The U.S. Economy Is on Track for a Soft Landing

• The Fed’s easing cycle is just beginning | After holding the fed funds rate at an elevated level for 14 months – its second longest ‘on pause’ period in history – the Federal Reserve (Fed) kicked off its easing cycle with a jumbo-sized 50 bps rate cut in September. Cooling inflation and softer labor market conditions have given policymakers the confidence they need to start dialing back some of the policy restraint put in place when the economy and inflation were much stronger than they are today. With inflation steadily declining, the Fed’s focus has shifted to protecting the labor side of its mandate. We expect rate cuts to continue through 2025 – with the fed funds rate settling at 3.4% by year-end 2025. The main difference in this easing cycle from previous ones: the Fed is cutting rates pre-emptively, rather than responding to recessionary conditions. With the economy still on solid ground, these ‘insurance cuts’ should help prolong the economic expansion.
• The election remains too close to call | The polls suggest this unprecedented election remains a toss-up. With 32 days to go, Harris has a slight advantage in the national polls – but remember, it’s the Electoral College that matters. One swing state in particular – Pennsylvania – will likely decide the presidential race. We expect Congress to remain divided, with the Senate flipping to Republicans and the House flipping to Democrats. Key policy decisions on our radar, regardless of who wins, are tariffs, the national debt, and the expiration of the 2017 Tax Cuts at year-end 2025. While election uncertainty may weigh on the equity market in the near term, remember that other fundamental factors – the economy, Fed policy, earnings growth, and investor sentiment – matter more for investors in the long term.
• Bonds are back to being bonds again | After a brief ‘detour’ during the Fed’s historic tightening cycle, bonds have resumed their traditional role of providing consistent income and stability in a portfolio context. Case in point: high-quality fixed income yields remain above their 20-year average and correlations have flipped negative again (suggesting bonds can provide a modest adequate hedge against equity risk). While the early innings of a Fed easing cycle tend to usher in lower rates (higher prices), this cycle may be different. With debt/deficit dynamics a key focus, the scope for a meaningful decline in longer-maturity yields is limited as we expect the 10-year Treasury yield to stay relatively stable over the next 12 months. Our favored sectors within fixed income are investment grade and municipals.
• The equity bull market is still intact | The macro environment – slow, but steady growth, decelerating inflation, Fed rate cuts, shareholder-friendly activity—remains supportive for the equity market. Our 12-month forecast for the S&P 500 is 5,850. But beware of ‘traffic patterns’ – election uncertainty, overly optimistic investors, and the potential for another growth scare – that can temper the gains near term. Our favorite sectors are Info Tech (AI boom still in its early stages), Health Care (aging demographics), and Industrials (beneficiary of government spending). Fed rate cuts and our soft landing outlook should also be supportive for small caps. We maintain our preference for U.S. over international as it has more exposure to our favored sectors (i.e.,Tech). The global backdrop is also supportive for emerging market equities, but selectivity remains important. India, in particular, remains on our radar screen.

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