From the studio:

Podcast: The Year Ahead opportunity set – with CIO's Kiran Ganesh, Jon Gordon, and Wayne Gordon (16:16)

Podcast: (17:59)

Thought of the day

US equities rose ahead of key inflation data due today, with the S&P 500 hitting its 52nd all-time high of the year on Tuesday. A 60-day ceasefire deal between Israel and Lebanese militant group Hezbollah may have aided investor sentiment, while markets continue to assess the potential implications of President-elect Donald Trump’s new tariff threats.

But while volatility may increase in the days and weeks ahead amid data releases and Trump’s next moves, we continue to see a favorable macroeconomic backdrop for US equities.

Overall inflation should continue to inch closer to the Federal Reserve’s 2% target. October’s personal consumption expenditures (PCE) price index—the Fed’s preferred inflation gauge—is due today and could see a strong gain after factoring in last month’s mixed consumer and producer price data. Shelter remains the biggest driver of inflation, and it has taken longer to slow than we expected. But we anticipate that shelter inflation will slow next year, helping to bring overall inflation down into the range that would allow the Fed to lower interest rates back to neutral. While most of the potential tariff increases are likely to be passed along to consumers, we expect them to cause a one-time increase in the price level rather than triggering sustained higher inflation over the medium term.

The US economy is growing at a solid pace, led by consumer spending. Also due today is the second estimate of US third-quarter GDP, which grew at a solid 2.8% pace in the prior reading. For 2024 overall, we expect the US economy to expand by just below 3%. While tepid global demand and still elevated borrowing costs could see somewhat more moderate GDP growth in the quarters ahead, further Fed rate cuts should help to keep the expansion going.

Fed minutes suggest more rate cuts ahead. Minutes from the US central bank’s November meeting showed that officials anticipate further interest rate cuts, albeit at a gradual pace, as inflation moderates and the economy remains solid. Policymakers noted that the downside risks to employment and growth have “decreased somewhat,” and that there was “no sign of rapid deterioration” in the job market. With the broader picture still pointing to a softening labor market amid slowing hiring, our base case remains that the Fed will cut rates by 25 basis points in December, followed by a once-per-quarter pace in 2025. Historically, Fed rate cuts in non-recessionary periods have been favorable for equities.

So, with artificial intelligence remaining a key structural tailwind for equities, we see the S&P 500 ending 2025 at 6,600 and view the US market as Attractive. Within the US, we like technology, utilities, and financials, as these sectors are supported by structural growth drivers and a robust earnings growth outlook.