Portfolio Intelligence podcast: avoid pumping up the volume—tempering return expectations

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Duration measures the sensitivity of the price of bonds to a change in interest rates.

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John P. Bryson

Hello and welcome to the Portfolio Intelligence Podcast. I'm your host, John Bryson, head of investment consulting and education savings here at John Hancock Investment Management. Today is January 27, 2025, and this is our first podcast of the new year. So I've invited Emily Rowland and Matt Miskin, our co-chief investment strategists here at John Hancock Investment Management to the podcast to talk about what happened … what's happening in economies and markets around the world. Matt, Emily, welcome.

Emily R. Roland

Thanks for having us.

Matthew D. Miskin

Yeah. Thanks for having us on.

John P. Bryson

Great. Hey, Matt, let's start with you. Well, it's only been about a month. It's feeling like a lot has happened in 2025. Can you walk us through what's happened in the markets specifically since the start of the year?

Matthew D. Miskin

Yes, John. And it does feel like this year … the first month feels like a bit of a year already. We are seeing a massive rotation in equities … technology stocks are underperforming while you're seeing more cyclical type stocks like industrials—industrials are the best performing sector year to date—and across cap it's actually mid-cap stocks that are the best performer on a global basis frankly.

We are seeing international starting to perk up a bit. The dollar's a bit weaker to start the year. That's helping European equities and they’re typically more industrial financials heavy. But more broadly, we're seeing value do better than growth, midcap do better than large cap, and more of a cyclical tilt. So a rotation to start 2025.

John P. Bryson

Excellent. So Emily, I want to dig into this a little bit more to kind of look forward as you rank the opportunities that you and Matt are seeing in 2025. What are they? Give me the top five and then specifically dig into international equities. Are they climbing the ranks if you will.

Emily R. Roland

Yeah. As Matt mentioned we are seeing a rotation that's included international equities. We are still modestly underweight non-U.S. equities. And the way we think about that decision is we want to find where the best relative economic growth is and where the best relative earnings growth is. And we still are seeing that in the United States. We look at things like global PMIs or purchasing managers indices to uncover where the best economic growth is.

And while we are seeing a modest improvement in … in Europe, in fact, that's one of the things that's really helped the outperformance of international equities so far this year. We look at the composite PMI, which combines manufacturing and services, and for the eurozone that actually just crossed over into expansionary territory from 49.6 to 50.2. The U.S. composite PMI is better.

It's at 52.4, but it is moderating a bit here. So markets are our pricing that in as Matt mentioned, the dollar's weakened a bit. The euro has jumped and that's helped lift European equities so far this year. But all in all, the earnings growth estimates are better in the U.S. Analysts are penciling in about 14% earnings growth in the United States this year.

Maybe a little bit optimistic. But you know still elevated. And penciling in about 6% earnings growth for the MSCI EAFE … so, not terrible in Europe. But just seeing better opportunities here in the United States. Within U.S. markets, we still are overweight quality—quality at a reasonable price. We have noted that the technology sector, while still sporting elevated earnings growth estimates, is expensive.

So we've seen, you know, very notable outperformance being driven by a small handful of mega-cap tech stocks. We've suggested still, looking at … at U.S. large-cap growth stocks because of those quality attributes that we see there, but really managing the valuation risk that's inherent in that part of the market by looking to areas on the value side. Thinking about utilities, financials, as areas that could benefit … healthcare stocks, which have underperformed meaningfully and are now trading at a significant … about a 20% discount to the broad market.

So we're trying to find some value across markets in beaten-down areas. We also, finally, continue to emphasize U.S. mid-caps stocks, which have done well so far this year. They're benefiting from onshoring trends or supply chains that are coming back to the United States from other parts of the world. We see that through that really a manufacturing renaissance that's playing out within the United States today.

They’re also, you know, really significantly, cheap versus large-cap counterparts trading at nearly a 30% discount to large cap. So it's a trend that you're not overpaying for. There's a relative sector composition element there with industrials being a big component of mid-cap stocks. And we see them as really being the key beneficiary of onshoring trends.

So lots of opportunities across markets. And I think, you know, this broadening out there we're seeing, this rotation that we're seeing—really healthy, from a breadth perspective for investors portfolio into 2025.

John P. Bryson

Yeah. It's funny your comments remind me of the panel that I, hosted. It was, you know, for quite a Boston partners and Tim Manning of Wellington, we talked a lot about the broadening out of the market. And we talked a lot about active management. Can you maybe add to the conversation around why active management can really, outperform in this type of, marketplace?

Emily R. Roland

Yeah, I mean, it's certainly a, you know, a stockpickers market. The challenge comes during times where … and I know we'll … we'll probably talk about the Fed here because that's an important element of what's to come in 2025. But, when the Fed is providing a ton of liquidity to the market, that typically is an environment that sort of lifts all boats.

And when the Fed is, is cutting, that's another that can be another challenge. Right now, the Fed is … is really on hold likely for the for the remainder of … of … for Well maybe we can talk about this. Maybe there's one cut but not as many as aggressive cuts as we're being priced in. And to us there's … that's an environment where there are more winners and losers across markets where there's not just across the board liquidity being provided that helps the … the lowest-quality stocks and the higher-quality stocks. Right now, there's … there's a bigger differentiator there. And it's a … it's really a ripe opportunity for active managers to take advantage of stocks that are potentially mispriced in that environment.

John P. Bryson

Excellent. Thank you. Hey, Matt. Emily had started to talk about global PMI that have been reported this week and economic information every single day. If … if you look around the world, how our economy's looking? Who's accelerating fastest? Who's growing at a good clip and maybe who's falling behind?

Matthew D. Miskin

Yeah. We've more broadly seen U.S. exceptional secular exceptionalism in 2024. I mean, it was … you couldn't get much better. By the end of the year in terms of the U.S. economy and its perception around the world ... there was a lot of positive sentiment, and I … it's not that the U.S. economy is … is doing poorly. It's still growing.

It's just we have already seen in January here a bit of a slip of the services side of the economy. You know, it just was doing so well that it just probably couldn't get any better, frankly. But we did see manufacturing improve. We got, actually, a Philadelphia manufacturing business survey that showed that basically the Philly Fed is … is just doing amazing.

You kind of almost want to look over to them and say, I'll have whatever they're having. Because it is just so strong. And then small business optimism surged. It's not picked up on a lot of the bigger data points, but it often filters in because half the employment picture is done through the small businesses. So that's usually a good indicator of hiring.

And, you know, basically more broadly, the business trends. But so the U.S., okay, just moderating a bit. Eurozone did not get worse and “did not get worse” is the new better. Before the eurozone just kept getting worse and worse and everything just happened in a way that it was like political risk then hit and everything else.

So now it's not getting any worse. The markets like that, the euro strength in European equities have come back a bit. They're actually pretty strong here to start the year. You know, it's hard to say if that means it's a new growth regime out of Europe or if it's just, hey, we're not getting worse and that's okay.

And then China, you know, it's been a bit … what we're seeing potentially is China going to pull through a demand where the U.S. had tried to get ahead of tariffs under the new administration and put in a ton of orders, basically to end the year December. And then we're going to have to see though if that's sustainable, we don't believe it is.

So, China had really strong data and actually we just got some data for January. It's already slipped a bit. But more broadly, out of China we have seen weakness. And so, you know, it's this kind of modest growth picture. We ended last year in great, great place. But a bit of a deceleration globally. And for us that means bond yields will be anchored.

It's going to be hard for them to break out much higher than this. In terms of stocks, we still need to think about earnings. I know that, you know, we're seeing some companies that have great earnings that are getting sold off here, but earnings growth is not going to be easy to come by across companies. You're still going to have to do that work that Emily was talking about finding the right companies right.

John P. Bryson

Very good. Hey, Emily, you…  you brought up the topic of the fed. Don't want to have a podcast without talking about the Fed and the possibility of rate cuts. What do you what do you see on the horizon for us?

Emily R. Roland

Yeah. So the the bond market is pricing in one cut now, in 2025, that is suggested it would be at the June meeting. And of course, this is a moving target, so it'll likely change as the incoming data come in. But what we've seen is a modest improvement in economic data. Matt, that just talked about it.

The Fed has a dual mandate. So there's two things that they think about in setting monetary policy. One is … they want to maintain price stability, which means keeping inflation not too hot and not too cold. And then they want to maximize employment. So looking at the inflation side of the mandate, you know, the … the disinflation trend is still intact, but it's taking a long time to get back down to the Fed's 2% target.

There is some, some great progress being made. Things like the shelter component, which represents about two-thirds of CPI shelter housing. We're finally starting to see that which have been coming in like 0.6%, 0.7% month over month … that's down to 0.3% or 0.4%. So that's … that's good news. But on the other side, there's been a bit of a twist where other elements of inflation have actually picked up a bit.

So it's not quite falling fast enough for the Fed to cut here aggressively, nut it is falling. On the labor market side, the jobs market's in good shape. The unemployment rate sitting at 4.1%. Last month we added about 250,000 new jobs. Yes, there are some risks there. There are some cracks in the labor market. That jobs growth is fairly concentrated in areas like government.

We've seen things like continuing jobless claims elevated. So basically, for folks that are applying for initial jobless claims, it's taking them longer to find a new job. The quit rate is coming down a bit, which means, there's less of a … a kind of idea around quitting your job and going to work somewhere else to make more money.

That's becoming harder. Sorry to be the bearer of bad news for anybody listening on the call today, but that's probably a thing of the past. So some cracks are forming, but the labor markets really it's … it's strong. And it means that the Fed probably doesn't need to cut aggressively. So we do think that the fed is on hold here at least for the first half of the year.

Again, they … they … we do think that they may resume cutting in the second half of the year. We think growth probably slows a bit. Inflation likely continues to come down. And if rates in the intermediate part of the curve stay elevated, there is kind of a self-correcting mechanism as far as the economy goes. So if there's better growth priced in to the longer-end of the mid-to-longer end of the curve, that means borrowing costs stay elevated.

So you think about mortgage rates, credit card interest rates, auto loans. There is a … really a challenge there to economic growth if borrowing costs remain that elevated. So, we do see rates coming down. I didn't get a chance when you asked me for the top five opportunities earlier across markets, and I completely failed to mention bonds.

We do think that there is opportunity in the income that's available in high-quality bonds now, as we head into 2025. You might have to wait here a bit for the duration component of that total return and high-quality bonds to kick in. But you are getting paid to wait as high-quality bonds are offering income, you know, north of 5% now, which is very, very elevated compared to the last 20 years or so.

Fed on hold, likely cutting, and then the total return potential in bonds likely to kick in in a bigger way. In our view, in the back half of 2025.

John P. Bryson

Thanks. And no problem on the missed there. We were focusing more on equities. So I'm glad you brought bonds back into the conversation. And I got to tell you, you'll be proud of me. I had a conversation with my 18 year-old daughter. It started and ended with her asking for a credit card. Who's got a 15-minute conversation. But in the middle, I squeezed in a conversation around the Fed's dual mandate and actually kept her attention for a little while as well.

Emily R. Roland

Well done!

John P. Bryson

Yeah. Thanks. So, very good. Hey, Matt, I'm going to come back to you. One of you had mentioned tariffs. It is on everybody's mind. As a matter of fact, to our listeners, I'm going to try to set up a podcast that does a deep dive on tariffs so we can really dig in. But at a high level, you mentioned it. Assess for me the possible impact of tariffs on the economy in markets. How should investors be thinking about them right now.

Matthew D. Miskin

So, one: we've done this before. So this is not our first time doing tariffs. There are already tariffs that are on. There were there are tariffs put on under the first time the Trump administration was in. They weren't taken off. We also have data of inflation. Under the first Trump administration … it averaged about 1.7%. I'm talking core PCE on a year-over-year basis.

So no real inflation, of any magnitude under the first Trump administration, the inflation started when we shut down the global economy around COVID. So that was really the catalyst for the inflation environment. Before that, there were tariffs, there wasn't much inflation. Part of the reason why … one, it's a global, very intricate, complex economy.

And so, if you do put tariffs on, well, the first thing that usually happens is the U.S. dollar strengthens. Think about it in the way of, you know, if you're buying some maple syrup from Canada and you're buying in Canadian dollars or loonies .. and the dollar, U.S. dollar strengthens, you're getting more syrup per dollar as your dollar strengthens.

So that can actually overcompensate for the tariff. The fact that the dollar strengthens makes the tariff less costly for U.S. consumers, because you've got more purchasing power with a stronger currency. So that it usually tempers some of the tariff impact. The other piece is that some maybe, the company will actually take on some of the costs. They'll also try to avoid the tariff impact the best they can. So they will, you know, find ways around it. It's, you know, something that all Americans try to do is avoid taxes. Companies that, you know, will have to pay the tariff. And in doing that, we'll try to avoid those taxes in ways. And then it will, you know, at some level hit the consumer.

But by the time the dollar is, you know, is there and that's mitigated some of the impact. And the company has done everything they can to mitigate the impact. What we found is the impact on the consumer is…  is not as much as, people think. Now look where this all ends up. There's a lot of different things.

You know, if you put on a small amount of tariffs for versus a lot of tariffs. You put tariffs on everything versus very select things. But this is a negotiation. This is another thing that we've seen under the Trump administration … In the last tenure, is that these … these discussions are happening in the broad, public sector.

And you're, you know, you're able to hear it. To us, it is about not overreacting. If you have reacted to every policy discussion from the administration over again … the last tenure or even to start … this, you'd find yourself trading all the time. You'd find yourself all over the place on your portfolio. And frankly, that turnover does not benefit you. And it does not end up necessarily being the right place to be. So we've got to be patient. We've got to not, you know.. Tune out the noise the best you can and really just focus on the fundamentals. Earnings are big. The Fed's going to be big. The tariffs, to us, is not going to be nearly as big of an influence as other major macro themes.

John P. Bryson

So that's why we have you and Emily on the podcast to kind of eliminate the noise and drill into the really important stuff. So thank you. Emily, my last question for you. We've covered a lot … any other advice that you're giving investors in 2025 as we move forward?

Emily R. Roland

Yeah, John, it's really about resisting turning up the volume in portfolio. So looking back on the last couple of years, it's…  it's easy to forget, but we just had remarkable returns for the S&P 500. And we got back-to-back 25% plus total returns. That's only happened four times in history. And the last time it happened was in the late 1990s.

So it's not to say that returns can't continue to be decent here across markets. It's just really thinking about what we just got. And a lot of that came on the back of multiple expansion. So we've seen decent earnings trends. But overall we saw the S&P 500, you know, seeing significant multiple expansion. And now we're sitting at about 22X forward earnings.

Emily R. Roland

So almost all of the 50% return in markets was driven from that. It's not to say there's no valuation upside here. We've gotten to as high as 24X. And we don't see elevated valuations as necessarily a catalyst in and of itself. You've got to see something else change. But it's something that we need to recognize. So just I think tempering expectations, focusing on the fundamentals, identifying those areas that have good earnings trends, to us is going to be really critical.

You know, we continue to see sentiment driving things like crypto and crypto-related asset. And we think that there is some room for that speculative frenzy to kind of see some downside potentially over the course of this year. So it's just kind of resisting reaching, over your skis and taking risk in portfolios and really focusing on those areas that can offer quality … offered at a reasonable price.

Looking at areas like intermediate core, core-plus bonds versus going down the credit spectrum. We just don't think investors are being compensated there and the yields are quite decent … again, in the high-quality bond space. And then, even looking at areas like infrastructure and … and, you know, alternatives type strategies, infrastructure being of our favorite category within the alternatives universe to really kind of … again, help with the challenge that the risk assets really aren't pricing in a ton of risks, today.

So, you know, specifically exposure to areas like infrastructure, we can see positive earnings trends there. We can see structural demand for power amidst the AI revolution. So, I think there's a lot of opportunities across portfolios, but it's really about thinking about risk. A lot of the investors I talked to are, you know, they … they see these 25%+ returns and they're frustrated if they haven't met those, so this can be a time where there is significant risk taking. And we just want to be mindful of that. And, and just be balanced and be diversified into in portfolios into 2025.

John P. Bryson

That's great. I think we've got a new era podcast episode title. Avoid pumping up the volume. I like that that phrase you dropped there. Yeah. Excellent. Matt. Emily, as always, thanks for joining the podcast. Great way for us to kick off 2025. Looking forward to catching up with you again soon. Folks, if you're not following Matt and Emily on LinkedIn, I highly recommend you do.

They're dropping great knowledge there on a regular basis. And as always, if you want to hear more from us, please subscribe to the portfolio Intelligence podcast on iTunes or you can visit our website JH investors.com. You can catch up and read our viewpoint on all things investing, all things business- building for your practice and much, much more. As always, thanks for listening in the show and looking forward to o talking to you more in 2025.