likely the Fed’s primary focus today, which means the next interest rate move is more likely to be a cut, particularly if we see signs of job market weakness.”
Implications for investors
Throughout 2024, the economy’s ongoing strength helped corporations meet or exceed earnings expectations. For the second consecutive year, the S&P 500 generated total returns topping 25%.6 Haworth says the earnings outlook remains favorable. “There appears to be a sufficient level of economic growth to keep the market buoyant, although likely with a degree of volatility.”
In the current environment, investors may wish to consider a modest overweight in equities and a modest underweight in fixed income, with a neutral position in real assets. Haworth says this reflects an economic environment that, in the near term, appears to put equities in a position to outperform fixed income.
If economic growth tracks closely to the previous two years, Haworth says there may be some market rotation that works to the benefit of stocks that in 2023 and 2024 underperformed the broader market. “Attention may turn to where earnings are growing,” says Haworth. “We may see more beneficiaries going beyond those technology companies that dominated the markets in 2023 and 2024 based on the artificial intelligence investment boom.”
Consider reviewing your current portfolio with your wealth management professional to determine if it’s consistent with your long-term goals and positioned to meet your needs in today’s market and economic environment.
Note: Diversification and asset allocation do not guarantee returns or protect against losses. The Standard & Poor’s 500 Index (S&P 500) consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The S&P 500 is an unmanaged index of stocks. It is not possible to invest directly in the index. Past performance is no guarantee of future results.