What are the potential economic ramifications of the recent election? Coming up, our experts will share their thoughts.

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From Thrivent Asset Management, welcome to Advisor’s Market360™, a podcast for you, the driven financial advisor.

The election is over, and President-elect Trump will take office in January. And with the House and Senate both with Republican majorities, there could be many changes afoot. How will the new administration govern? Some of the many areas that might be affected include regulations, taxes, the deficit, immigration and foreign policy. The big question for us at Thrivent Asset Management is: how might those changes affect the economy and our clients’ portfolios?

To help us get a feel for what might happen in 2025, we have three Thrivent Asset Management experts: Steve Lowe, Chief Investment Strategist, David Spangler, Director of Mixed Asset and Market Strategies, and Kent White, our Head of Fixed Income.

Without further ado, let's get into it…

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The upcoming change in administrations has already impacted markets. Given the expected policy changes coming in 2025, what should we expect going forward? Here’s Spangler:

(Spangler) “The day after the election, it was a very strong reaction to the Trump victory for the areas of the market that would benefit from Trump policies. So, areas such as financials, small-caps, they performed very well and interestingly, large-cap tech performed well in that day as well. Since then, however, it's not actually tracked, as one might have expected and that small-caps have not performed as well.”

We also wanted to hear Spangler’s expectations for how policies communicated by the new administration might impact specific sectors in the year ahead.

(Spangler) “Well, some of the positives that can come from Trump policies would be maintaining the tax cuts from 2017. Perhaps lower tax cuts as well. Deregulation I think, could be very important to the markets, as well. And, you know, I think that areas such as financials and, and traditional energy, aerospace, defense, industrials like, steel, those can do well. And I think that it's a situation where also globally the U.S. will maintain its dominance. So, I think that as we come into 2025, it's not actually that different from what we've been seeing over the last couple of years, which is large-cap tech, growth, domestic continue to outperform as we come into 2025.”

We also wanted to hear how the policies of the new administration might affect fixed income, so we turned to White:

(White) “Yields have been moving higher anticipating this. And, Trump is also running pretty large across-the-board tariffs, which could be inflationary in the short run at least. So that's also likely contributed to the increase in inflation expectations and a recent increase in rates as well. But we're still not expecting a recession. The economy has been resilient through the Fed's hiking cycle, which I think most people did not expect when the Fed was raising rates as much as they did. You know that typically, we see a recession after something like that. But right now, we're still not seeing any signs of weakness that concern us too much.”

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The U.S. Federal Reserve, or Fed, plays a big role in the economy. Its policies have helped to ease inflation but by how much? Here’s Lowe…

(Lowe) “If you look the most popular measure of inflation, which is the Consumer Price Index, is down by about, you know, close to two thirds. You've seen inflation expectations in the markets go up. And that's due to stronger than expected growth, particularly future growth and expectation that they will accelerate, possibly this year with less regulation and more supportive government policies.”

You heard Lowe mention the Consumer Price Index: that’s the measure of the average change over time in prices paid by consumers for goods and services.

During the campaign, President-elect Trump spoke frequently about tariffs and immigration policies. How might new actions in those areas affect inflation? Again, here’s Lowe:

(Lowe) “Tariffs could add to inflation. That's really kind of a one-time hit. And the other side is tariffs could actually dampen demand and slow growth. And then there's also less immigration. And immigration, particularly over the last few years, has been key to the labor force. In other words, there's a shortage of workers that ease the shortage in the shortage that cause wages to go up.”

We wanted to know if Lowe saw some bright spots in the economy…

(Lowe) “People are still spending. You know, they still want to go out more than they did before. It's restaurants. It's air travel. So overall the trend is really good, but it's bumpy and uneven even and sticky in pockets in the so-called last mile. In other words, getting inflation down to the 2% target is going to be very hard. I think you have upward pressures over the next year. So, what this means is the Fed is going to be slower to cut rates.”

As Thrivent’s head of fixed income, Kent White keeps very close tabs on the actions of the Fed. Here’s what he is anticipating for 2025:

(White) “To Steve's point, inflation is unlikely to follow a straight line all the way down to 2%, and it may take a lot longer to get there than maybe the market is pricing in right now. In the near term too, we also have seen some seasonal ticks up in inflation the last few years in the first part of the year — January, February, March of last year, we saw inflation spike a bit. It was the same thing that we saw the year prior. So recently, inflation has been just a little bit moderately higher. The monthly prints. And so, a little concerned about what we might see going into the beginning of next year, too. So, and I think the Fed is probably well aware of those kind of issues. In terms of the market, it is definitely backpedaled from the number of rate cuts it was expecting for next year.”

We wanted White’s take on how the Fed might proceed with rate cuts.

(White) “So I think the Fed still believes their policy rate is somewhat on the restrictive side and would like to cut, but I wouldn't be surprised if they slow the pace of rate cuts down a bit, just to get a better sense of how inflation and the labor market are tracking, and where the new administration's policy ultimately lands and its potential impact on the economy.”

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So far, we have been focused on the U.S. economy. We want to broaden our discussion to include the global economy with a special focus on Europe and China. Here’s Spangler:

(Spangler) “I think that internationally it's weak—and likely weakening—which is to say that the U.S. economy now has some additional supports to it economically. But we're seeing less supports internationally. You know, this has been the case for quite a while. Just in terms of the markets themselves over the last five to six years, we've been pretty underweight international. A lot of the reasons have to do with the weakening economy within China.”

We wanted to dig a little deeper on the issues facing these economies. Again, here’s Spangler:

(Spangler) “China has structural long-term issues, such as demographics and a lack of innovation that are going to inhibit their growth in inside of Europe. Europe is also struggling, particularly France and Germany. And now we also are having deglobalization and onshoring within the United States. All of this is working against Germany and Europe, overall. Energy prices are, of course, are much higher. And so, from a competitive standpoint with higher wage costs as well, much less flexibility within their labor force. It all, it all sort of translates to very sluggish or negative growth within Europe. And so, we think that there will be continued distancing of the United States economy to the rest of the world. And that can then be reflected in the equity prices on the relative markets, which is why we continue to remain underweight international relative to domestic.”

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Returning to the U.S. economy, we wanted to get White’s thoughts on Treasury rates.

(White) “I think we're probably going to see another year of volatility in the treasury rate market. There's just a lot of domestic and global macro uncertainty right now. Especially here in the U.S. around the potential impact of tariffs and immigration policies. And yields are likely to remain in the 4 to 4 and half percent range through 2025. Unless we were really to begin to see some softening in labor markets or the broader economy.”

We also wanted to get his thoughts on the Treasury yield curve…

(White) “As for the Treasury curve, I think we're likely to see the curve steepen, meaning shorter duration Treasuries or Treasury yields are likely to decline more than longer duration Treasuries. This view is really based primarily on our expectation for higher fiscal deficits, greater Treasury supply, as well as the fact that the Fed is likely to still be cutting rates, maybe not as much as the market expects it to, but that will bring the front end yields lower.”

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Next, we are turning our attention to equities—which have been for the second year in a row, quite strong. We wanted to get an expert’s opinion on what has been driving the market. Here’s Spangler:

(Spangler) “It's really come down to corporate earnings and the resiliency of the U.S. consumer. And the U.S. economy overall has allowed the markets to perform very well. Coming into 2025, I actually believe that's what we'll continue to see is that quality, and even large-caps and tech, can continue to do well within the market. Small-caps are considered to be far lower quality overall. Now, there are quality companies within small-cap indices. And I think that there will be pressures on small-caps as we come into 2025, such as, higher rates and perhaps some areas of the economy that could slow. But in general, I do expect to see more of a continuation of what we have experienced over the last couple of years coming into 2025.”

These very strong markets have left valuations quite rich. We wanted to know: do valuations even matter anymore? Here’s Lowe:

(Lowe) “Valuations are quite rich. If you look at price earnings, a common measurement, as well as the median. But it doesn't really matter in the short term—as David is fond of saying, valuation is a condition, not a catalyst. So in other words, markets can stay rich for quite a while. The risk right now is that growth expectations are already pretty, pretty high, you know, so how could you possibly get growth? Productivity improvements. We're on a pretty good productivity cycle right now. That's the potential of AI, to improve productivity right now. That's really just potential. And then changes in government policy can impact earnings a lot. You know, the regulatory environment, the tax environment, so, markets are rich, but that doesn't really impact returns in the short term.”

Spangler had this to add…

(Spangler) “By some estimations, if we were to get corporate tax cuts in addition to what we had from the 2017 tax cuts, if they went for example, from 21 down to 15%, we may not get that, but if we did, it is estimated within the S&P 500 that that could raise earnings per share by as much as 4% for the overall index, which then means that it's not as rich.”

Because the market has been dominated by the big tech names, it has been relatively narrow. We wanted to know if Spangler sees a path to a broadening of the market.

(Spangler) “It's entirely possible. Certainly. Enhanced economic growth. Different types of policies that can come from the Trump administration could favor other areas of the markets, such as financials, industrials, materials, even real estate and biotech. It could help small-caps and mid-caps as well. So yes, you can see, a broadening out, within the market. Also too, if AI doesn't continue to live up to its expectations, then you could see a broadening out to the remaining 493 companies within the S&P 500. Those are things that could encourage broadening out within the markets. But I think in general, if there is a broadening out, I don't think it's all the way down in the market cap spectrum and down in the small-caps, maybe in the mid-caps and maybe into the remaining companies within the S&P 500. But I think for, you know, in my view, for the foreseeable future, still the momentum is within large-cap and within large-cap tech.”

Lowe summed it up:

(Lowe) “It's still a quality story. Quality continues to perform well.”

The importance of earnings growth should not be underestimated. We wanted to get Lowe’s outlook for potential earnings growth in 2025:

(Lowe) “Earnings have been solid. 2024 earnings are expected to be up about 9% on sales of 5%. But there are some signs of softening. If you look at the number of companies that have exceeded expectations over the last quarter, that that's fallen a little bit, a bit below average. And the breadth has been very low. So if you look at market earnings overall for the S&P 500, it's mega-cap tech that are driving a large part of that. And rolling kind of forward one year expectation for that area is up about 30% growth. So that's very, very strong. And if you look at the rest of the S&P 500 outside of the mega-cap tech names, that's only about 7%. You know cyclical—their earnings are down. Financials are doing okay mid-single digits. Small-caps are flat. And their earnings are really, a challenge in that area. You know, risk, which we talked about, is AI expectations, if they disappoint for large-cap tech, that'll be problematic. But earnings are really important because they drive markets over time. That's essentially what you're, you're buying when you buy a stock is the promise. You know, the earnings stream in that. And ultimately, I think for markets to go up, we have to see a broadening of earnings growth, you know, into the more cyclical parts of the market.”

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Earlier in the episode, we discussed interest rates and Treasuries but have yet to cover credit markets. Let’s let White explain his position on credit markets:

(White) “Valuations are probably our biggest focus right now. We've seen a pretty strong post-election rally in virtually every credit asset class to levels that we haven't seen in decades, like investment grade credit is as tight as it's been since pre-2000. So, we're being a little bit more cautious around credit and a little bit more up in quality. Just because we don't feel like we're getting paid as much as we should be or normally are to take additional credit risk. But most of those asset classes, really, from a valuation perspective, look pretty rich to us right now. So, whether it's within these different asset classes, we’re generally up in quality and, or just in some of our multi-asset class portfolios, we're also kind of skewing a little bit more to higher quality, whether it's Treasuries or securitized, it's skewing more of our portfolio towards those, those areas.”

For investors who are looking for yield, White and Lowe have some suggestions:

(White) “Well, from a pure yield perspective, there's plenty of opportunities. I think that's the distinction here is that yield across fixed income really looks very attractive. So, we like fixed income and the benefit it provides in a diversified portfolio, especially the downside protection that it might have in case things go in a direction that we're not anticipating.”

(Lowe) “Another area that looks attractive are preferreds, particularly in financials and banks, you know, banks are well-capitalized right now. And there you can pick up significant yield.”

We would be remiss if we didn’t ask White about concerns he has about credit.

(White) “Oh well I think we're just talking about how valuations are our primary concern. We don't have a lot of spread cushion at these levels. Meaning that if spreads were to widen from here, your excess return over just owning a government bond could be negatively impacted and could actually eat into your total return. So that's one area that we're definitely a little bit more concerned about.”

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Next, we wanted to hear how each of our experts are positioning assets. We will start with Lowe:

(Lowe) “Big picture, we're moderately overweight equities. That includes public equities. We also have a little bit of private equity in our mixed asset funds and within fixed income within the mixed asset funds, duration. We’re not taking a lot of duration risk, particularly on the long end, you know, 10-year Treasuries, we're a little bit overweight risk on the short end because we still expect the Fed to cut, but gradually. And then we're modestly overweight credit risk.”

Next, we will drill down on equities. Here’s Spangler:

(Spangler) “Well as Steve just mentioned, we're overweight equities. We're at about our long-term strategic overweight within equities. We have about 2% in public equity overweight and about 1% in private equity. We're continuing to add to private equity. And as we continue to add to private equity, we take some away from the public equity side, primarily in the area of small-caps. We're underweight international by some 4 or so percent, and we intend to stay at least that, underweight, for the foreseeable future. And within equity itself, domestically, we're overweight large-caps. We're overweight mid-caps and underweight a little bit on small-caps. Actually, we're more neutral on small-caps at this point. We added a point of equity on more recently after the election, but we wanted to add a point of equity on because of some pro-growth types of policies that can come out of the new administration. We put the point into small-caps, more as a risk mitigating type of strategy. We were a little underweight and now we're more neutral. But I think that over the intermediate or longer term, we’ll probably bring that weight in small-caps back down a little bit. If small-caps do well, then I do expect also too, mid-caps to perform reasonably well and know maybe not entirely keep up with small-caps, but they'll perform well too. And we're overweight mid-caps and will benefit from that. But I think that being overweight large-caps is a more of a higher quality area of the market to be in. And so, we don't actually intend to change that overall allocation.”

And we will let White describe his positioning on the fixed income side:

(White) “Right now it's difficult to be underweight credit given our generally positive outlook for the economy in 2025, even though valuations are a little stretched. However, like I said earlier, we have been moving up in quality or more defensively positioned in certain parts of the credit curve, you know, favoring the front end. And we're keeping a little dry powder in the form of cash and U.S. Treasuries in the event we see a better opportunity. Add back a little bit more risk.”

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To wrap up this episode we wanted to get our experts’ opinions on what investors should be focusing on in 2025. We will start with Lowe:

(Lowe) “I think, looking through some of the volatility and headlines, if you remember the President-elect’s first term, there are a lot of things posted on what was then Twitter. And that would market to react very quickly. I think that, you know, keep your eyes on the fundamentals in the economy and have a kind of a longer-term view.”

Next up is White:

(White) “You know, I, I think we are going to see some headlines. And I think the ones that I probably worry most about are headlines around trade policy and tariffs and kind of any type of trade war that we might get into with some of our trading partners. So that's one thing I think I will definitely be watching. Again, yields just kind of just to drive that point home, just investors should focus on where yields are and kind of get those yields while they can. They may not always be here. And then finally just we're always watching the labor markets. Just I think that's going to be a key thing, especially for the whatever the Fed is going to do in 2025. So, those are probably the three things I'm most focused on right now.”

And we will let Spangler bring us home…

(Spangler) “I think from my perspective, it's kind of a tension between what we've talked a lot about. Pro-growth policies, but pro-growth policies themselves could also be inflationary. If it's inflationary, if interest rates rise then that actually could be negative for the for the markets and negative for particular areas within the market, like small-caps. It's one of the main things I think to pay attention to is, is rising rates, as they could be influenced by more pro-growth policies, but also to then on the other side is tariffs. Tariffs could also be inflationary as well. But possibly not pro-growth.”

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We hope you enjoyed this 2025 outlook. Once again, we would like to thank Steve Lowe, David Spangler and Kent White for their insights. What did you think of this episode? Email us at podcast@thriventfunds.com with your feedback or questions for our experts. Want more episodes of Advisors Market360™ and other market and investing insights? Visit us at thriventfunds.com, where you can learn how we can partner with you, the driven financial advisor. Bye for now.

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