As the crisp winter air fades into spring, it won’t be long before baseball fields across the country are bustling with kids, bats cracking, and cheers. Yogi Berra, who was a famous New York Yankees baseball player maybe better known for his witty quotes than his on-field success once said, “Baseball is 90% mental, the other half is physical.” ¹ It’s a game of strategy, and like a lot of competitive sports requires having an “even keel” mindset. To have an even keel mindset is to not let your emotions run too high or low during the momentum swings of a game and trust your fundamentals.

Having an even keel mindset as we enter each new year, we find to be incredibly important here at Asio Capital as each new year presents different opportunities and challenges. 2024 proved to be another very strong year for the stock market. It was the second consecutive year that the S&P 500 returned over 20%, a feat that has happened only three times in history: 1935-1936, 1954-1955, and 1995-1998.¹ The late 90’s was particularly fascinating as the S&P 500 returned more than 20% for 4 years in a row.

All the ingredients were in place to rattle investors in 2024 including one of the most unpredictable elections in history, a constant drumbeat of geopolitical tension and conflict, as well as interest rates that ended the year much higher than anticipated.

The Federal Reserve cut interest rates for the first time this cycle in September and for the year lowered front-end interest rates by 1%. Ironically, despite the cuts, yields rose. The 10-year US Treasury hit a low for the year the day prior to the first Fed rate cut in September and proceeded to scream higher for the remainder of the year driven by expectations for higher growth and inflation.²

The backdrop as we enter 2025 for equities appears to be favorable. Economists expect US GDP growth to be above historical averages, and the unemployment rate remains historically low.³ Incoming 47^th President Donald Trump has fueled a lot of optimism given his agenda to lower tax rates, focus on deregulation, and implement pro-growth policies, including more domestic production of critical goods and technologies. There is also a renewed focus on the importance of addressing elevated levels of government spending and the government’s ballooning fiscal deficit.

Beyond equities, fixed income investors can continue to benefit from attractive gross yields without needing to go down-in-quality or take on meaningful duration risk, which is a measure of sensitivity of bond prices to fluctuations in interest rates. The flat nature of the yield curve, meaning there is small difference between short and long term rates, allows for yield to be maximized whether its for money market fund holdings, shorter duration fixed income, or a more traditional strategic fixed income investment allocation.

As an example, the US Corporate Bond Index yielded 5.35% as of year-end. The chart below shows that while down from its peak in October 2023, the yield remains attractive dating back to 2010.⁴

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Given the positive set up described for equities and fixed income, it’s important to be cognizant of what the potential challenges we believe the market must navigate:

• There are a lot of inflationary forces in place with economic growth, the labor market, onshoring of manufacturing, the green energy transition, and the potential for trade tariffs.
• Policy uncertainty. Given only a slight majority in both the House and Senate, there are questions as to how much policy change will be accomplished and the potential impact.
• High expectations. Sentiment entering 2025 is much more optimistic than 2024 and that is reflected in valuations across various asset classes – equities, credit spreads, cryptocurrencies, etc.

Housing affordability continues to be a major issue as home prices are historically high and mortgage rates are elevated compared to recent history. The combination of these factors has stalled housing activity at a time when the supply of new homes being built is far below what is needed. We’re not sure there is an easy fix outside of letting market forces work themselves out, but it will be interesting to see if action is taken by the new administration to alleviate the supply issue.

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Artificial intelligence enthusiasm has been an important driver of equity returns led by the hyperscalers, which are large-scale data center companies. To put the significance of AI into perspective, JP Morgan Asset Management expects between 2024-2027 the 5 major hyperscalers (Microsoft, Amazon, Alphabet, Meta, and Apple) to spend approximately $1 trillion on this buildout.⁶ We believe we’re still in the early innings of spending which will benefit numerous companies across the AI value chain.

Power generation was a huge focus for investors in 2024 as it relates to the AI story given the staggering requirements critical to power these massive, power-consuming AI efforts. Nuclear power was back in vogue. We believe the focus may shift in 2025 to the application layer as companies seek to leverage AI to achieve various goals such as cutting costs and optimizing workers. Over the long term, we believe this could enhance productivity and boost margins for companies.

We’re excited for the new year and the opportunities we see for our clients. It also provides the opportunity to reflect on how we can continue to improve to deliver on the high expectations we place on ourselves, and our clients deserve. It would be naïve for us to believe that the market won’t have moments of exuberance and fear as the year unfolds, in fact we’d expect it. Having a process and investment culture rooted in fundamentals and an even keel mentality, we believe is crucial to our service mission.

We wish you and yours the best in 2025,

Bryce Goldbach, CFA®
Portfolio Manager & Wealth Strategist

1/8/2025