Top asset managers, overseeing trillions of dollars in investments, are advising clients to adopt a defensive stance, particularly through heavy bond allocations, as rising equity prices and the Federal Reserve’s diminished likelihood of further interest rate cuts raise concerns.
Vanguard, the $10 trillion asset management giant, has updated its 2025 outlook, recommending that financial advisers and select wealthy individuals allocate 38% of their portfolios to stocks, with the remaining portion dedicated to fixed-income assets. This adjustment marks a decline from 41% in 2024 and 50% in 2023, signaling a shift away from the traditional 60/40 portfolio model.
Todd Schlanger, senior investment strategist at Vanguard, noted in an interview that “for investors willing to take a bit of active risk and deviate from their long-term policy portfolio, de-risking makes sense.” Vanguard’s updated forecast reflects concerns over market volatility, particularly in the wake of the 2024 election and its impact on investor sentiment. Despite initial optimism surrounding President-elect Donald Trump’s policies, including his economic strategy known as “Maganomics,” economists have issued cautionary forecasts driven by persistent inflation and high interest rates.
The move toward greater bond exposure follows two years of robust US equity market performance, with some investors now questioning the value of stocks. The S&P 500’s price-to-earnings ratio, a key valuation metric, has surged from 19.2 in September 2022 to nearly 30 in recent weeks, prompting concerns that stocks have become overpriced.
Invesco’s solutions arm is also advising clients to increase their fixed-income holdings and focus equity investments in defensive sectors, such as healthcare, consumer staples, and utilities.
T. Rowe Price’s portfolio manager, Charles Shriver, expressed a preference for equities but noted a shift towards value stocks, avoiding overvalued growth companies in favor of more reasonably priced alternatives. “Stocks look extremely expensive on a historical basis,” said Will Smith, a high-yield manager at AllianceBernstein. “It will be difficult for stocks to deliver returns as high as the past decade.”
The preference for bonds over equities had fallen out of favor during the strong performance of the S&P 500 in 2023. However, Schlanger emphasized that Vanguard’s “time-varying asset allocation” model, which has a 10-year horizon, aims to manage risks amid changing market conditions. “While there may be periods of underperformance,” he stated, “we believe this model will continue to manage risk effectively, especially as the price of US equities rises, which increases the potential for lower returns and greater drawdowns.”
The S&P 500 saw a significant surge following Trump’s election victory, reaching an all-time high just under 6,100 by December 6. However, markets have since cooled, and 2024 concluded with a decline in equities, notably lacking the anticipated “Santa Claus” rally.
Alessio de Longis, head of investments at Invesco Solutions, acknowledged that the momentum from the election rally had waned, with markets losing steam. “Our view is that growth is decelerating,” he said. “The evidence of inflation weakening significantly is not yet compelling.”
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