In Short

• Ahead of former President Trump’s election, uncertainty abounded in October despite mostly positive economic data releases
• While an additional 25-basis-point cut in December is expected following the Federal Reserve’s November move, the potential for an early 2025 pause remains
• Given the election results and strong year-to-date performance from equities, now may be prudent time to review long-term asset allocations, as well as wealth, trust and estate plans
• We maintain an at-target overall view across equities with an overweight to U.S. small caps as we continue to anticipate further broadening of equity-market performance
• Within fixed income, we downgraded our view on investment grade given full valuations

First Cut in the Rearview

Uncertainty remained October’s theme for U.S. markets heading into Election Day, with a potpourri of economic data and quarterly earnings for investors to digest. Inflation—both headline and core—came in a bit hotter than consensus in September but still showed signs of cooling. This was a positive sign alongside a blockbuster payrolls report and better-than-expected retail sales, both of which supported consensus that a soft landing remained on track. In response, bond yields surged during the month. After hitting a low in mid-September of about 3.5%, the U.S. two-year Treasury yield has climbed to around 4.2%. The five- and 10-year yields were both up by over 50 basis points each, to 4.2% and 4.3%, respectively.

September FOMC minutes showed that, while generally split, a substantial majority of members supported the 50-basis-point rate cut during the meeting. Notably, almost all agreed that the upside risks to inflation had diminished although most said downside risks to employment had increased. Looking ahead to the upcoming FOMC meetings, while we expect an additional 25bps cut in December, following the most recent November cut of 25bps, we acknowledge that an interest rate hold before year-end remains possible with a pause at the December meeting. Immediately following Powell’s November press conference, the market was not pricing in a full rate cut before year-end. The sentiment shift from early August, when investors were factoring in the potential for well over 100bps of interest rate cuts, to a potential pause in December has created meaningful volatility in fixed income markets. The repricing of Fed expectations in relation to other global central banks and strong U.S. economic growth—the first preliminary read of Q3 GDP came in at +2.8% annualized—has likely driven the U.S. dollar to rally and hit two-month highs, with the currency appreciating on the month by the most since April 2022.

With the Fed’s first (outsized) cut in the rearview mirror, investors turned their attention to several other key risks during the month. The wide-ranging strike of U.S. dock workers and the potential threat of supply chain disruptions was ultimately resolved with a deal early in the month after a tentative agreement for a 62% wage increase over six years. The potential for expanding conflict in the Middle East caused energy prices to initially spike, but they settled down as the month progressed. The economic impact from the hurricane season is still difficult to measure but could potentially affect economic data released for the period—this was evident in the November nonfarm payrolls report that showed only 12,000 jobs were added during the month and reflected an estimated 512,000 people not at work due to the one-two gut punch of Hurricanes Helene and Milton, along with the temporary impact of labor strikes, including at Boeing. Perhaps more worrisome than those exogenous shocks was the downward revisions to August and September’s payroll reports, which declined by a total of 112,000 jobs. As some of these risks begin to settle, we believe investors have been looking for confirmation, clarity or ideally both.

The first step toward clarity came in November with the presidential victory by Donald J. Trump. From assassination attempts to late-stage candidate switches, the U.S. election was remarkably eventful, and at this point we expect some of the political volatility to subside. That said, U.S. budget deficits and the inflationary impact of potential tariff policy may challenge the president-elect. Prior to the election, we saw these risks reflected in market inflation expectations and gold prices, for example. The two-year inflation breakeven (the market’s inflation expectation for two years from now) rose from 1.5% in early September to 2.4%, surpassing the level of five- and 10-year inflation breakevens for the first time since May. We find it difficult to believe that the Fed would deliver consecutive rate cuts next year in the face of +2.5% GDP growth and increasingly stubborn inflation. These few key risks are likely to remain in place during the transition period and into President Trump’s second term. (Please click here for more NB Private Wealth election insights.)

Amid the election-related volatility, we noted some clear takeaways from the corporate sector. Third-quarter earnings season is well underway with almost 70% of S&P 500 companies reporting through the end of October. Coming into the quarter, a +4.3% EPS growth rate was expected—a lower hurdle than in recent quarters. Through the end of the month, the blended earnings growth rate was 5.1%, which if it holds would mark the fifth consecutive quarter of earnings growth for the index. Notably, the S&P 500 is starting to see a bit more breadth in earnings growth from sectors other than Information Technology, including Health Care, Financials and Consumer Discretionary.

Navigating the Winds of Change

Following the long-awaited outcome of the election and the transition of power between parties, we recognize that there will be potential implications for taxes, immigration, regulation and trade. As a result, it is a prudent time to review long-term strategic asset allocations, wealth, trust and estate plans, and any other long-term planning that could be affected by the leadership change.

The latter half of Joe Biden’s presidency was significant for the U.S. economy. Following the most aggressive interest rate hikes in history, economic conditions defied gravity with persistently better-than-expected GDP and earnings growth as inflation cooled and the labor market remained resilient. Fixed income markets, typically a safe haven asset in portfolios with a more muted return profile, delivered double-digit returns over the past 12 months, boosting portfolio returns.

Domestic stocks posted noteworthy performance, with the S&P 500 returning an annualized 23.3% (cumulatively about 52%) from October 2022 to 2024. These results were mostly due to mega-cap technology companies in 2023, with about 67% of the total return driven by the top 10 stocks in the index. This year, however, returns have broadened through the end of October with 58% of the S&P 500’s total return coming from the top 10 stocks. While this is a significant level of contribution, it is a notable decline from 67%, especially given the index’s continued concentration. The top 10 stocks made up 35% of the index as of the end of October—the most concentrated levels in history. A rotation within sectors has also occurred. Last year’s laggards, including Financials and Utilities, are leading and outperforming the index so far this year, while Communication Services has taken the best-performing title from Technology.

These outsized returns, especially for equities, may have caused portfolios to move away from long-term strategic targets. This concept, referred to as “portfolio drift,” occurs when changes in the market affect an asset allocation or the weighting of asset classes within a portfolio. An increase in the weight of equities, for example, could affect a balanced growth (60% equities and 40% fixed income) portfolio by shifting the mix to 65/35 or even 70/30. This type of shift could expose the investor to more (or less) risk than originally intended. Portfolio rebalancing helps to get a portfolio back in line with investment objectives while also taking advantage of investment opportunities as they emerge in a changing market environment.

New leadership likely means new policy. On taxes, President-elect Trump will likely seek to decrease the corporate tax rate to 20% and block the sunset of the 2017 tax reforms. He has also contemplated taxing endowments. The regulatory environment, meanwhile, would likely become less onerous under Trump, particularly for the financial, health care, energy and technology sectors. Trump would also seek to curtail illegal immigration through increased enforcement and deportation. Trade will certainly be in focus, as Trump favors tariffs on Chinese goods and has mentioned broader protectionist policies.

Trust and estate planning could also be affected, so it may be advantageous to use the historically high federal estate and gift tax exemption ($13.61 million per person, $27.22 million per married couple), which is set to sunset in 2026 to its 2017 level of $5.49 million, adjusted for inflation. Talking with your advisor is a key first step in assessing whether employing planning strategies could be appropriate.

As we move closer to a new year, we believe investment positioning should take into account current expectations for continued declines in interest rates and inflation (even as economic growth remains on track) and a deteriorating U.S. debt profile. Our tax-exempt fixed income team argued in its recent Municipal Basis Points publication that, with the Fed lowering rates, investors should consider putting excess cash to work to secure higher tax-exempt incomes for longer, where applicable. In addition, any expected consequences that arise due to changes in Washington, D.C. should be closely monitored and, from an investment perspective, approached tactically in relation to long-term strategic targets. All things considered, the removal for uncertainty on the political scene may finally help the market to refocus on fundamentals. This, in turn, could finally trigger the broadening of equity market performance beyond U.S. mega-cap technology stocks that we have been anticipating for much of this year and saw during the third quarter.

Portfolio Implications

Equities moved lower during the month, led by developed non-U.S. and emerging markets. We maintain an at-target overall view across equities, with an overweight to small caps, as we continue to anticipate further broadening of equity-market performance. Renewed stimulus from China has improved the outlook for non-U.S. markets, but we believe its structural challenges will continue to weigh on the global economy. Within equities, we favor lower-beta, higher-quality names, with a preference on value over growth. In this more challenging environment, we also favor employing active management to select companies with high earnings visibility.

Fixed income saw a fair share of yield movement in October, leading prices lower, especially in longer-duration bonds. We downgraded our view on investment grade fixed income given full valuations, and our soft-landing outlook and debt sustainability concerns make us cautious on longer-dated bonds even as policy rates are cut.

In a challenged fundraising, exit and financing environment, we believe significant opportunities exist within private markets for firms and strategies that can act as liquidity and solutions providers to help close the capital supply/demand gap and support value-added transactions. This backdrop, along with Neuberger Berman’s deep relationships and unique position within the private equity ecosystem, has translated into record levels of deal flow across our platform. We continue to see potentially compelling opportunities across secondaries, co-investments, private credit, and capital solutions. We are cautious on core private real estate, but this is offset by what we see as abundant market-dislocation opportunities in the value-add and opportunistic sectors and particularly in real estate secondaries.

Index Returns as of October 2024

Source: Bloomberg, total returns as of October 31, 2024. S&P 500 Index is represented by S&P 500 Total Return Index. Nasdaq Composite NASDAQ-Composite Total Return Index. Dow Jones is represented by Dow Jones Industrial Average TR. Large Cap is represented by Russell 1000 Total Return Index. Mid Cap is represented by Russell Midcap Index Total Return. Small Cap is represented by Russell 2000 Total Return Index. All Cap is represented by Russell 3000 Total Return Index. Large Cap Growth is represented by Russell 1000 Growth Total Return. Large Cap Value is represented by Russell 1000 Value Index Total Return. Small Cap Growth is represented by Russell 2000 Growth Total Return. Small Cap Value is represented by Russell 2000 Value Total Return. ACWI is represented by MSCI ACWI Net Total Return USD Index. ACWI ex US is represented by MSCI ACWI ex USA Net Total Return USD Index. DM Non-U.S. Equities is represented by MSCI Daily TR Gross EAFE USD. EM Equities is represented by MSCI Daily TR Gross EM USD. Cash is represented by ICE BofA US 3-Month Treasury Bill Index. U.S. Aggregate is represented by Bloomberg US Agg Total Return Value Unhedged USD. Munis is represented by Bloomberg Municipal Bond Index Total Return Index Value Unhedged USD. Munis Short Duration is represented by Bloomberg Municipal Bond: Muni Short (1-5) Total Return Unhedged USD. Munis Intermediate Duration is represented by Bloomberg Municipal Bond: Muni Intermediate (5-10) TR Unhedged USD. Investment Grade is represented by Bloomberg US Corporate Total Return Value Unhedged USD. High Yield is represented by Bloomberg US High Yield BB/B 2% Issuer Cap Total Return Index Value Unhedged USD. Short Duration is represented by Bloomberg US Agg 1-3 Year Total Return Value Unhedged USD. Long Duration is represented by Bloomberg US Agg 10+ Year Total Return Value Unhedged USD. Global Aggregate is represented by Bloomberg Global-Aggregate Total Return Index Value Unhedged USD. EMD Corporates is represented by J.P. Morgan Corporate EMBI Diversified Composite Index Level. EMD Sovereigns – USD is represented by J.P. Morgan EMBI Global Diversified Composite. Commodities is represented by Bloomberg Commodity Index Total Return. Commodities ex Energy is represented by Bloomberg Ex-Energy Subindex Total Return. U.S. 10-Year Yield is represented by US Generic Govt 10 Yr.