Big splashes create wide ripples. This week we dive into where bullish sentiment surged post-election, how a unified government could buoy stocks and which SMID cap sectors might make waves with M&A.
The November Global Fund Manager Survey (FMS) showed a post-election surge in bullish sentiment around growth, U.S. stocks, high-yield bonds, and small caps.
The 22% of survey responses which came after Election Day showed even more bullishness. For the full November survey, the net percentage of FMS investors expecting higher global inflation climbed 28 points to -16% from -44% in October. Post-election, inflation expectations jumped to +10%, the highest level since July 2021. Growth expectations also rose post-election with net +23% of investors discounting higher global growth, up from -10% last month. Just 55% of FMS investors expect a “soft landing” (vs. a peak of 79% in September) while 33% anticipate “no landing”. When asked for 2025 views, 43% of post-election respondents said U.S. stocks will be the best performing asset class while 35% said the Russell 2000 will be the top index. FMS equity allocation rose to 29% net overweight, the highest since August 2013.
Electoral sweeps are rare.
Jared Woodard highlights that one party will hold the majority of federal and state government bodies for just the sixth time since 1934. As a result, some of the largest policy shifts in a generation across energy, onshoring and deregulation could unleash U.S. productivity growth. For example, >300,000 regulations were added from 1990-2021; regulations cost companies $3 trillion annually (12% of Gross Domestic Product). BofA economists note that U.S. productivity is already accelerating (1.9% growth vs 1.3% in 4Q19). In their view, the post-pandemic surge in new business formations and strong investment could send productivity growth even higher. Against this backdrop, Jared thinks investors should allocate more to stocks in 2025. Despite high index valuations, profit growth is broadening, equity supply is shrinking, and corporates are hoarding nearly $8 trillion in cash.
Many of our analysts believe that the M&A (mergers & acquisitions) outlook has brightened following the election.
The current FTC chair, who has blocked multiple mergers, is expected to be replaced and historically, bank M&A has been >50% higher under Republican administrations. Even before the election, deal activity had already increased, rising 5% year-over-year to the highest level since 2021. Macro factors most correlated with M&A, including strong equity market returns, inexpensive small vs. large valuations and tight credit spreads have been supportive, although other factors including interest rate uncertainty are less favorable. Head of U.S. Small/Mid Cap Strategy Jill Hall points out that historically, a pickup in M&A hasn’t been a reason to buy the Russell 2000 which has more frequently underperformed in heavy M&A years, perhaps because small caps have sometimes rallied into M&A cycles. Still, certain small cap sectors have led when M&A has picked up, specifically Health Care, Tech, Staples and Utilities. Financials should benefit as well, following a long dearth of M&A.
