Market Commentary

• The run-up in stocks and other assets like home prices has generally increased household wealth and boosted consumer confidence.
• Tariff and immigration restrictions are likely to need time to have their full effect and are likely to add to inflation late in 2025.

A number of things have helped propel stocks higher throughout the year and so far this fall. Of course, one of the keys has been robust consumer spending. The unemployment rate has remained historically low. The run-up in stocks and other assets like home prices has generally increased household wealth and boosted consumer confidence. The services segment of the economy (restaurants, vacations, and other forms of “experiences oriented” spending) remains in expansion mode and has continued to push gross domestic product (GDP) growth forward. Looking ahead, given the results of the recent election, we anticipate an extension of the Tax Cuts and Jobs Act of 2017 (TCJA) as well as a deregulation push that should help increase corporate profitability. These positive factors have contributed to the rationale for increasing our projection for economic growth in the U.S. next year.

But there is another positive to consider. Another factor that improves our economic outlook is the likely Treasury spend down of its Treasury General Account (TGA), potentially injecting $700 to $800 billion into the domestic economy in the first half of next year. This will likely begin to occur after the debt-ceiling extension expires on January 1, 2025. When the debt ceiling expires, the Treasury will not be able to issue new debt until Congress raises the debt limit. It might take until midyear for Congress to act. In the meantime, the Treasury will use the TGA to pay its bills. These TGA funds are currently held outside the banking system at the Federal Reserve but will be transferred into the banking system as reserves. This should result in a somewhat steady stream of liquidity being fed into the banking system and economy.

One of the offsets to better economic growth is the potential inflationary effects of tariffs that the incoming administration has advertised that it will seek to impose on China and other trading partners. One way that tariffs raise domestic inflation is by increasing the prices of goods that U.S. companies will still want to buy overseas (e.g., shoes and food items). Another source of likely inflation would be higher wages after immigration restrictions limit the number of new workers, especially in construction and services industries. Tariff and immigration restrictions are likely to need time to have their full effect, and we estimate that they will add to inflation late in 2025. In the meantime, however, the deregulation and tax-cut extension positives that we expect should be more important for driving economic and earnings growth through the year. The combination of better growth and gradually growing inflation pressures is likely to result in interest rates moving further to the upside, and we now see the yield on the 10-year Treasury note ending 2025 in the 4.5% to 5% range.

Better economic growth and anticipated increased earnings per share have led us to raise our year-end 2025 target range for the S&P 500 Index to 6,500 to 6,700. We expect valuations to remain above the long-term average as large-cap growth companies’ positive fundamentals should continue to drive markets and earnings in the coming year. Our favored equity sectors include Energy (most favorable), Industrials, Financials, and Communication Services. 

Forecasts and targets are based on certain assumptions and on views of market and economic conditions which are subject to change.

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