Risk aware
The outlook is not without risks. Clarity in some areas is offset by uncertainty in others. New policies around trade and immigration could be inflationary across time. More broadly, there are undertones of consternation over the prospect for future inflation. These concerns are not without merit. In prior cycles when inflation was 6% or higher, a second wave of 6% inflation followed in nine out of 10 instances, according to a 2024 Strategas study of 23 developed market countries across more than 2,000 years of data. We saw this in the 1970s in the U.S.
Other policy changes under a new administration are yet to be determined, and geopolitical risks remain elevated. We have a constant eye on the equity risk premium (ERP), which measures the value of stocks relative to bonds. While the ERP is low for some of the priciest areas of the market, including the mega-caps, we find that it remains well in line with historical averages for the equal-weighted S&P 500 Index.
Revisiting value stocks
One notable development amid the expanding market breadth we’ve observed since mid-2024 has been the neck-and-neck performance of value and growth stocks. This comes after two exceptional years for growth that punctuated more than a decade of leadership versus value.
While we don’t believe growth momentum is exhausted, we do see several reasons why investors should consider revisiting ― and potentially increasing ― their exposure to large-cap value stocks. We discuss why many investors may be unintentionally underweight value and why active strategies may be appropriate for closing the gap in the Q1 edition of Taking Stock.
Bottom line
Across styles, sectors and geographies, we believe nimbleness and selectivity will be important to navigating markets in the coming months. If change will be a hallmark of 2025, we expect this will be a pivotal period for active managers with the flexibility and expertise to navigate the vagaries and opportunities ahead.
