Can the momentum in equities continue in 2025?

From an economic standpoint, we're actually going to see an acceleration in economic growth in the United States for the first half of ‘25. And at the same time, we're going to see an acceleration in inflationary conditions. It doesn't mean inflation accelerating back up to mid to high single digits, but just moving away from the Fed's target. So what does that mean? It means we can certainly see continued strong performance out of the equity market. It may broaden, may see it move into small caps, we may see it move into cyclicals, but I think the most important factor in the first half is to the extent that the market has discounted several rate cuts by the Fed, we may start to see those taken out of the market, which again, will just create some minor volatility in pockets of the market.

The biggest headwinds for 2025 and beyond is the world's had an over reliance on government spending and widening deficits, not just in the U.S., but around the world in order to sustain growth. And we finally reached the point where they drove inflation to such an extent. We've seen the rise in populism, and we've seen a lot of shakeups around the world politically. So we have to find another growth engine, which is another way of saying we have to rebalance our economies. And to the extent that comes with shifts in fiscal impulse or to the extent it comes with very significant shifts in monetary policy, and what I mean by that are potentially even capital controls that may repatriate monies back out of the US, back into Europe or elsewhere to stimulate domestic growth initiatives, that's going to create a lot of volatility. I think it will be disparate in time, meaning it doesn't overall change the value of securities, but it's a reversal of flows. I think that's something we're really going to have to watch. I don't think we'll have a sense of that until we get into the back half of ‘25 when we start to see how we're going to fund some of the policy initiatives that will be implemented in the first half.

A lot of investors are trying to focus and find the laggards, meaning kind of reminiscent of the late 90s, early 2000s when we saw the internet bubble and small caps underperformed so significantly in the U.S. They're trying to look at the current scenario and say, wow, small caps must be cheap. And on a relative basis, they look inexpensive or developed world X-US looks cheap on an absolute and a relative basis. But I really don't think there's big pockets of undervaluation. So when we look at US small caps, yes on a relative basis, they're less expensive than large caps. But on an absolute basis, they're they're fairly valued. They're not significantly overvalued, but they're not trading at a deep discount like they were in the late 90s and early 2000s. And then when you look in the developed parts of the world outside of the US, the current policies, both their energy policies and some of the fiscal policies, are really significant headwinds. So those valuations that are discounted reflect those fundamentals, meaning they're just not very robust fundamentals.

We're going to see a re-acceleration in economic growth in the US, and we're going to see a little bit of a tick-up in inflation. And so on the margin, that is good for small and mid-cap companies at broadening of economic activity. We'll probably see some deregulation in and around the energy sector. Again, that's good for small and mid-sized companies.

But I think the real opportunity will be maybe in the back half of ‘25 or ‘26 when a lot of these delayed capital investments really begin to be accelerated. And that's when we'd start to see the biggest impulse or tailwind. And the market's starting to sniff that out. We've seen a broadening in the rally within the US equity markets to include the small and mid-cap sector in the second half of 24.