Tactical Allocation Takeaways

• We are not recommending any changes to our current tactical allocations. We continue to maintain a positive outlook for the global economy but are mindful of the uncertainty around geopolitical events including policies of the new U.S. administration.
• We continue to reflect on the risks associated with U.S. equity markets that have quite optimistic earnings expectations reflected in today’s prices and growing concentration risk as a few companies represent a larger portion of the market. On the other hand, non-U.S. equity market valuations are reflective of much more moderate economic outcomes.  That is to say that we prefer to remain well diversified because there are not obvious and meaningful asymmetric risk-adjusted return opportunities in any region.
• We continue to maintain a slight underweight to U.S. Large Cap equities in favor of cash/short-duration fixed income but will be exploring opportunities in Credit Risk Alternatives during the quarter ahead to evaluate whether better trade-offs exist there.
• Expect greater volatility in 2025 as policy uncertainty is expected to persist throughout the year.

Investors looking in the rearview mirror may be mesmerized by the back-to-back 20%+ returns enjoyed by the S&P 500 Index these past two years. Looking ahead, our economic outlook for the U.S. is more favorable, but a more thorough assessment of valuations relative to implied growth rates is warranted.

One of the most dominant investment themes of 2024 was the emergence of AI. Investors poured money into new generative AI startups, chipmakers like NVIDIA that power the models saw their stocks soar, and incumbent tech companies like Google, Apple, and Microsoft made aggressive investments in data centers as demand for data exploded. A less recognized but related trend has been the rise of construction spending on manufacturing, which has tripled since 2020 from $75 billion per year to nearly $250 billion in 2024 (U.S. Census Bureau data) on the back of efforts to onshore or nearshore supply chains following pandemic disruptions. To accommodate this growth, significant investments in both infrastructure and power will be needed, creating opportunities for investors to benefit. In 2024 our investment team surveyed the opportunities to invest in digital infrastructure across public and private markets. We also published a deep dive on the state of the power markets globally including implications across industry segments:

Digital Infrastructure Market Overview – October 2024

Charging Forward – The Case for Investing in Power Now