U.S. Sector portfolio positioning intra-quarter update as of 11/12/2024

The economic backdrop continues to evolve, and while the U.S. election results may introduce both headwinds and tailwinds for the economy and markets, we believe near-term impacts skew toward an extension of the economic cycle. We have made select portfolio changes where we see potential for incremental outperformance or risk control.

November 12, 2024

ACTIONS and OVERVIEW:

Increased allocation to Financials sector

• Added to existing Financials sector ETF holding

Selectively increased allocation to Information Technology

• Added new Software industry ETF holding

Eliminated Utilities sector allocation

• Sold Utilities sector ETF position

Eliminated Real Estate sector allocation

• Sold Real Estate sector ETF position

Portfolio rebalance

We continue to believe we are in a mature economic cycle, with a mix of positive developments like healthy personal income and spending, but also challenges like a softening labor market. We believe the Fed remains on track for near-term rate cuts, which could lead to a re-steepening of the yield curve amid continued economic growth.  U.S. election results reduced near-term market uncertainty and, while some potential policies of the new administration, such as widespread imposition of tariffs, could present headwinds to growth, we believe the balance of policy and sentiment impacts on the economy is likely to skew in favor of continued growth within our typical 6-to-18-month investment horizon.

UPDATE DETAIL:

Increased allocation to Financials sector

• The potential for continued economic growth, along with signs of an improving credit backdrop, an ongoing rebound in capital markets activity, and improved balance sheet strength all increase our near-term outlook for Financials.
• The incoming administration may usher in a more favorable regulatory regime, which could further boost investor sentiment in certain areas of Financials, while potential corporate tax cuts should be particularly beneficial for the domestically tilted sector, in our view.

Selectively increased allocation to Information Technology

• Software companies typically have relatively predictable revenue streams with high margins and free cash flow that make the Software industry more appealing to us than other Technology industries in an environment where policy uncertainty remains, particularly with respect to tariffs.
• We believe a potentially friendlier business climate on the heels of the 2024 election could support enhanced technological adoption among small-and-medium sized businesses, which could drive Software industry earnings growth acceleration over the course of 2025.

Eliminated Utilities sector allocation

• Utilities typically demonstrate their best relative performance amid falling rates and slowing growth, but we now see an increased likelihood that growth remains stable and downward pressure on interest rates is reduced over the next 6-to-18 months tied, in part, to potentially wider deficits and fading disinflationary forces.

Eliminated Real Estate sector allocation

• We believe a reduced likelihood of downside for interest rates tied, in part, to the potential for stronger economic growth, wider deficits, and fading disinflationary forces, is a fundamental headwind for Real Estate,
• A sharp rise in the sector’s valuation over the past year reduces the attractiveness of the sector, which has the lowest projected earnings growth in 2025 of any sector.