There is a saying, that I think could be considered universal across most topics. I believe the saying goes… “Opinions are like noses. Everyone has one and no one cares, until someone starts picking at it.” Okay that’s probably not quite right, but you get the point.

In preparing for 2025’s investment thesis I wanted to reflect on different analyst’s, pundit’s, forecaster’s, and economist’s opinions of the US economy – and even market expectations – for 2022, 2023, and 2024. Then I reviewed those same individual’s views of 2025 and I arrived at the aforementioned “opinion based” conclusion. In absolute terms, their respective research was logical, persuasive, and thought provoking. And yet, most of them were completely wrong in their assertions, after they were picked at. But why?

To help us understand where their assessments diverged from the outcomes they forecasted we need to look at both fundamental and technical analysis. In particular we need to separate the various contributing factors to really understand whether these various individuals were way off in their forecasts, or if the domino they thought would tip… just never tipped. The same holds true for our research.

The Defining Factors:

Fundamental vs Technical Analysis

I could start off with saying that markets are unpredictable and as such forecasts are only as good as the day they are written. But that would imply there is no rhyme or reason to how markets, or economies, perform. If true then the last 100+ years of corporate finance, economic research, and market analysis would be as useful as the wallpaper on your bathroom walls… or am I the only one with wallpaper in my bathrooms?

To better understand what I mean let’s start with a very simple understanding of fundamental analysis. At it’s root, individuals who perform research on companies, markets, economies, and more start their research with a basic understanding of a problem to be solved, the players who are trying to solve the problem, and the concept that there is enough market demand to warrant solving the problem. These three data points allow individuals, like our team, to evaluate the landscape being assessed.

For example, let’s say you are at home and decide you want to take a trip; but to take this trip you need a mode of transportation. Now you could use the tools you were given at birth (your legs) to traverse the distance of your trip but unless you know where you are going and how quickly you need to get there… that mode of transportation may not be appropriate. Therefore, as you assess your needs, timeframe, desired outcome, and more you run through a list of options that may be better suited to accomplishing the task at hand.

Now let’s say this problem solving leads you to decide you need a motor vehicle. While completing your logical assessment is a massive accomplishment in its own right, you’re now left with trying to figure out which type of vehicle you should purchase and from which brand you should purchase this vehicle from? This is where choices could be unwieldy and analysis by paralysis typically takes over. However, let’s assume you are able to navigate through everything flawlessly and end up with the vehicle you need to traverse the great distance to complete your trip. Now you have to plan the route, map out where you are going to stay, determine where you are going to stop for food, decide how much money you will need to fund the trip, and ultimately decide if you are going to do all of this on your own… or with the help of someone else.

As you can see, planning something as “simple” as a trip comes with a number of micro decisions that in turn build on themselves in the development of the desired/forecasted outcome. When we overlay this basic thought process to assessing a company’s financial health, competitive advantage, process workflow, market size, and more it becomes clear that a number of variables need to be executed correctly for the target outcome to be reached. Of course, when you add in external variables not directly related to a company (e.g. dollar appreciation, interest rate policy, inflation expectations, war, or protectionism) the hypothetical outcomes become that much harder to forecast.

This is where historical patterns, economic theory, mathematical principles, and strategy are used to narrow down – or guide – the decision making process. While past performance is never an indicator of future results, patterns seem to consistently pop up from year to year or decade to decade. These patterns are then analyzed and mathematical models are created to determine correlation, and in some cases causation. The point being, financial models are used to evaluate an individual company’s fundamental performance within a set of parameters that may be outside the control of the company. These models help individuals, like our team, evaluate outcomes.

The same holds true for technical analysis. Just like there are time tested patterns and models within with fundamental analysis there are also patterns and models within technical analysis. The only difference between the two points of view is… well, everything. In other words, fundamental analysis does not take into consideration the models and patterns used within technical analysis, and technical analysis does not take into account the models and patterns used within fundamental analysis. This is why being able to evaluate a problem from two separate, but equally valuable, perspectives helps researchers and analysts create a well-rounded outlook.

If we stay with the same example previously mentioned then we could view technical analysis as the vehicle manual that sits in the vehicle glove box that most of us rarely review. However, when something goes wrong and that weird symbol pops up on the dashboard it is usually the quickest resource we can use to find out if our vehicle is about to blow up… or maybe just needs an oil change. The point being technical analysis could be viewed as rules based back-tested indicators that highlight what to do if, or when, something has happened – or is about to happen.

I should note, neither technical analysis or fundamental analysis should be viewed as “seeing into the future”. It’s more like using muscle memory when driving home from work. When you have done the same task over and over for years you tend to develop the muscle memory which can lead to complacency. It’s only when you experience a pattern interrupt – like traffic – that your “present moment” is brought to the forefront of your mind. You are more attentive to the world around you and you’re not thinking about what you’re having for dinner.

Hopefully that was clearer than mud and I didn’t lose you in trying to simplify how Wall Street comes up with their financial models which in turn leads to future forecasts. The bottom line is this, those that build financial theories, models, and forecasts – like our team – base their models on the data input into the models. If the data input into the models is akin to different dominos in row of dominos then all it takes is for one domino not to fall for an entire section of the outlook to not pan out as intended.

The 2025 Forecast

If you have made it to this point you might be asking yourself, why is he going to offer a forecast for 2025 when he just said forecasting the future is data dependent and the data needed to evaluate outcomes isn’t known until the date an event happens? Simple, while I – along with many of my peers – cannot predict the future we can use the aforementioned patterns, theory, and strategies that are time tested over 100 years to narrow the potential outcomes. Then as events unfold the forecasts can be updated, adjusted, and the investment strategies can be modified to reflect real-time data.

So let’s start the 2025 outlook with a set of baseline assumptions, or beliefs:

1. US equity market valuations are at historic highs.
2. Interest rates are expected to remain higher for longer.
3. A normal yield curve is upward sloping (i.e. lower rates slope higher over time).
4. The dollar index has only been higher twice in the past 25 years (i.e. 2001 & 2022) making it difficult – or more expensive – to export goods.
5. China’s economic demand continues to weaken.
6. The President-Elect has stated he will enact tariffs on countries across the world.
7. The national debt is $36 trillion, the annual deficit is ~$2 trillion, and interest expense (alone) is expected to reach $1.3 trillion dollars a year by the end of 2025.
8. US tax brackets are anticipated to remain the same, if not decline for some, by the end of 2025.
9. War in the Middle East and Ukraine are ongoing with a potential war over Taiwan on the horizon.
10. The AI frenzy has hit a critical juncture… the speed to deployment is limited by power capacity, and power is constrained by infrastructure, money, and time.

The list could go on quite a bit longer but we believe these are the most salient points. For this reason, our 2025 market outlook can be summarized in two words: cautiously optimistic.

At the heart of our investment strategy we use a “Core and Explore” approach. This means a core component of our portfolio is rooted in strategic positions based on how we believe the market will move based on the aforementioned variables. These core components are typically chosen to be less volatile – although that has been a challenge over the past two years as both equities and fixed income have been on a roller coaster ride. Whereas the explore components tend to be more volatile but are chosen to offer the opportunity for excess returns – or alpha generation.

For 2025 our core components will focus on energy production to address supply constraints, financials based on an upward sloping yield curve, high quality fixed income on the short to intermediate part of the yield curve (with some exposure to the long end of the curve as yields reach, or exceed, 5%), utilities for dividend yield and stability, and finally investments that align with an “American First” thought process as the new administration focuses on creating a more protectionist environment within the US.

As for our explore components, we will continue to focus on the themes previously mentioned: Infrastructure, AI, and Space/Defense. However, there will be a slight tilt in the focus toward an end to end supply chain within Infrastructure, there will be a tilt toward computing and data center within AI, and a deeper exploration of Space/Defense proliferation through satellites, hypersonic missiles, and cyber security.

This leaves the question, will we remain defensively positioned headed into 2025? At the outset of the year, with the uncertainty in the first 100 days of the new administration, we will remain defensively positioned. However, as opportunities are presented on market pullbacks we will look to unwind our defensive approach and become more aggressively positioned thus fully deploying our Core and Explore strategy.

How will we know if our investment thesis for 2025 is working?

The simple answer, we will only know in the moment based on the data that is presented at that time. If inflation remains stubborn for longer, growth remains low but not negative, and interest rates remain higher for longer concerns of stagflation will begin to surface which will have a negative impact on equity prices. On the other hand, if the US engine of growth rallies on then asset prices should increase with inflation potentially moving in lockstep.

As it is our process is to maintain a strategic outlook using thematic investing we try to remain nimble throughout the year. Should dramatic events unfold, or severe deterioration take hold, our investment thesis will adjust accordingly. This is why we provide monthly Market Updates to every client. We believe in full transparency.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. You cannot invest directly in an index. Asset allocation is no guarantee of risk reduction. Past performance is no guarantee of future results.