Mr. Lowe, Mr. Spangler, Mr. White, and Mr. Branstad are discussing the asset classes and portfolios they manage. The views expressed are as of November 21, 2024, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. The commentary should not be considered as investment advice or a recommendation of any particular security, strategy, or product.

The concepts in this presentation are intended for educational purposes only. They may not be suitable for your clients' particular situation. The suitability of any specific product or strategy will be dependent upon your clients' particular situation.

Branstad: Hi, everyone. Thank you for joining us today for Thrivent Asset Management's capital markets perspective on our outlook for 2025. I'm Jeff Branstad, portfolio manager of Thrivent Model Portfolios. I'm joined today by Steve Lowe, chief investment strategist, David Spangler, director of mixed asset market strategies and Kent White, head of fixed income.

The U.S. election results already have impacted markets. How have our equity markets reacted, David, to the Republican sweep and what do you expect in 2025 given the expected policy changes?

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—also too 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.

Branstad: What are some kind of the positive and negative expectations for how the new administration might impact markets?

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.

Branstad: So, Kent, how about on fixed income? What are the implications for Treasuries and credit from the new administration?

White: Trump's election is widely viewed to be positive for growth, which generally puts upward pressure on interest rates. And president elect's economic plans are also likely to include a pretty sizable increase in the deficit and a large increase in Treasury supply as well to finance these deficits.

Yields have been moving higher anticipating this. And, Trump is also running on 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. We're still not expecting a recession. The economy has been remarkably, remarkably 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.

Branstad: Let's pivot to the Fed. The Fed has been concerned about inflation for a very long time now. But inflation has eased substantially.

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.

What that has done, it's allowed the Fed to cut interest rates. So, it can help stimulate the economy. Recently the inflation data, however, has been a little bit more mixed. 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.

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.

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.

Branstad: Kent, with the slower pace of cuts, markets are also expecting fewer rate cuts than they were earlier this year. What do you expect from the Fed in 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. 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.

Branstad: As we've discussed, the U.S. economy has been quite resilient and actually performed pretty well. How about the global economy, David? And what are your expectations for that going forward, especially considering or especially thinking about Europe and China?

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.

Lowe: Germany was kind of the industrial center of Europe. And that is weakening.

Spangler: So, Germany is far more geared and levered to exports and exports to China. 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.

Branstad: Kent, what's your outlook on Treasury rates?

White: You know, 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 4.5% range through 2025. Unless we were really to begin to see some softening in labor markets or the broader economy.

Branstad: What about the Treasury 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.

Branstad: Let's move on to equities, David. Equities have been strong for the second year in a row. What in your view has been the driver in the market?

Spangler: Well, 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 in 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.

Branstad: Strong markets. These very strong markets have left valuations quite rich. Does that even matter anymore? What are your thoughts there?

Lowe: Area 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. When valuations are rich like they are now, expected long term returns fall. 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. Markets are rich, but that doesn't really impact returns in the short term.

Spangler: Yeah. And 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.

Branstad: Yeah. All of a sudden it just doesn't look so expensive anymore. The markets, though, have remained relatively narrow. Do you see a path to that broadening?

Spangler: Never say never.

Branstad: Okay.

Spangler: And, 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, as been mentioned, 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: So, it's still a quality story. Quality continues to perform well.

Spangler: Yeah. Quality performs well across all segments. But I think particularly in the highest quality companies, what you're going to find in large-cap.

Branstad: We talk a lot about the importance of earnings growth. What's your outlook on earnings growth, Steve.

Lowe: Yeah. 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'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 cyclica—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. 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.

Branstad: We've talked a lot today about interest rates and Treasuries, but we haven't really discussed the credit markets much. Kent, credit markets have been pretty rich as well. How are you positioned in credit?

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.

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 those 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.

Branstad: For an investor that would be looking for yield, what would be looking attractive for them right now?

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. 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.

Another area that we really like are tax exempt municipal bonds, high quality munis. You have tax equivalent yields now that are in the 5 to 6% range depending on your tax bracket, which we find very attractive, even if tax rates are potentially lower next year.

Lowe: You know, another area that looks, attractive are preferred, particularly in financials and banks, you know, banks are well-capitalized right now. And there you can pick up significant yield.

Branstad: Do you have concerns anywhere, Kent, in credit?

White: We were 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.

Branstad: What are some of the key items? This is for everybody here. What are some of the key items you think investors should be focusing on in 2025?

Lowe: Sure. 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.

White: You know, 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 that's those are probably the three things I'm most focused on right now.

Spangler: You know, 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 too then, on the other side, is tariffs. Tariffs could also be inflationary as well. But possibly not pro-growth.

Branstad: Let's finish here today by going through our mixed assets positioning. Steve, broadly, how are you positioned?

Lowe: Yeah. 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.

Branstad: David, drilling into equities. How are you positioned within equities?

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 we’ll 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.

Branstad: Kent, how about 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.

Branstad: All right. Kent, David, Steve, thank you all for your, sharing your insights and your perspective today. And thank you all for joining us, and we hope to see you again soon. Happy holidays.

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