Market briefs
Breaking insights on the economy, market volatility, policy changes and geopolitical events.
Five reasons for investor optimism in 2025
AS WE BEGIN TO LOOK AHEAD TO 2025, investors face many unknowns, ranging from geopolitical risk to potential policy changes in Washington. “Amid all that uncertainty, though, there are bright spots breaking through that we think could help maintain the current bull market through 2025 and well into 2026,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.
Two new Chief Investment Office (CIO) reports, “Investment Insights” and “Viewpoint,” highlight several factors supporting investor confidence. “We call them “5 for 2025,” says Hyzy.
1. Strong corporate earnings. U.S. corporate resilience should continue to drive earnings growth through 2025 and into 2026, Hyzy believes.
2. A wider playing field for equities. The narrow band of mega technology companies that has driven much of S&P 500 growth lately should expand to include “the best of the rest”—a broader array of companies with improving fundamentals, he says.
3. Further rate cuts. In keeping with the Federal Reserve’s quarter-point interest rate cut on November 7,1 “We expect measured, moderate interest rate cuts to continue in 2025, creating a potential boost for small cap stocks and a new cycle of mergers and acquisitions among mid-sized companies,” Hyzy says.
4. Normalized bond markets. An inverted yield curve, with short-term bonds paying higher interest than long-term bonds, has added to fixed income volatility over the past couple of years. “A return to more normal yield curves, with long-term rates steeper than short-term rates, could provide some normalcy for bond markets,” he believes.
5. Disruptive innovation. “Artificial intelligence and other technologies should continue to unfold across a variety of industries, helping improve profit margins, operating leverage and productivity,” Hyzy says.
An advisor can help you determine which of these factors could play a role in your investment strategy, Hyzy suggests. And because market volatility is always possible, make sure any decisions support diversification across and within asset classes.
For more timely market insights, tune in regularly to the CIO Market Update audiocast series, and watch for more Year Ahead Outlook insights to come in the weeks ahead.
What should investors expect from the coming election?
IN AN ELECTION OFFERING TWO STARKLY DIFFERENT VISIONS for the United States, it’s easy to assume that the future direction of the economy is dependent on November’s results. But while the importance of our choices for the presidency and Congress shouldn’t be minimized, investors may find reassurance in the underlying strength of the U.S. economy, according to Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. Hyzy recently spoke with Libby Cantrill, head of public policy for the global bond firm PIMCO, to exchange perspectives on the ways the vote could affect markets and the U.S. economy – as well as the ways it’s unlikely to have an impact.
How is the election shaping up?
With a tight presidential race and both parties defending narrow and vulnerable majorities in the Senate (Democrats) and the House (Republican), all scenarios are in play, Cantrill says – either a sweep by either party or a divided Congress. Both parties could lose control of their respective Houses, which would be a first in U.S. history. She adds that we may very well not know who the next president is on the night of the election. If that happens, the challenge for voters may be to recognize the need for careful counting and to trust the system as the process plays out.
What are the implications for industries, inflation and budget deficits?
Despite sharp and well-publicized differences, the parties share some basic economic positions, such as the need to support U.S. semiconductors, artificial intelligence and other technologies. “I don't see that radically changing, whether it's a Republican or Democratic administration,” Cantrill says. In the energy sector, a Republican win could favor traditional fossil fuels through eased drilling restrictions, while Democrats would likely extend the push for renewable energies. Still, she observes, there are many people from both parties who realize that both sources of energy are needed.
Both Republicans and Democrats offer policies that could come with unintended consequences. Proposed higher tariffs under a Republican administration could spur price increases even as the Federal Reserve seeks to keep inflation coming down, Cantrill says. At the same time, the higher corporate taxes being discussed by some Democrats could pose a challenge to economic growth.
Neither party seems inclined to seriously address a budget deficit that now represents more than 6% of U.S. GDP1, Cantrill says, adding that with one side pledging tax cuts and the other increased spending, the deficit could rise to 7-8% of GDP over the next decade. The dollar’s status as the world’s global reserve currency – and, in particular, the structural demand for U.S. Treasurys as the world’s reserve asset – offers the U.S. unique protection, Cantrill believes. But she notes that high deficits, if unchecked, could eventually become a drag on the economy.
How can voters navigate the uncertainty?
While elections are vital in determining the political and economic direction of the country, history suggests investors should keep the potential impact on their portfolios in perspective. In past presidential races, however contentious and regardless of outcome, Cantrill notes, markets have historically gone up after the votes are counted.
According to Chris Hyzy, this pattern will likely hold true following the current election, thanks to the dynamic nature of the U.S. economy. “This ‘innovation machine’ continues to plow through most every challenge, and long-term opportunities for investors run wide and deep,” Hyzy says. “What's most important is creating and sticking to a disciplined investment strategy designed to achieve your long-term goals.”
For additional insights on how the election’s potential impact on the economy – and what the outcome might mean for the U.S.’s current healthy profit cycle and the Federal Reserve’s next moves – watch Chris Hyzy’s conversation with Libby Cantrill, head of public policy at PIMCO.
What the first rate cut in years means for investors
AFTER FOUR YEARS OF RATE HIKES, the Federal Reserve (the Fed) cut the federal funds rate by 50 basis points amid ongoing signs of cooling inflation and a slowing economy.1 While aimed at supporting a softening labor market, “this widely anticipated cut aligns with market expectations after historic increases in recent years to counter inflation,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.
More to come. “This is the start of a rate cut cycle. Look for two additional cuts in 2024, followed by several more in 2025,” says Matthew Diczok, head of Fixed Income Strategy for the Chief Investment Office (CIO). “While these should help bring inflation to the Fed’s 2% target by early 2026, we don’t believe the Fed is worried about hitting 2% exactly, as long as they see a continuing disinflationary trend. The Fed is more concerned with not slowing the economy too much.”
The outlook for stocks. “When rates begin to fall, that has generally been positive for equities over the following 12 months,” Hyzy notes. Industries such as housing, automotive and financials should benefit as consumers find borrowing less expensive, Diczok adds. And lower credit costs could also keep spending strong across the consumer sector.
“Investors may also find potential opportunities in dividend-paying stocks, which have historically done well as rates decline,” Hyzy suggests. While history doesn’t ensure future results, top dividend-payers in four previous cutting cycles beat the S&P 500 index by 7.3% one year after the first cut, and 12% after three years.2 Another potential opportunity: Small cap stocks. “Lower rates improve access to capital, and small companies have recently regained earning momentum after several disappointing years,” he says.
Implications for cash and bonds. “Income-seeking investors who have received attractive yields on excess cash in recent years may want to consider shifting to longer-term bonds before short rates go lower,” Diczok suggests. “Bonds have been a good diversifier from stocks and, unlike cash, can offer a fixed, reliable income.”
Look for buying opportunities. Amid these short-term considerations, don’t overlook the long-term implications as rates (and the economy) normalize. “We see these cuts as helping set the stage for a long-term cycle of growth across industries,” Hyzy says. “Accordingly, investors should view periodic market weakness as an opportunity to strategically add to their long-term portfolios.”
For more timely insights on interest rates and the markets, read “And so it begins,” from the CIO and tune in to the CIO’s Market Update audiocast series for regular updates.
What to know about infrastructure investing 2.0
FOR SOME INVESTORS, INFRASTRUCTURE MAY SOUND SOLID, predictable and a little dull. “Traditionally, most people associate infrastructure investing with toll roads and utilities, but the opportunities have significantly expanded with structural changes in the economy, including the energy transition, digitization and changing demographics,” says Anna Snider, head of Investment Manager Selection and Sustainable and Impact Strategy for the Chief Investment Office (CIO), Merrill and Bank of America Private Bank. “In addition to being able to provide the potential for steady income and help minimizing the effects of an economic downturn, infrastructure investors may now have greater opportunity for capital appreciation and growth, given the significant amount of capital required to address these structural trends,” she notes.
While bridges, roads, airports and water companies remain key components, infrastructure increasingly refers to areas such as renewable energy and the rapidly digitalizing global economy. “Between 2023 and 2027, global data demand is expected to more than double, thanks to cloud computing, 5G and artificial intelligence,”1 Snider says. The money needed for new data centers and power sources, along with building and maintaining traditional infrastructure, adds up to an estimated $15 trillion global “investment gap,”2 she notes. “Projects run the gamut from energy and storage distribution to electric-vehicle charging and energy-grid modernization.”
Two ways to invest
This massive need creates potential opportunities for investors across publicly traded and private markets, Snider says.
Public investment opportunities might include shares of established companies such as water, gas and electric utilities, or communications companies. These companies are likely to benefit from the surge in demand for energy and data.
Private investment opportunities represent an opportunity for qualified investors to participate from an early stage in companies developing new technologies in areas such as storage batteries, clean energy, carbon capture and more. “The need for private capital to develop, mature and scale these new areas leads to a potentially significant growth opportunity,” Snider says.
However, along with higher return potential, private investment brings added risk, she notes. For example, as technology rapidly evolves, “There’s a risk that an asset will become obsolete before the end of its useful life.” Infrastructure investment may be affected by changes in political policies, and young companies in need of funding for growth may be especially susceptible to changing interest rates. To help balance these risks, it’s important to invest in infrastructure as part of a broadly diversified portfolio designed around your personal goals, Snider adds.
For a closer look at the world’s expanding infrastructure needs and potential opportunities for investors, read the CIO’s recent Investment Insights report, “Paving the way: Expanded opportunities in infrastructure investment.” And be sure to tune in regularly to the CIO’s Market Update audiocast series for more on the markets.
Women’s Equality Day challenge: Take our pop quiz
BUSINESS, POLITICS, ENTERTAINMENT, SPORTS: These are just a few of the arenas in which women have left their marks this year, breaking barriers, setting ticket-sale records, advocating for better pay. But the progress isn’t limited to just a handful of pop stars, athletes, filmmakers and politicians; American women everywhere have made great strides financially and professionally.
Why does this progress matter? For one thing, “Stronger gender inclusivity in corporate leadership and management yields more competitive company performance,”1 says Sarah Norman, head of Sustainable Investing Thought Leadership for the Chief Investment Office (CIO), Merrill and Bank of America Private Bank. For more insights, read The Glass Half Full: The Progress and Power of Women from the CIO.
With Women’s Equality Day 2024 approaching, answer the four questions below to see how much you know about the financial status of women today.
TEST YOUR KNOWLEDGE OF WOMEN'S PROGRESS
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Q: Despite the high cost of childcare, in July 2024, the labor force participation rate of women aged 25 to 54 hit a record high. What’s the correct percentage?
Q: True or false: The number of women on the boards of S&P 500 companies has nearly tripled in the last 10 years.
Q: How much wealth are women projected to control by 2030?
Q: What percent of Congressional seats are currently held by women — and how many women have run for President of the United States since its founding?
1Impax research and FactSet data as of 8/31/23. Three-year period: 11/30/20-8/31/23.
2Bureau of Labor Statistics. Data as of August 2, 2024.
3World at Work, “Rapinoe: Pay Equity Can Be a Goal for Everyone,” May 20, 2024.
4Bloomberg. Data through 2023.
5BofA Global Research, “Fighting for DEI while battling inflation,” March 3, 2023.
6Time period of 2008-2021. The Vanguard Group, “Diversity matters: The role of gender diversity on US active equity fund performance,” March, 2022.
7Fortune, “Percentage of women running Fortune 500 companies holds at 10.4%,” Jun 4, 2024.
8Wells Fargo, Impact of Women-Owned Business Report, January 2024.
9McKinsey & Company, “Women as the next wave of growth in US wealth management,” July 2020.
10Pew Research Center, “118th Congress has record number of women,” January 2023.
11Center for American Women and Politics, “Women Presidential and Vice Presidential Candidates: A Selected List,” 2024.
What’s causing the volatility — and how can you respond?
A LOWER-THAN EXPECTED JULY JOBS REPORT drove markets down on Friday, during a week already beset by volatility.1 The 800-point plunge in the Dow Jones Industrial Average raised new concerns about the prospects for an economy that has remained surprisingly resilient throughout 2024. Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank, offers four reasons for the latest disruption and four reasons to keep things in perspective.
4 drivers of volatility
- Recession concerns. “As reflected in the jobs report, economic data has been consistently slowing,” Hyzy notes. “Investors fear early signs of a recession.”
- Overdue rate cuts? Observers increasingly believe the Federal Reserve (the Fed) fell behind by not cutting rates at their July meeting.
- Geopolitics. With November’s presidential election and wars abroad, “the geopolitical environment has become more uncertain,” Hyzy says.
- Bond-buying pullback. A rate increase by the Bank of Japan and subsequent pull-back on bond buying has upset currency, interest rates and risk assets such as technology stocks globally.
4 reasons for calm
- Recession unlikely. “We believe the economy is still normalizing from pandemic-era disruptions,” Hyzy says. “While the road back is rocky, the BofA Global Research team does not expect a recession, all things considered.”
- Strong earnings. “Corporate profits remain healthy. We expect low double-digit growth for the S&P 500 this year, and mid to high single digits in 2025,” Hyzy believes.
- Rational rate decisions. While rate moves naturally draw extra attention amid volatility, the Fed is working to normalize rates based on inflation and employment trends, rather than panic over a recession, Hyzy says. And potentially significant cuts appear likely soon. “The Fed funds futures market now has a better than 80% probability of a 50-basis-point cut in September.”
- AI-powered productivity. “The long-run benefits of generative artificial intelligence (Gen AI) across a number of sectors are just beginning,” Hyzy says. “Higher productivity combined with rapid innovation allows for more substantive corporate growth than many observers are seeing.”
Expect more volatility, and stay diversified
As the economy continues to work through these challenges, investors should expect above average volatility in the short term, Hyzy says. “Avoid sudden reactions to headlines and market shifts,” he suggests. “Stay diversified across and within asset classes and rebalance as necessary.” As you consider your long-term investment goals, he adds, “look for periods of market weakness as an opportunity to strategically add to your portfolio.”
For more on current market volatility, read “Four by Four Relay,” the latest Investment Insights from the CIO, and tune in to the CIO’s Market Update audiocast series.
Can markets top their strong first half of 2024?
DEFYING PREDICTIONS OF A MARKET LETDOWN, the S&P 500 index of the largest U.S. stocks surged 14.5% during the first half of 2024.1 So, can equities maintain that momentum through the rest of the year? History says it often happens.
“Since 1950, in years when the S&P 500 returned greater than 10% in the first half, the index was higher 82.6% of the time in the second half,”1 says Kirsten Cabacungan, Investment Strategist for the Chief Investment Office (CIO) at Merrill and Bank of America Private Bank. While past performance doesn’t guarantee future results, a recent Chief Investment Office Capital Market Outlook report, “Can U.S. equities take the heat?” highlights three factors supporting that hopeful outlook:
- Economic activity, while moderating, continues to outperform expectations, thanks to cooling inflation, a still-solid labor market and consumer spending.
- The rise of generative artificial intelligence (AI) is driving enthusiasm for U.S. companies.
- Corporate earnings are gaining momentum. “Analysts expect S&P 500 earnings to grow by around 11.0% this year and 14.4% in 2025, a big improvement over 2023,” Cabacungan says.2
What could hold the markets back?
Uncertainties, ranging from global geopolitics to the possibility that inflation could remain above the Federal Reserve’s 2% target longer than expected, remain potential roadblocks. And then there’s November’s contentious presidential election. “The Chicago Board Options Exchange Volatility Index (VIX) has historically risen 25% on average from July to November during U.S. election years since 1928,” Cabacungan says.3 While stocks tend to rally after an election, lingering volatility could dampen second half results, she adds.
Market choppiness could create potential buying opportunities
Despite the markets’ strong first-half performance, the economy is still working through extraordinary disruptions from the pandemic. “Until that’s complete, investors should anticipate some market choppiness,” Cabacungan notes. She suggests staying diversified both across and within asset classes and looking for opportunities to strategically add to your portfolio during times of weakness.
Markets at midyear: Where do we go from here?
“THE MARKETS AND U.S. ECONOMY have shown remarkable resilience so far in 2024,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. Despite persistent inflation, elevated interest rates and global unrest, the S&P 500 rose by more than 10% in the first 100 days of the year. And, though there’s no guarantee of future performance, points out Hyzy, “historically, gains of 10% or more over the first 100 days have led to a positive year overall 76% of the time.”1
So, what could investors expect for the rest of 2024 and beyond? “We think today’s somewhat choppy environment is a bridge to a more bullish future,” says Hyzy. Watch the Market Decode video above to understand the factors supporting this view. And for a more detailed look at potential future market performance and how you can prepare.
In it, Hyzy will be joined by analysts from the Chief Investment Office and BofA Global Research to take a deeper dive into where the markets and economy are now — and where they may be headed next.
TEST YOUR MIDYEAR MARKET KNOWLEDGE
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Q: True or False: All three major stock indexes — the Dow, the S&P 500 and the Nasdaq — have broken records so far in 2024.
Reasons to join the ‘Stay Invested’ party this election year
MARKETS ARE ESSENTIALLY APOLITICAL. “That’s the main thing investors should keep in mind during election years,” says Joe Quinlan, head of Market Strategy for the Chief Investment Office (CIO), Merrill and Bank of America Private Bank. Long-term market returns are driven more by market fundamentals, like the strength of the economy and corporate earnings, than they are by assumptions about a political candidate’s possible future policies.
So, while it’s true that uncertainty about the outcome of elections can cause heightened volatility,1 investors shouldn’t “vote” with their assets by trying to reconfigure their portfolios to align with what may lie ahead. “Making investment decisions along political party lines is a great way to underperform the broader market,” says Quinlan.
“Instead, join the ‘Stay Invested’ Party,” he suggests. History tells us that U.S. equity returns during election years and non-election years are not dramatically different.
What’s more: From 1953 to the present, $1,000 fully invested in the S&P 500, regardless of party in power, would be worth $1.7 million today versus only $56,000 if you kept the same amount invested only during Democrat-led administrations, and $30,000 if you kept it invested only during Republican-led administrations.2
“All the more reason not to try to time the markets or make major moves before Election Day,” says Quinlan, who offers these three useful reminders for investors during election years:
- Stay focused on your long-term goals.
- Stay diversified across all asset classes, with an emphasis on quality.
- Above all, stay invested.
“In fact,” he says, “you could consider using periodic volatility leading up to the election as an opportunity to add to your portfolio.”
For more timely insights, watch “Investing in a year of election uncertainty.” And be sure to read Capital Market Outlook and tune in to the CIO’s Market Update audiocast series regularly.
A brighter future for renewable energy stocks?
WITH RENEWABLE ENERGY EQUITIES TUMBLING by more than half since their highs in early 20211, investors may wonder if the sun has set on solar and wind. Yet, with another Earth Day upon us, the underlying drivers are as strong as ever, says Joe Quinlan, head of Market Strategy in the Chief Investment Office (CIO) for Merrill and Bank of America Private Bank. “We believe the global transition toward a clean energy future is still very much in progress.”
In the “Market Decode” video above, Quinlan looks at the myriad factors that drove clean energy stocks to new heights and more recently spurred their decline. He also highlights the forces shaping a potential comeback for the sector, as well as the market segments that could benefit from this ongoing shift in the global energy mix.
For a deeper dive, read “Renewable energy equities: What next after the boom and bust?” in this edition of the CIO’s Capital Market Outlook. You can find more on investing and the environment in “Climate risk and the markets: 5 key questions answered.” And be sure to check out our most recent Capital Market Outlook for the latest market news and insights.
EARTH DAY POP QUIZ: TEST YOUR KNOWLEDGE
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Q: True or false: The world’s biggest carbon dioxide emitter is also the world’s biggest renewable energy consumer?
How troubling are the interest costs on U.S. debt?
WITH FEDERAL INTEREST PAYMENTS REACHING $659 billion in 2023, some investors fear the government’s spiraling costs to service rising debts could disrupt the broader economy. “That’s a big, concerning number — nearly twice the level from 2020,” notes Joe Quinlan, head of Market Strategy for the Chief Investment Office (CIO) at Merrill and Bank of America Private Bank. “Fortunately, we believe the U.S. economy is large enough to limit any market impact.”
The situation. The spike reflects two dynamics, Quinlan notes in the latest CIO Capital Market Outlook report: A $9.5 trillion surge in U.S. debt from 2020 to 2023 and higher U.S. Treasury rates.
The concern: Higher government borrowing costs could push borrowing costs for businesses and individuals higher for longer, dragging the economy down in the short term.
Keeping perspective. Even at elevated rates, government interest payments represent about 2.4% of U.S. GDP.1 “That’s higher than over the past decade, but we see this as manageable for a $28 trillion economy that remains the most dynamic and innovative in the world,” says Quinlan.
Investment considerations. “Investors should follow the news but avoid precipitous reactions and instead stay well-diversified and focused on long-term investment goals,” Quinlan advises.
Tune in to the CIO’s Market Update audiocast series weekly to stay up to date on financial news that could affect your investments.
TEST YOUR MARKET KNOWLEDGE
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Q: What percentage of U.S. government spending goes to paying debt interest?
New goal: Limiting geopolitical risk in your portfolio
WHILE UKRAINE AND GAZA DOMINATE HEADLINES, they’re just two of more than 180 current regional conflicts, the highest number in 30 years.1 A global landscape marked by such rising tension and uncertainty could affect U.S. and global economies, markets — and investors — for years to come, notes Joe Quinlan, head of Market Strategy in the Chief Investment Office (CIO) for Merrill and Bank of America Private Bank.
“Don’t pause investing or diverge from your long-term strategy, but do consider geopolitics along with corporate earnings, valuations and other metrics when making investment decisions,” Quinlan suggests. Watch the “Market Decode” video above for tips on how to incorporate geopolitics into your investment decisions.
For more insights, read “Are the markets really impervious to geopolitical risks?” in the January 8, 2024 Capital Market Outlook, and tune in to the CIO’s Market Update audiocast series for weekly check-ins on the markets and economy.
1 International Institute for Strategic Studies, 2023. Bloomberg, “It’s Not Just Ukraine and Gaza: War is on the Rise Everywhere,” Dec. 10, 2023.
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