Reading the Tea Leaves (Ep. 3) – 2025 Policy and the Economy

Chris Zand: Hello, and welcome to our quarterly series, Reading the Tea Leaves. I'm Chris Zand, and today I'll be joined by Chief Investment Officer for the core equity strategy, Nael Fakhry, and Senior Research Analyst for the core equity strategy, Jasmine Shen.

Today's December 6th, and we're 45 days away from the start of a new presidential administration and Congress. And with that, of course, comes many changes to consider. We're expecting regulations to relax, interest rates to potentially decline, and taxes to go lower among other things, but how these policy changes may affect key sectors is still a big question mark.

Nael, I'd like to start with you and ask what you expect from the incoming administration and how it's going to impact the economy in the U.S.

Nael Fakhry: Well, we think this will generally be good for the corporate sector. First of all, we think there'll be significant deregulation. And related to that, we think there'll be a lot more M&A by companies.

We also think there'll be favorable corporate tax treatment in terms of extension of the initial Trump tax cuts that were put in by the first administration and that are set to expire. We think that will be extended. We also think bonus depreciation will be extended. And if rates go down, of course that'll be stimulative, but we're keeping a close eye on tariff policy and a very strict immigration policy.

If those two policies are imposed as they've been described, that could push up inflation and therefore limit the amount of rate decline that we and the general economy are anticipating.

Fundamentally, we think our quality growth approach should position us well. Many of our companies should benefit from deregulation. They are often serial acquirers in some cases, and most of our companies are U.S.-based and therefore will benefit disproportionately from the favorable tax treatment.

Having said that, we've made some changes to the portfolio, which I think we'll get into in a minute. But generally, these policies will favor the corporate sector.

Chris Zand: Thank you, Nael. I'd be curious. Which sectors on the equity side do you see being impacted the most?

Nael Fakhry: I'll start off with technology. We think that there's going to be significantly less antitrust action against big tech. In terms of the risk of big tech breaking up, we think that's going down going forward, and we expect that there'll be more jawboning and talk about perceived media bias than actual risk to technology.

We do think there will be significant export controls, particularly around semiconductors, and that could have a negative impact on certain players in the sector. That covers technology.

In terms of industrials, tariffs should lead to more on-shoring and near-shoring. And as I mentioned above, the favorable corporate tax treatment to companies based here in the U.S. leads to higher profitability, and that could enable higher reinvestment that could drive future growth. That could actually help industrials. I'll pass it off to Jasmine to cover a couple other sectors.

Jasmine Shen: On financials, we think that a steepening yield curve where we have long-term interest rates higher than shorter-term rates should increase interest income for banks, and investment banks should benefit from increased capital market activities and M&A.

On healthcare, we think that less regulation and antitrust scrutiny could be good for both insurers and pharma companies. However, we are monitoring closely key personnel appointments at government agencies, as these key appointments will likely drive policy agenda going forward.

On positioning, we have increased our exposure in financials and industrials and are keeping our overweight positionings in healthcare and technology to be both offensive and defensive.

Chris Zand: Thank you, Jasmine. I'd be curious. How are you thinking about both long-term and short-term implications for these policies?

Jasmine Shen: In the short term, I think the policies should definitely benefit companies and boost corporate profits. In the meantime, we are seeing some speculative asset classes being built up, which could be dangerous and is an area that we will actively avoid.

Over the medium to long-term, sweeping deregulation and lack of predictability could have more unintended consequences in the future. We're closely monitoring the impact on sectors and how companies and other countries are reacting and staying flexible in this fluid environment.

Chris Zand: Fascinating. Well, a lot to consider. I think this is probably a good time for us to conclude this episode. I'd like to thank you both for joining us and for our viewers for tuning in. As always, if you'd like to speak to us further about these topics or any items in the wealth management or financial planning area, please reach out to Osterweis Private Client. Thank you.