Explore current trends in equity valuations, credit spreads, and macroeconomic conditions with actionable considerations for portfolios.
Q: What are some of the key market and macro developments of January 2025?
A: (Brian McMahon) Most forecasts of future GDP growth were revised modestly higher during 2025, so GDP forecasts for 2026 and 2027 have both been revised higher as well, despite anxiety last year. Inflationary pressures have moderated since 2022 but remain above the Fed’s targets. The prices of many tradeable goods are rising in the wake of tariffs on most imports, but housing inflation has moderated. Until now, inflation rates have been close enough to targets to allow central bankers globally more latitude for paying increased attention to supporting employment.
The U.S. unemployment rate, which averaged 3.9% over the last three years, is now at 4.6%, so the Fed is paying closer attention to it. The Fed funds rate was 5.33% from July 2023 to September 2024, and it’s now 3.63% and it’s expected to decline further.
Q: What is the importance of dividends in return?
A: (Matt Burdett) For much of the past decade, central bank policies, including expansive balance sheets and ultra-low interest rates, created an environment where capital appreciation overshadowed the role of dividend income. But I like to remind investors of the importance of dividends to long-term returns. The big picture is that dividends have accounted for roughly half of your total return over the past 150 years. However, there are periods when dividends are less important, and others when they’re extremely important. If you look at the current decade, through 2025, the average price appreciation has been 12.7%, while the income component has been only 1.7%, for a total return of 14.4%. But you look at other decades, such as 2000-2010, 1931-1940, 1911-1920, and 1881-1890, you see that income is higher than 100% of return.
This demonstrates the power of dividends not just as a source of income but as a driver of total return, playing a key role in providing both performance and protection. Moreover, companies that not only pay dividends but also grow them have produced consistent returns. Dividends are a sign of a company’s earnings and cash flow strength, and they force companies to be practical with their free cash flow allocations.
Q: Can you talk about the significance of recent and potential Fed developments?
A: (Christian Hoffmann) I’ve been concerned about the Fed’s independence for over 12 months. The Fed has been under attack, and I think, broadly, that markets and people are happy to see Powell stand firm, and that other key policymakers say they stand with Powell and central bank independence, not just for the U.S. broadly as a global ideal. The interesting part of that is the market reaction, which has been pretty subdued. Investor perceptions of the degree of Fed independence will matter for longer-maturity bond rates and the US dollar exchange rate following the upcoming appointment of a new Fed Chair. Many of us are looking forward to the announcement of the new Fed Chair, which could happen in the coming days and weeks.
Q: What is the expectation for market returns for 2026 and beyond?
A: (Brian) Most publicly traded firms did not cut earnings guidance in 2025 despite possible tariff impacts on the cost of inputs, prospective retaliation by affected countries, and the potential for a macro slowdown ahead. Consensus forecasts from equity market analysts call for the S&P 500 Index earnings to grow by at least 10% per year this year and next, and most non-US equity markets are also expecting above-average year-over-year earnings growth. Most global equity markets posted returns of more than 10% in local currencies in 2025. However, non-U.S. investors who invested in U.S. dollar assets suffered a headwind of about 10% to their total returns last year. So, kind of a reversal of the way it had been in some prior years.
Investor optimism is strong even as investors struggle to assess policy uncertainty, geopolitical tensions, and the immediate and longer-run impacts of these issues on various issuers of stocks and bonds.
Q: What has been the impact of the AI-driven market on fixed income?
A: (Christian) There’s an adage that fixed income markets lead equity markets, and certainly that’s sometimes true as it relates to AI. Interestingly, AI has been the dominant driver of U.S. equity markets for a number of years now, and really just entered the chat last year in fixed income markets with over $200 billion of AI-related issuance in the investment-grade market. You know, this is also pretty different from when you had a telecom build-out in the late 1990s and early 2000s, when there were highly levered entities that weren’t generating cash flow. So, this isn’t a speculative build-out where we don’t have cash flows to support the underlying business.
The two big impacts are that issuance levels can push spreads wider in the investment-grade market, and the bigger risk is how people feel about AI more broadly. If sentiment shifts broadly across equity markets in a risk-off event, it flows through all markets, not just equity or debt markets.
 Q: Did you have a major learning experience during the past year?
A: (Matt) 2025 was a year where diversification really shone and came through. And it was a reminder to many that portfolio diversity matters. The macro geopolitical backdrop has been pretty wild, so active investors need to stay focused on individual companies. And within that focus, investors analyze and develop various scenarios to arrive at a reasonable risk-reward. So, we’re always learning. You never stop learning as an investor, which is one of the things that we all appreciate. I would say that there was no specific lesson in 2025, but being balanced and diversified really helps, and it’s probably going to matter a lot going forward.
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