Tom Wald, CFA®, Chief Investment Officer, Transamerica Asset Management, Inc.
In this article we review:
The impact of the presidential and congressional elections on the U.S. equity and fixed income markets
The election’s potential impact on expected economic growth and upcoming federal tax legislation
Our new year-end 2024 S&P 500® price target and expected year-end 10-year Treasury bond yield
New forecast for year-end 2024 Treasury bond yield curve
As the long-awaited presidential and congressional elections are now over, we believe the following points regarding the U.S. equity and fixed income markets are pertinent to investors:
U.S. EQUITY
The conclusion of the presidential and congressional elections has positioned the equity markets for a potential move higher during the final months of the year. As a result, we are increasing our year-end 2024 price target on the S&P 500 to 6,200.
Donald Trump’s decisive victory combined with the shift to Republican control in the Senate was achieved in short order and without a lengthy or disputed vote count as had been feared by many investors. With this sense of uncertainty now removed, stocks are likely to continue rising during the final months of the year.
With Republicans controlling the White House and Senate, the risk of higher federal tax rates has been substantially mitigated. As various provisions within the Tax Cuts and Jobs Act of 2017 are renegotiated in Congress during 2025, it is now unlikely we will see higher individual and capital gains tax rates and the corporate tax rates could potentially be reduced. Such an outcome could be an economic catalyst for consumer spending and the prospect of a lower corporate tax rate should provide for a higher probability of double-digit corporate earnings growth in CY 2025 and beyond.
What is likely to be a less-regulated, more pro-business economic agenda under a Trump administration and Republican Senate will likely increase the probability of rising gross domestic product growth for CY 2025 perhaps in the 2.5%–3.0% range. Expected Federal Reserve interest rate cuts and declining inflation should provide further tailwinds for economic growth, thereby providing for a favorable equity environment.
From a risk perspective, attention may soon focus on how far a Trump administration might extend further tariffs imposed on China as well as on additional countries. When then-President Trump first imposed trade tariffs on China in 2018, markets experienced some volatility. Looking forward, uncertainty looms as to whether future tariffs will be applied as longer-term policy or more in association with tactical trade negotiations.
All considered, given the quick conclusion and results of the election combined with continuing Fed rate cuts and the declining rate of inflation, the overall environment for stocks appears favorable for the remainder of the year, and we have adjusted our expectations accordingly.
FIXED INCOME
We expect one more Fed rate cut in December to conclude the year with a federal funds rate target range of 4.25%–4.50%. Given election-based developments, it appears longer-term rates will maintain their recently established higher levels in anticipation of a further strengthening economy and steepening yield curve. Therefore, we now believe the 10-year Treasury yield will finish the year close to its current level at about 4.40%, representing a modestly upward sloping three-month to 10-year yield curve.
In this environment, we believe corporate credit spreads will likely hold stable and strong risk-return opportunities remain for intermediate term investment grade bonds in the six-to-nine-year maturity range. We see opportunities for A-rated and BBB-rated corporate bonds in the middle of the curve where investors can lock in recently elevated yields while mitigating against reinvestment risk at the short end of the yield curve and duration-based price risk at the longer end.
In summary, the post-election environment appears to be one that will continue to be favorable for both stocks and bonds. Taking this into account from an asset allocation standpoint, we also believe it to be a favorable environment for balanced 60/40 stock-bond portfolio strategies.
Investments are subject to market risk, including the loss of principal. Asset classes or investment strategies described may not be appropriate for all investors.
Past performance does not guarantee future results. Indexes are unmanaged and an investor cannot invest directly in an index.
Equities are subject to market risk meaning that stock prices in general may decline over short or extended periods of time.
Fixed income investing is subject to credit rate risk, interest rate risk, and inflation risk. Credit risk is the risk that the issuer of a bond won’t meet their payments. Inflation risk is the risk that inflation could outpace a bond’s interest income. Interest rate risk is the risk that fluctuations in interest rates will affect the price of a bond. Investing in floating rate loans may be subject to greater volatility and increased risks.
Growth stocks typically are particularly sensitive to market movements and may involve larger price swings because their market prices tend to reflect future expectations. Growth stocks as a group may be out of favor and underperform the overall equity market for a long period of time, for example, while the market favors “value” stocks. Value investing carries the risk that the market will not recognize a security’s intrinsic value for a long time or that an undervalued stock is actually appropriately priced.
Investments in global/international markets involve risks not associated with U.S. markets, such as currency fluctuations, adverse social and political developments, and the relatively small size and lesser liquidity of some markets. These risks may be greater in emerging markets.
The information included in this document should not be construed as investment advice or a recommendation for the purchase or sale of any security. This material contains general information only on investment matters; it should not be considered as a comprehensive statement on any matter and should not be relied upon as such. The information does not take into account any investor’s investment objectives, particular needs, or financial situation. The value of any investment may fluctuate. This information has been developed by Transamerica Asset Management, Inc. and may incorporate third-party data, text, images, and other content to be deemed reliable.
Comments and general market-related projections are based on information available at the time of writing and believed to be accurate; are for informational purposes only, are not intended as individual or specific advice, may not represent the opinions of the entire firm, and may not be relied upon for future investing. Investors are advised to consult with their investment professional about their specific financial needs and goals before making any investment decisions.
The 10-Year U.S. Treasury bond is a U.S. Treasury debt obligation that has a maturity of 10 years.
S&P 500® Index: An unmanaged index of 500 common stocks primarily traded on the New York Stock Exchange, weighted by market capitalization.
Transamerica Asset Management, Inc., (TAM) is an SEC-registered investment adviser that provides asset management, fund administration, and shareholder services for institutional and retail clients. The funds advised and sponsored by TAM include Transamerica Funds and Transamerica Series Trust. Transamerica Funds and Transamerica Series Trust are distributed by Transamerica Capital, Inc., (TCI), member FINRA. TAM is an indirect wholly owned subsidiary of Aegon Ltd., an international life insurance, pension, and asset management company.
