Insights

From the Investment Policy & Strategy Group

Equities

While valuation levels are elevated, we look for equities to generate returns of 7.5% annualized over the next three years and maintain a slight +5% overweight vs. benchmark.

Growth & Value

Style: We generally recommend a balanced allocation to both growth and value-oriented investments, as there are compelling opportunities for stock pickers in both style buckets. We expect significant dispersion that transcends growth/value and is determined by individual company management team efforts to boost productivity and profit margins. Stock selection will be more important than style selection.

Small Cap & Large Cap

We see a three-part catalyst for a broadening of the market to small caps. First, likely changes in regulatory policy will spur M&A activity. Traditionally, smaller companies benefit as the target of M&A. Second, the continued (albeit slow) easing of interest rate stress will accrue to the benefit of small caps. This playbook has unfolded several times—any drop in rates is met by a rally in small caps. Third, the cost of access to productivity-enhancing technologies will spread to smaller companies, putting them on more even ground in seeking profit margins. This will help to narrow the earnings gap between large and small companies. We continue to recommend an allocation to small caps that is modestly above benchmark/policy targets.

U.S. & Non-U.S.

While many great companies based outside the U.S. have compelling valuations, we remain cautious about the global growth outlook. Continued geopolitical conflict, changes in political leadership, regulatory burdens, and less-compelling demographics in China and Europe present macro headwinds. However, numerous excellent companies (many with compelling valuations) are domiciled on exchanges outside the U.S. While the portfolio diversification benefits of globally diversified investing have waned, they do still exist. Over the past ten years, the correlation between the MSCI ACWI Ex-U.S. Index and the MSCI U.S. Index is 0.46. For U.S. investors, we see non-U.S. investing as an alpha opportunity more than a beta opportunity. We continue to advocate for modest exposure to non-U.S. equities through active management. For global investors, we recommend market weights across geographies for beta management but seek a high active share, allowing the pursuit of excellent companies. For all investors, non-U.S. investing is a rich alpha opportunity set, though for benchmark-aware investors, careful attention must be paid to geographic allocations.

Fixed Income

We expect a slow path to lower rates, as inflation will be slow to decline and employment has remained stable. We expect some volatility for bonds, with rates trading in a wide range. The Fed and markets will be heavily data-dependent and markets are apt to overreact to each data point. If employment weakens, the Fed will respond quickly. Overall, this is a good scenario as rate pressure will eventually be alleviated, with the economy still on solid ground.

Market Monitor

This table provides a comprehensive view of returns across various markets across time. It is paired with a snapshot of economic data, allowing a comparison of annualized returns while referencing the coincident economic conditions.

¹ Table rows are sorted by 3-year annualized returns. Source: Bloomberg. Data is as of 9/30/2024.