Breaking insights on the economy, market volatility, policy changes and geopolitical events
AS AN EVENTFUL 2024 WINDS DOWN, 2025 is shaping up to be a pivotal year for investors, believes Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. “Resilient U.S. corporate earnings, ongoing interest rate cuts (though likely at a slower pace than previously expected, as the Federal Reserve indicated when they announced their third cut of the year this week), a return to a more normal bond market, disruptive innovation and an emerging ‘asset-light’ economy should combine to create a powerful launchpad for a new era of potential growth,” he says.
For many useful suggestions on how you can prepare, tune in to the 2025 Year Ahead Outlook webcast, “Get ready for what’s next,” if you haven’t already watched it. Another good way to ring in the New Year, financially? Consider making the following three investing resolutions.
“Some investors look for the perfect time to enter or re-enter markets,” Hyzy says. “The best approach is to invest steadily.” Past performance is no guarantee of future results, of course, but since early 2023 the economy has proven far more resilient than economists expected.1 Equity investors who stayed out of the markets fearing a possible recession would have missed S&P 500 gains of 24% in 20232 and more than 26% in 2024 (as of Dec. 11)3.
“We expect continued economic and market growth in 2025,” Hyzy adds. “But there are risks, and short-term swings are unpredictable. Those uncertainties only reinforce the importance of a disciplined strategy built around your personal goals.” Dollar cost averaging — investing a fixed amount at regular intervals, no matter what the markets are doing — can help smooth the effect of ups and downs.
“We talk a lot about the need to diversify across and within asset classes. That’s especially important for stock investors in 2025,” notes Marci McGregor, head of Portfolio Strategy for the Chief Investment Office (CIO) for Merrill and Bank of America Private Bank. “While the seven largest companies in the S&P 500 currently represent about 30% of the index’s market capitalization,4 improving fundamentals among the other 493 on that list could potentially create broader opportunities,” McGregor says. “Diversifying your stock portfolio could help you weather volatility and capture new areas of growth,” she adds.
Investors lately have enjoyed attractive cash and short-term bond returns thanks in part to a relatively rare, inverted yield curve with short-term yields outpacing long-term yields. “We expect the yield curve to normalize in 2025 with long-term rates steepening relative to short-term rates,” says Matthew Diczok, the CIO’s head of Fixed Income Strategy. “You may find that longer-duration bonds offer returns above inflation while helping to mitigate volatility risks in your stock portfolio.”
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1The New York Times, “Economists predicted a recession. So far they’ve been wrong,” Jan. 26, 2024.
2MarketWatch, “Stock Market today: S&P 500 ends slightly lower but posts 24% 2023 gain,” Dec. 29, 2023.
3MarketWatch, “S&P 500 Index,” Consulted Dec. 11, 2024.
4Chief Investment Office, Viewpoint, December 2024.
5As of Dec. 6. Reuters, “S&P 500, Nasdaq hit record closing highs; Lululemon gains, data supports rate cut view,” Dec. 6, 2024.
IN A WIDELY EXPECTED MOVE, THE FEDERAL RESERVE (the Fed) announced their third and last rate cut of the year yesterday — another quarter-point drop. While the announcement was expected, remarks made by Fed chair Jerome Powell indicating a slower pace of cuts, from an expected four to two in 2025, poured cold water on the equity markets. By market close, the three major stock indices were down 2.5 to 3 percent or more for the day, while Treasury yields climbed.1
“Based on the latest data on inflation, the economy and the job market, the BofA Global Research team was already forecasting only two cuts for 2025,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. “Clearly, many market participants expected more.”
Investors have been looking forward to the potential for continued strong economic growth, healthy corporate profits and premium stock valuations in 2025, says Hyzy. The Fed’s data-driven forecast, based on uncertainty around the future path of inflation and the labor market, pushed the yields on Treasurys higher and affected equities, particularly in sectors most sensitive to high interest rates, negatively. High-growth equities and shares in sectors sensitive to high rates led the market declines, notes Hyzy.
“Equities have already begun to bounce back, but there’s little doubt that investors will continue to remain on edge, especially with a lack of clarity around a possible government shutdown causing more volatility,” notes Hyzy. But, amid the uncertainty, some things haven’t changed. “As always, it’s important to stay diversified and focused on your goals,” he adds.
“We still have high conviction in our themes of higher economic growth and profits for 2025, driven by increased productivity, a more normal yield curve, wider participation across the equity markets, a positive view on small- and mid-cap shares, and an emerging asset-light era that will benefit companies more resistant to interest-rate fluctuations.” In fact, he adds, “A short-term reset, such as we’ve just seen, only creates a stronger base from which to begin 2025.”
For more insights on how you can prepare for risks and opportunities in the year ahead, watch our Outlook 2025 program “Get ready for what’s next.” To learn more about this week’s Fed decision and resulting market volatility, read the latest Investment Insights report, “Fed flashes yellow.”
IN THE INFORMATION AGE, CORPORATE DOMINANCE no longer necessarily means having the biggest factories and longest production lines. The financial edge increasingly goes to companies with fewer fixed assets and greater flexibility, says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. “As we look ahead to the new year, the asset-light economy is one of our key growth themes for 2025 and beyond.”
“Compared with manufacturing and other asset-heavy industries, asset-light companies — many of them in the tech and healthcare sectors — generally are more focused on intellectual property than real-world assets, and they have more capital to spend on high-growth areas of their businesses,” Hyzy says. With less need for credit to finance fixed assets, they’re more resistant to interest rate fluctuations and they are often less labor-intensive. “An economy increasingly dominated by asset-light companies could help drive long-term growth and an extended bull market for investors,” Hyzy believes.
“The asset-light economy should gain momentum in 2025 and 2026, thanks to some economic bright spots we see developing,” he says. “The rapid advance of artificial intelligence and other technologies is already bringing greater productivity and operating leverage to companies across industries. And markets generally are rebalancing away from dominance by a small handful of companies, leaving more room for younger asset-light companies to grow.”
But, even as their share of the economy diminishes, asset-heavy industries will remain essential, notes Marci McGregor, head of Portfolio Strategy for the Chief Investment Office (CIO) for Merrill and Bank of America Private Bank. In fact, thanks to technology’s enormous need for energy and other resources, asset-heavy companies could even experience a boost as they help to meet the need for more infrastructure to power the asset-light economy.
“Big picture, asset light’s increasing dominance, with its potential to drive higher productivity and profits, is good for the economy and markets,” sums up Hyzy. But, notes McGregor, “Valuation of these companies can be a challenge, and that’s something investors need to think about in the lens of this new asset-light world.“ As always, it’s important to maintain a diversified portfolio.
For a deeper look at the asset-light economy and what it could mean for your investments in the year ahead, read the CIO’s December Viewpoint, “2025 Year Ahead: The Advancement of the Asset-Light Era.” And be sure to tune in to the Outlook 2025 program “Get ready for what’s next” for a full view of what to expect across sectors, industries and asset classes in the new year and beyond.
A NEW ADMINISTRATION IS POISED to take over the government in January, with one party controlling both the White House and Congress (with slim margins) and many major policy shifts, from taxes to tariffs and more, under consideration. So, naturally, investors have questions: Will there be new market winners and losers? Could the post-election rally last? And how might our resilient economy be affected?
The markets tend to care more about profits than politics, notes Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. That said, he adds, “there’s no question that some of the policy changes being considered have the potential to benefit certain sectors and asset classes more than others.“ Still, he continues, “it’s important to remember that there are checks and balances in both the markets and government as money moves around the globe. Change is a constant, but we continue to believe that the market drivers are already in place for another extension of the bull market cycle over the next five to 10 years.”
The video above features Hyzy’s wide-ranging post-election conversation with Savita Subramanian, head of U.S. Equity & Quantitative Strategy for BofA Global Research, and Jim Carlisle, Public Policy Executive for Bank of America.
Watch it for insights on ways you can prepare for the potential changes ahead. And be sure to tune in to the Outlook 2025 webcast “Get ready for what’s next” on December 12 for more tips to help you navigate the markets in the new year.
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.
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.
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.
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.
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.
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.
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.”
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.
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.
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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.
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You have choices about what to do with your 401(k) or other type of plan-sponsored accounts. Depending on your financial circumstances, needs and goals, you may choose to roll over to an IRA or convert to a Roth IRA, roll over a 401(k) from a prior employer to a 401(k) at your new employer, take a distribution, or leave the account where it is. Each choice may off er different investments and services, fees and expenses, withdrawal options, required minimum distributions, tax treatment (particularly with reference to employer stock), and provide different protection from creditors and legal judgments. These are complex choices and should be considered with care.
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