Stocks maintained their upward trajectory in the third quarter, with the S&P 500 rising by 5.9%. Notably, leadership shifted from mega-cap tech stocks to sectors like real estate, utilities, and industrials, reflecting our expectation for broader earnings growth beyond the "Magnificent Seven."

Fixed income also rallied, driven by anticipation of the Federal Reserve’s rate-cutting cycle, which officially began in September after a pause since July 2023. With the economy remaining strong and short-term rates declining, we foresee a continued favorable environment for risk assets, although uncertainties loom on the horizon.  

As the November presidential election approaches, polls indicate a tight race, with former President Trump leading in betting markets. The outcome hinges on swing voters in seven key states.

Despite a polarized environment, both candidates share common ground on certain policies, including an expected rise in the budget deficit and an expansion of child tax credits. However, they diverge significantly on tax strategies. Vice President Harris proposes increasing the corporate tax rate to 28%, while Trump aims to lower it to 15%.

It's crucial to remember that the executive branch's effectiveness is contingent on Congress's composition. Current polls suggest Republicans may secure the Senate while Democrats are favored to narrowly win the House, leaving uncertainty regarding the implementation of partisan proposals. Investors should focus on economic fundamentals rather than election outcomes, as historical data show that GDP growth, cost of capital, and inflation significantly influence returns more than the president's party affiliation.

International growth lags the U.S., but the MSCI All Country World ex-U.S. index is trading at a 36% discount to the S&P 500 based on P/E ratios. As the Fed lowers rates, the attractiveness of U.S. debt may diminish, potentially redirecting investments toward international markets.

U.S. equities appear to have priced in aggressive rate cuts, so any disappointment on this front may lead to increased volatility. The upcoming election adds another layer of uncertainty, along with rising global geopolitical tensions. Historically, stock returns in the year following initial rate cuts average only mid-single digits, though they tend to perform better alongside an expanding economy.

Fixed income delivered double-digit returns over the past 12 months, as rates fell across the curve in anticipation of a change in Fed policy. Interestingly, the 10-year Treasury yield has risen since September's initial cut, highlighting a discrepancy between short- and long-term interest rates. This may be the market signaling stronger economic growth and inflation than had been priced in previously. While higher yields benefit investors, we anticipate increased volatility in fixed income as yields move toward their neutral levels.

With uncertainty in equities and fixed income, alternative investments such as private real estate and private credit offer intriguing opportunities. The recent drop in commercial real estate values appears to have stabilized, and even modest rate decreases could boost deal activity and lead to higher rents as inflation picks up. Sectors such as industrial, multifamily, and digital infrastructure (e.g. data centers) are well-positioned for growth. Private credit has thrived on rising rates, with floating-rate loans providing strong yields. Although yields may dip with Fed rate cuts, they should still outperform public bonds, and credit quality is expected to improve amid lower borrowing costs as more companies move away from traditional bank financing.

Equities and fixed income delivered strong results this past quarter, particularly notable in an election year. While the summer brought some volatility due to mixed economic data, investors found reassurance in the Fed’s signals of upcoming rate cuts. Now, with a clear rate-cutting cycle and improving economic indicators, optimism is rising. However, if the Fed’s actions lead to higher inflation and a significant rise in long-term bond yields, volatility could increase, requiring more tempered expectations. Amidst this backdrop, careful stock selection is key, along with diversification through alternative investments. By staying focused on economic fundamentals and seizing opportunities in a dynamic environment, investors can confidently navigate the path ahead toward further gains in 2025.