Ultra-high-net-worth individuals and their families are facing some big challenges, and many are seeking the counsel of multi-family offices to help them navigate uncharted waters.
InvestmentNewshas been speaking with Elizabeth Anderson, vice president of business development at Whittier Trust, to find out more about the issues facing UHNWIs and how the multi-family office approach can offer more than that of a single-family office.
Anderson has been with the oldest West Coast-headquartered multi-family office for a decade, and Whittier started as a single-family office for real estate and petroleum pioneer Max Whittier in 1935. Over its almost 90 years, the firm has been driven by its early realization that its role is not just about managing and preserving a family’s wealth, but the impact it has on the family.
“Our experience with one generational family inspired the transformation into the Whittier Trust multi-family office,” Anderson said, adding that its services include investment management and consulting, trust services, family office, philanthropy, family continuity, real estate management and investing.
Family Dynamics
Anderson says that demand for multi-family offices is growing as families seek hands-on teams who can manage their wealth and business, but also the intergenerational transfer of both.
Often, this will be prompted by a change of family dynamics.
“A great example of this was when a single-family office moved to Whittier Trust after the family patriarch died, and it became clear that the SFO was unable to effectively serve the evolved needs of the family,” she said. “Clarifying trust terms, managing ownership changes, meeting cash flow needs, educating family members and dealing with new family leadership dynamics inspired some of the staff to retire and others to scratch their heads about what to do next. As a part of this step, we will help families determine clear lines of communication, rules of engagement and methods for conflict resolution that resonate with all generations.”
After an initial period of assessing the family’s assets and designing the new family office around the family’s culture and needs, there were challenges related to dynamics that required careful management to unite them around shared purpose and values.
“More than five years later, we have seen this family through divorces and graduations, family illness and new careers,” added Anderson. “Their wealth has grown substantially, and family members understand their family legacy. They are confident that their wealth will support their ongoing needs and those of their children. The next time they experience a death or significant change, they will be prepared.”
Philanthropy is one way that the Whittier Trust team finds it can unite families.
“Philanthropy can be more than just a vehicle for charitable giving; it can also be an apparatus for the family to have something outside their immediate concerns that they can all work toward and grow together,” Anderson said.
Anderson says that many clients want to take a hands-off approach to their wealth management, to allow them to focus on their passions.
“For example, within one UHNW family, one client enrolled in art school to develop her skills in oil painting. Another started spending summers in Montana to fly fish more often. A third started a non-profit benefiting at-risk children. Having a family office managing their personal and financial details allowed each member to spend their time in a more meaningful way,” she said.
Biggest Challenges
Along with the intergenerational transfers of wealth and business, what does Anderson see as the biggest challenge faced by UNHWIs and their families currently?
Tax is a major consideration for Whittier’s team and is often complex given the diverse assets of UHNW families.
“Asset location, distinct from asset allocation, is crucial for maximizing after-tax returns. Our portfolio managers look at placing tax-inefficient assets, like corporate bonds and high-turnover strategies, in tax-deferred or tax-exempt accounts to grow tax-free,” Anderson shared. “For taxable accounts, our advisors employ tax-efficient investments such as low-turnover stocks, direct indexing, low-dividend growth equities, municipal bonds, or preferreds with qualified dividends to optimize compounding. Our investment managers also allocate growth assets to accounts intended for future generations and income assets to those with shorter time frames.”
In conclusion, Anderson noted that there is a skill set that is key for those who work with Whittier’s clients.
“We invest in our people with extensive training and support to make certain that we are listening to our clients, being empathetic and building a strong foundation with them. While academic intelligence is always important, we also pride ourselves on valuing EQ among our teams,” she said.
Interview with Elizabeth Anderson, Vice President at Whittier Trust. Elizabeth is based out of the Pasadena office and focuses on family business transitions, succession planning and pre-liquidity personal planning.
For more information, start a conversation with a Whittier Trust advisor today by visiting our contact page.
From Investments to Family Office to Trustee Services and more, we are your single-source solution.
What ultra-high-net-worth individuals need to consider when mulling an exit.
In my role at Whittier Trust, I've seen firsthand how critical it is for ultra-high-net-worth individuals (UHNWIs) to have a well-thought-out exit strategy for their family businesses. Despite the intensive planning that typically goes into wealth management, recent research from the Exit Planning Institute suggests that a staggering 80% of business owners lack solid exit strategies, leaving their wealth in limbo and risking economic continuity for future generations.
The planning process of an exit strategy can often be fraught with uncertainty and potential pitfalls, making it a critical issue for business owners nearing retirement or a transfer of ownership or leadership. Here are the five key questions UHNWIs should ask their advisors to ensure a smooth and successful transition.
1.How many different exit strategies are available to me?
Understanding the various ways you can exit is fundamental to choosing the right path for your business. Each exit strategy has unique implications and suitability depending on your business's circumstances and your personal objectives. Here's a breakdown:
Generational Family Transfer
When multiple generations of a family are actively involved in the business, an owner might prioritize business legacy and family engagement over the sale price. If the objective is to keep the business in the family, the exit plan might involve transferring company stock, often at a discount, to direct heirs over many years. While keeping a majority stake in the company and control over operations, the owner can transfer assets to the next generation while still mentoring and training the next leader.
A generational family transfer can play out in a variety of ways: the owner may ultimately sell stock in the company to family, retire holding minority ownership or gift all stock to heirs. A successful transfer will take at least three to five years to accomplish, position the business for success, meet the owner's liquidity and financial needs after the transfer and leave the new owner(s) financially stable after the transaction.
Management Buyout
An owner who wants to sell all or part of the company to existing management might favor a management buyout. This type of ownership transition involves structuring a deal in which management uses the assets of the business to finance a significant portion of the purchase price. This can work for an owner who believes in the management team and thinks it will be able to keep the business thriving when he/she exits. However, if the management team lacks adequate liquidity, the seller may have to accept a lower price or unattractive deal terms, including heavy seller financing.
Sell to Partners
When the owner has partners and a quality buy-sell agreement, a sale to partners may be the only selling option. A buy-sell agreement generally articulates a controlled process for transferring ownership. Since the buyers fully understand the business and it's a planned process, selling to partners generally isn't too expensive. Common challenges in selling a business to partners include a lower sale price, slow transfer of proceeds and potential disagreements among partners.
Sell to Employees (ESOP)
When an owner wants to sell the company to its employees, an employee stock ownership plan (ESOP) might be the answer. In this type of sale, the company uses borrowed funds to acquire shares from the owner and contributes the shares to a trust on behalf of the employees. ESOPs require a securities registration exemption and are classified as an employee benefit, so it's an involved process. An ESOP sale takes many years to complete and is generally more expensive and complicated than other options. However, it can be a way to reward valued employees with company ownership. The tax savings to the seller can be substantial as well.
Sell to a Third Party
When the business is healthy and the owner wants to cash out, selling to a third party could be a good option. Whether the interested party is a strategic buyer, a financial buyer or a private equity group, the owner should expect to pay some big up-front costs to engage experienced professionals to guide the owner and company through the selling process. Having the right partners attending to the owner's interests, negotiating with the buyer and structuring deal terms are crucial to achieving the best outcomes.
Although the payoff can be attractive, third-party sales are not for the faint of heart. The process takes at least nine to twelve months and can be intense and emotional for the seller. Often, the seller retains some obligation to the business beyond the sale but has to be ready to give up control entirely. A third-party sale is ideal for an owner who is open to having the buyer bring new energy, ideas and change to the business.
Recapitalization
An owner who is open to having outside investors fund the company's balance sheet might consider bringing in a lender or equity investor to act as a partner in the business. By selling a minority or majority position, the owner can partially exit, monetize a portion of the business and reduce ownership risk in the company. New growth capital can bring more earnings to the original owner. When ready to exit the company completely, the original owner might sell the remaining shares through further recapitalization or another exit option.
Selling any portion of the company to an outsider can precipitate a loss of control and a cultural shift within the company. An owner who is not ready to be accountable to partners should consider this before opting to recapitalize.
2. How long before retirement should I begin thinking about my exit?
Ideally, business owners should start thinking about their exit strategy at least five to ten years before their intended retirement. This period allows for comprehensive planning that can influence key outcomes of the eventual sale. Value-building initiatives need time to succeed and show results before they can impact sale proceeds (valuation optimization). Identifying and grooming a successor — whether a family member, a key employee or an external buyer — is generally most effective over an extended period (succession planning). Structuring the business and the sale to maximize tax efficiency and comply with legal requirements is an involved process (legal and tax planning). Finally, strengthening the business's operations and financial health can make it more attractive to potential buyers (operational improvements).
3. Whatsteps should I take to optimize valuation and transition?
Optimizing your business's valuation and ensuring a smooth transition involves several strategic steps. First, conduct regular financial audits to present clear and accurate financial statements; transparency is key to attracting serious buyers and securing a favorable sale price. Next, take a look at opportunities to enhance operational efficiency to demonstrate the business's profitability and growth potential. This might involve adopting new technologies, improving processes or cutting unnecessary costs. Another crucial step is to develop a strong management team that can operate independently, as a business that doesn't rely solely on the owner is more attractive to buyers. Solidifying relationships with key customers and suppliers is also important, since long-term contracts and stable relationships add value and stability to the business. Finally, ensure the business complies with all legal and regulatory requirements. Any outstanding legal issues can deter buyers or lower the sale price.
4. What if a big part of my exit is going to be a sale or a partial sale?
If you are leaning toward a sale, either partial or complete, several considerations come into play. Engaging professionals is one of the first and most crucial steps. Working with experienced legal, financial and business advisors helps owners navigate the complexities of the sale process. Those professionals can also help with due diligence. Buyers will conduct thorough examinations of every facet of your business, including financial records, legal documents and operational data. Being prepared with detailed and organized documentation can facilitate a smoother due diligence process and instill confidence in potential buyers. This preparation not only expedites the sale process but also helps in presenting your business as a well-managed and transparent entity, which can lead to a more favorable sale price.
Identifying potential buyers is also a strategic consideration that can greatly influence the sale’s success. Depending on your business's nature and industry, potential buyers could be competitors, private equity firms or even international investors. Identifying and approaching the right buyers ensures that you attract parties who see the most value in your business.
5. How should I structure sale deals?
Structuring a sale deal requires careful planning and negotiation to balance your needs with the buyer's. This involves key elements like payment terms, which can be a one-time lump sum or installments. You might even consider seller financing, which can make the deal more attractive but comes with the risk of the buyer defaulting. Another option is to structure earn-out payments tied to the business’s future performance, which can bridge valuation gaps but require clear metrics and timelines. Noncompete agreements are often requested by buyers to prevent owners from starting a competing business post-sale, so ensure the terms are reasonable and don’t unduly restrict future options.
The structure of the deal can also significantly impact your tax liabilities. Understanding the tax implications of different payment structures is crucial, as installment payments may help spread the tax liability over several years. Work with wealth management advisors to explore strategies that could mitigate your tax burden. Experienced legal counsel can help you draft and review all agreements, focusing on representations and warranties to minimize future liabilities and ensuring provisions for indemnification to protect against potential future claims or disputes.
You will also have to decide whether you'll stay involved in the business after the sale, in either a consulting capacity or a more formal role. This can ease the transition and provide additional income, but it might also limit your ability to fully step away. Don't forget to consider how the sale aligns with your personal and family goals. Reflect on how the sale proceeds will be integrated into your overall estate plan, ensuring the structure supports your legacy and philanthropic goals. Also assess how the sale structure impacts your lifestyle and plans, whether it involves retirement, new business ventures or other personal endeavors.
The transition of a family business is a complex process that requires careful planning and execution. By asking your advisors the right questions, you can ensure a smooth and successful exit that secures your legacy and financial future.
Written by Elizabeth Anderson, Vice President at Whittier Trust. Elizabeth is based out of the Pasadena office and focuses on family business transitions, succession planning and pre-liquidity personal planning.
For more information, start a conversation with a Whittier Trust advisor today by visiting our contact page.
From Investments to Family Office to Trustee Services and more, we are your single-source solution.
Next-gen philanthropy is about more than just giving money away.
Philanthropy is about helping others and offering invaluable funding to support communities and causes. With a family foundation, it’s also about preserving a legacy andbringing family members together in the name of a shared cause or purpose. The styleand look of a family foundation varies, and it’s important to consider how to engage the next generation in all aspects of the foundation.
Junior boards—also called associate boards—can be a powerful tool in helping prime thenext generation for leadership, and they can be highly personalized in structure, style, andpurpose. They can be as small as a few members, or as large as 20 or more, and the agelimitations can be anywhere from pre-teen to mid-30s. These launch pads areinstrumental in not only growing the foundation’s reach but also growing the junior board members as individuals.
“Junior boards help teach the next generation about the foundation and its mission, howit’s structured and more. It’s a good way to strengthen members’ financial literacy skills. Ithelps them learn about the value of money, investing the foundation’s assets, learningabout the stock market and the power of giving with an eye on both strategy and passion,”says Jesse Ostroff, Assistant Vice President and Client Advisor for Whittier Trust’sPhilanthropic Services. Junior boards can also help strengthen familial ties, preparemembers to transition to the main board and help members discover more about themselves. Here’s how.
Strengthening Family Bonds
Junior boards can help strengthen a family’s bond, especially if there are many branchesor if the members aren’t particularly physically or emotionally close. “It’s a good way forcousins or more distant relatives to be able to collaborate and decide how and where themoney should go,” says Ostroff, who adds that working together is helpful in makingjunior board members feel less alone in their giving.
Even close-knit junior boards can deepen their relationship. Ostroff recalls one example of a small junior board that had been working together for many years. Whittier Trustfacilitated an opportunity for them to share during a family retreat, where each membermade a presentation on their chosen grantee organization, describing why they felt it wasworthy of support and providing an overview of the diligence they had conducted on it.“It was during the pandemic so it took place over Zoom,” Ostroff noted, “but it workedreally well, and the subject matter helped them develop deeper connections with eachother and with the foundation Board.” One of the unanticipated outcomes was a numberof cousins deciding to collaborate and support each other’s chosen organizations. “Eventhough you’re family, you don’t always take the time to listen and hear about each other’s interests,” he says. “This opportunity strengthened family ties in a natural, organic way.”
Facilitating Family Continuity
Family foundations often struggle with succession plans, so establishing a well-functioningjunior board can help smooth younger family members’ transition to the main board. Butit also takes intentionality. “Part of our role is to get the junior board excited enough towant to devote time and attention to their philanthropy, despite the competing demands ofcareer and family,” says Ostroff, whose team does this by showing interest in juniormembers as individuals, having strategic conversations with them about the change they’dlike to see in the world, and accompanying them on site visits to grantee organizations sothey can see first-hand the impact they’re having.
Conversely, some junior board members are exuberant and need help focusing their interests and reining their strategies. Ostroff recalls one junior board of teenagers whowere excited to be participating in their family’s philanthropy, but they hadn’t yetidentified a mission and felt daunted by the responsibility to give money away. To theircredit, they wanted to do it right and didn’t know where to begin. “We convened thegroup and used a core values game to help them to identify first the family’s core values,and then their individual values,” he says. “From there, it was easier for them to select oneor two focus areas for their grantmaking, and then to drill down and choose particular nonprofits they wanted to support.”
Inspiring Personal Growth
Ostroff’s favorite aspect of his job is watching junior board members grow through theirparticipation in the family’s philanthropy. “They develop life skills, such as financialliteracy, respectful communication, critical thinking, and collaboration, that set them up forsuccess in their careers and relationships.” As they begin to see the myriad benefits ofaligning their family’s wealth and values, younger family members become more effectivestewards of the wealth they may eventually inherit.
Whittier Trust helps create, manage and develop junior boards, tailoring their recommendations and plans to a family’s philanthropic mission and grantmaking style,while simultaneously helping them find their own philanthropic voice. “As the nextgeneration moves up, there will be new societal challenges, new philanthropic trends andopportunities. Millennial and Gen Z family members are coming of age in a world that iscompletely different from the one their grandparents inhabited,” says Ostroff. “And we’reable to provide them with the tools and support they will need to meet their moment andmake their own impact.”
If you’re ready to explore how Whittier Trust’s tailored philanthropic services can work for you, start a conversation with a Whittier Trust advisor today by visiting our contact page.
From Investments to Family Office to Trustee Services and more, we are your single-source solution.
The momentum from two years of remarkable economic resilience and strong market returns came to an abrupt halt in April 2025. The catalyst for market turmoil this time around was an unexpected turn in the administration’s global trade policy.
April 2, 2025 was touted as Liberation Day in anticipation of the long-awaited details on President Trump’s reciprocal tariff policy. The President used his executive authority to address the lack of reciprocity in U.S. bilateral trade relationships and to “level the playing field for American workers and manufacturers, re-shore American jobs, expand our domestic manufacturing base, and ensure our defense-industrial base is not dependent on foreign adversaries—all leading to stronger economic and national security” (Office of the United States Trade Representative).
However, the scope and magnitude of the proposed tariffs exceeded all expectations. In the initial Liberation Day proposal, all countries were subject to a minimum tariff rate of 10%. Countries with whom the U.S. has a large trade deficit were subject to even higher reciprocal tariffs.
The immediate reaction to the announcement was an immense fear of a global recession and a spike in inflation. Consistent with these fears, stocks sold off dramatically after the initial announcement. A temporary pause in reciprocal tariffs for all countries except China then halted the stock market decline. However, the U.S. dollar and bond market both fell sharply and unexpectedly during the week of April 7, 2025 in contrast to their conventional safe haven status.
We address concerns about higher inflation, higher rates, a recession, a bear market, and a weaker U.S. dollar in this article.
We are aware that this is a highly charged and contentious topic. We will, therefore, refrain from any ideological, philosophical, political, or moral judgment on the subject. We also realize that public disclosures on the topic may lack full transparency for reasons of national security. In a rapidly changing world, our views here have been penned in mid-April 2025.
How Did We Get Here?
The original impetus for higher tariffs is likely rooted in the fact that almost all of our trading partners charge a higher tariff on our exports to them than we do on their exports to us. For example, 2023 World Trade Organization data estimates that China, India and the UK have tariff rates of around 17%, 12% and 5% respectively on U.S. exports to them. In contrast, our corresponding tariffs on their exports to us are around 10%, 2% and 2% respectively. This mismatch in tariffs is probably further exacerbated by other unfair trade practices such as non-tariff barriers and currency manipulation.
The administration’s policy on tariffs may have been further emboldened by the perceived leverage of the U.S. over many of its trading partners. Figure 1 shows how this leverage is achieved. It compares the importance of a country’s imports to us (x-axis) versus the importance of U.S. exports to its own global trade (y-axis).
Figure 1: Leverage in Trade Relationships
Source: Wolfe Research, World Integrated Trade Solution as of 2022
This chart helps us understand where the U.S. has more leverage with its trading partners. We explain Figure 1 with an example. Take Vietnam for instance. All imports to the U.S. from Vietnam account for only around 4% of total U.S. imports. However, those same Vietnam exports to the U.S. account for almost 32% of its total exports. In light of this imbalance, Vietnam is far more likely to negotiate than retaliate.
In Figure 1, it is clear that Mexico, Canada and several Emerging Markets countries in Asia and South America are most dependent on trade with the U.S., while countries in the EU have more equal trading relationships. China has the most trading leverage against the U.S.; its retaliation has, therefore, been fast and furious.
These salient data points had already been priced into expectations of a higher tariff rate of around 8% prior to Liberation Day. Nonetheless, markets were caught off guard on April 2nd at two levels—by the methodology of tariff calculations and the resulting magnitude of reciprocal tariffs.
Contrary to expectations of a more targeted approach, the reciprocal tariffs were derived from a rudimentary framework that aimed to reduce bilateral trade deficits. Each country’s tariff rate was determined by dividing the U.S. trade deficit with that country by total imports from that country. This number was then cut in half to create the new U.S. “discounted” reciprocal tariff. Here are some of the initial proposed reciprocal tariffs from Liberation Day: China 34%, EU 20%, Japan 24%, India 26%, Vietnam 46%, Switzerland 31% and UK 10%.
These initial reciprocal tariffs have since been suspended for 90 days for all countries except China from April 10th. In sharp contrast, tariffs with China have escalated exponentially through a sequence of retaliations; they now stand at 145% on Chinese exports to the U.S. and 125% on U.S. exports to China. U.S. tariffs on all other countries temporarily stand at the minimum baseline of 10%.
We summarize the revised April 10th levels of tariffs in Figure 2 before turning to our inferences and forecasts.
Figure 2: Average Effective Tariff Rate as of April 10, 2025
Source: The Budget Lab, Yale University
The average global tariff rate for the U.S. is now projected to go up more than 10-fold from 2.4% to approximately 27%. We label this average tariff rate as a “pre substitution” rate since it assumes that all flows of global trade remain constant and intact at 2024 levels. However, higher tariffs on Chinese goods may well trigger substitution to other cheaper imports. The resulting “post substitution” average tariff rate is lower and estimated to be 19%.
Thoughts on Current Trade Policy
We appreciate the desire to increase the U.S. manufacturing base and reduce foreign dependencies in industries critical to national security. We also applaud the pursuit of fairer terms for global trade.
Nonetheless, we initially believed that it was sub-optimal to achieve these goals with an aggressive trade policy alone. A number of tenets in the opening approach seemed misaligned with our global leadership role, created by our own dominant economy and strong alliances with others.
The costs of high fixed trade barriers are well-known, e.g. higher prices, slower growth, less competition, less innovation, and lower standard of living. The expansive and punitive trade war in its initial formulation on April 2nd risked a U.S. recession and an alienation of our allies.
The singular focus on reducing bilateral trade deficits through high imputed tariffs also felt misguided. A large portion of the U.S. trade deficit is driven by principles of comparative advantage where cost of production is often lower overseas and by cultural differences in our lower propensity to save and greater desire to consume. Besides, the large foreign trade surpluses eventually make their way back into U.S. dollar-denominated assets giving our stocks, bonds and currency hegemonic power.
These thoughts may also have preyed on investors’ minds as they indiscriminately sold risk assets. The S&P 500 suffered a 2-day decline of -10.5% on April 3rd and 4th. It was remarkably the first ever decline of such magnitude to be triggered by a policy initiative during benign times – as opposed to an existing endogenous fundamental crisis (e.g. Global Financial Crisis) or an unexpected exogenous shock (e.g. Covid).
Two recent developments have opened up a different possibility for the intent and scope of the current trade war: 1) The U.S. has rapidly escalated tariffs against China all the way up to 145% and 2) The U.S. has rapidly deescalated tariffs on all other countries down to 10% for 90 days. There may now be some credence to a scenario where the trade war is focused on curtailing China’s economic, manufacturing, scientific, technological, and military might while actually strengthening all other global alliances through reconciliation, collaboration and some coercion.
Future Evolution of Trade Policy
We have maintained since the elections that the bark of proposed tariffs will eventually be bigger than its final bite. We have been clearly surprised by the much louder bark and greater magnitude of the new reciprocal tariffs and the damage they have inflicted on the markets so far. Nonetheless, we still believe they will eventually be implemented at lower levels than the ones proposed on April 2nd.
Excluding China, we reckon that global tariffs will settle in at the 8-18% level. While an extensive and protracted global trade war remains a possibility, it is not our base case.
It would serve both the U.S. and China well to find an off ramp towards a more stable co-existence as the world’s two leading economies. If that doesn’t happen for any reason, it is conceivable that the U.S. may largely shift its trade dependence on China to other countries. As supply chains re-adjust, we expect the tariff shock to fade and be subsumed by the positive fundamentals of higher productivity growth, fiscal stimulus and deregulation.
Impact on the Economy
The direct impact of higher tariffs is clearly inflationary and recessionary. We also understand that high levels of policy uncertainty can take an indirect economic toll from reduced consumer spending, slower hiring and lower capital expenditures.
Since higher prices are tantamount to a tax on households, we begin by estimating the impact of tariffs on disposable incomes. Figure 3 shows the likely impact of the April 10 package of tariffs on disposable incomes across different deciles of household incomes.
Figure 3: Impact of Tariffs on Disposable Income
Source: The Budget Lab, Yale University
The top 10% of households by income (highest decile #10) in Figure 3 is expected to see the smallest disposable income decline of -2%. On the other hand, the lowest decile of household income may see disposable income fall by almost -5%.
Any reduction in consumer spending from a decline in disposable income will likely be uneven and disproportionate across income categories. A -2% decline in disposable income for the highest income households may have virtually no effect on their spending. Since most of the aggregate consumer spending takes place in high income households, we are optimistic about a relatively muted impact of tariffs on growth.
We expect up to a -1% direct impact of tariffs on GDP growth and up to a -0.5% indirect impact. Therefore, we expect GDP growth to be reduced by -1% to -1.5% in 2025. From a strong starting point of 2.5% real GDP growth, we expect 2025 growth will still be above zero even after our anticipated reduction.
While the odds of a recession or “stagflation” have gone up, neither scenario is our base case. We estimate the odds of a recession to be 30%, which is well below the consensus expectation of 60-70%.
It is evident that inflation will likely be higher in 2025, but we expect it to subside in 2026 as the world adjusts to a new global trade order. On a positive note, we observe that inflation expectations for a 5-year period starting in 2030 have actually declined from 2.3% to 2.1% as of April 11, 2025. We believe current Treasury bond prices are overestimating long-term inflation risks.
Impact on the Markets
U.S. Stocks
The U.S. stock market has seen some wild swings in 2025. Here is the most striking statistic we have found on recent stock market volatility: If you add up all the absolute intra day moves of 3% or more in the 3 trading days between April 7th and April 9th, the S&P moved a monumental 52%!
In the midst of such high volatility and uncertainty, it is difficult to form an outlook for U.S. stocks. We give the task at hand our best analytical effort and intuitive judgment by forecasting both expected S&P 500 earnings and P/E multiples.
We have observed over the years that earnings growth for the S&P 500 tends to be 3-4 times U.S. GDP growth. Based on our view above that GDP growth may be lower by -1% to -1.5%, we expect S&P 500 earnings growth may also be lower by around -4% to -5%. Despite a reduction in the earnings growth rate because of tariffs, earnings will still rise in the next 12 months.
We have a more differentiated view on where trough multiples will likely end up. In prior recessions, they have fallen to as low as 10-13x. In non-recessionary growth scares, they have fallen to 15-16x.
We believe trough multiples will be higher during this growth scare. The current economic and market crisis is policy-induced; up to a certain point, the antidote for the crisis also remains in the hands of policymakers. And as a beacon of hope and optimism, we already have light at the end of the tariff tunnel in the form of fiscal stimulus and deregulation. Therefore, we strongly believe the trough P/E multiple will be higher this time at about 18x.
We also know that trough earnings and trough P/E multiples are never coincident; you cannot see them simultaneously. You typically see trough prices first, then trough multiples and finally trough earnings.
With these building blocks in hand, we estimate that a viable floor for the S&P 500 may exist at the 4,900-5,000 level. While we obviously cannot rule out lower prices, we may just about avoid a bear market by remaining above its closing price threshold of 4,915.
Our base case rules out a bear market, expects the current correction will not be protracted and predicts the S&P 500 will deliver a positive return in 2025.
U.S. Bonds and Dollar
The manic turmoil in the U.S. bond and currency markets during the week of April 7th could well be the topic of an entire article. We confine ourselves to a few key observations here.
Treasury bond prices and the U.S. dollar both fell significantly in the second week of April. This is an extremely rare occurrence, and it triggered profound fears that we were at the beginning of the end of U.S dominance in global bond and currency markets. Critics attributed the selloff to fundamental factors ranging from heightened U.S. fiscal risks caused by an imminent recession to a devastating loss of confidence in U.S. institutions and leadership.
We do not believe those factors were central to the meltdown in U.S. bonds and the dollar. Instead, we believe it originated from a more nuanced and niche event in the bond market. It is widely understood that hedge funds were unwinding a very large and highly leveraged “bond basis” trade in the face of low liquidity and high volatility. This forced and rapid liquidation created significant price dislocations in both Treasury bonds and the U.S. dollar.
We expect U.S. Treasury bonds and the dollar to stabilize in the coming weeks. We believe the 10-year Treasury yield should be closer to 4.1-4.2% in the near term and around 4.5-4.6% in the long run.
Summary
We close out our discussion on a positive and optimistic note.
We know from prior experience that high levels of consumer pessimism, policy uncertainty and fear gauges tend to be contrarian in nature. In other words, stock market returns in the aftermath of high pessimism or fear have historically been high. Figure 4 shows the contrarian nature of consumer sentiment.
Figure 4: Consumer Sentiment is Contrarian
Source: University of Michigan, JPMAM, as of April 2025
The latest reading of consumer sentiment nearly reached its all-time low mark of 50.0 on April 11, 2025. While it accurately reflects coincident pain in the economy, it sadly lags the direction of future stock prices.
The stock market tends to look 9-12 months ahead and generally bottoms out when things are at their worst and about to get better. If history is any indication, stock returns over the next 12 months may be handily positive.
We summarize our key takeaways below.
We believe final tariffs will be lower than those proposed currently; their impact on inflation, GDP growth and corporate profits will also be lower than currently feared.
We assign a low probability to a recession, “stagflation” or a bear market.
We do not anticipate a protracted correction in stock prices; we expect the S&P 500 to deliver a positive return in 2025.
We believe fears of “de-dollarization” and significantly higher Treasury yields are overblown; we expect the bond market and the U.S. dollar to halt their declines in the coming weeks.
Within client portfolios, we are focused on adding to or buying new high quality securities that have sold off disproportionately in this “tariff turmoil”. In these uncertain times, we remain careful, prudent, disciplined, and prepared to act on emerging opportunities.
To learn more about our views on the market or to speak with an advisor about our services, visit our Contact Page.
Three key questions to strengthen your investment strategy.
At its core, investing is straightforward: Buy low, sell high. But additional factors such as taxes, along with your risk tolerance and asset mix, can significantly impact your returns. Three key questions can help ensure your investment strategy is positioned to maximize your long-term after-tax returns and legacy goals.
1) Is your wealth concentrated in just one or two businesses, asset classes, or stocks?
At Whittier Trust, new clients frequently come to us having created significant wealth through a single asset—perhaps their own company or stock from an employer. As the oldest multi-family office headquartered on the West Coast, we have seen this position time and time again. But that doesn’t mean that we respond in the same way each time.
“Conventional wisdom tells us that reducing the concentration and diversifying the proceeds is the appropriate way to mitigate an investor’s risk,” says Nick Momyer, Senior Portfolio Manager at Whittier Trust. “But while that may work for one client, it could be all wrong for another.”
At Whittier, we never take a one-size-fits-all approach. “The first step,” Momyer explains, “is to leverage our expertise as fundamental investors to gain a foundational understanding of your assets.”
The Whittier investment team will study the tax characteristics of your holdings and factor in the exposures that inform potential risk and return. “Then, armed with this deep knowledge, we craft personalized portfolios comprised of uncorrelated assets, minimizing the overlap with your existing holdings,” Momyer says.
This complementary method delivers tax efficiency and enhanced downside protection, safeguarding your wealth.
2) Is your investment portfolio tailored specifically for you? Or do you sometimes feel you’re just another account number to your wealth manager?
At Whittier Trust, we believe our clients deserve a more calibrated approach that can significantly improve the compounding power of your portfolio: the use of individual securities for tax-efficient wealth management. Unlike mutual funds, individual securities offer granular control over your portfolio, selecting each holding with detailed knowledge of its track record, integrity, and growth potential.
“Our client-centric approach starts with your objectives,” Momyer says, “which guide our management of a customized portfolio, tailored specifically for your unique needs and desired outcomes. This gives us great advantages for capital gains management and tax-loss harvesting. We can identify assets to complement and diversify a legacy portfolio of concentrated positions, then manage capital gains on a security-by-security basis. This allows us to potentially defer, transfer, or even avoid capital gains taxes through calculated selling and tax-efficient gifting strategies.”
The market will always have ups and downs, and at Whittier, we use these fluctuations to your advantage. By strategically harvesting tax losses on underperforming stocks, the Whittier team offsets taxable gains from other investments, reducing your tax bill and freeing up capital for reinvestment. “Think of it as tax alpha,” Momyer says, “Actively using tax-efficient strategies to boost your after-tax investment returns.”
These stratagems are particularly beneficial for ultra-high-net-worth clients with complex portfolios that include concentrated and highly appreciated assets. Individual securities allow us to navigate these situations effectively, minimizing tax drag and preserving more of your wealth to compound over time.
“One recent example was a client who inherited a concentrated technology holding with a looming tax burden,” Momyer recounts. “We saw an opportunity for a multi-pronged approach. By expertly harvesting tax losses elsewhere in their portfolio and leveraging the client’s donor advised fund, we reduced their tax liability, diversified their portfolio, and honored their charitable wishes.”
3) Are your investments aligned with your long-term financial and legacy goals?
Many investors focus on growing their wealth but may not have a clear roadmap for sustaining it over generations. At Whittier Trust, we integrate portfolio strategy with estate planning, philanthropy, and wealth transfer goals.
“Our approach goes beyond returns. We help clients structure their investments to support their broader objectives, whether that’s leaving a legacy for their family, supporting causes they care about, or simply enjoying financial freedom,” Momyer says. “By considering factors like trust structures, estate planning, and tax implications, we help ensure your portfolio works in concert with your long-term vision.”
At Whittier Trust, we take a holistic approach to wealth management, ensuring that your investments align with your evolving financial needs and legacy aspirations. By combining deep investment expertise with thoughtful estate and tax planning, we help clients not only grow their wealth but also secure their financial legacy with confidence and purpose.
Getting Started
At Whittier Trust, our history and experience become your advantage, directing you to the strongest market performers while making sure taxes don’t erode your wealth. Once our investment team gains a clear understanding of what matters most to you, we craft a customized, efficient portfolio of individual securities, to maximize your after-tax return and meet your objectives. You gain greater control with less effort and stress, knowing you can rely on your fiduciary advisor and family-office investment team to act in your best interests. We invite you to contact Whittier Trust today and discover how we can help you not only achieve your personal and financial goals, but perhaps surpass them.
If you’re ready to explore how Whittier Trust’s tailored investment strategies can work for you, start a conversation with a Whittier Trust advisor today by visiting our contact page.
From Investments to Family Office to Trustee Services and more, we are your single-source solution.
Sandip engaged in a healthy debate with top industry professionals and economists about the recent turmoil in the markets as a growth scare threatens to devolve into a recession or stagflation.
Risk assets have sold off in the midst of high policy uncertainty and fiscal austerity from government job cuts. In the span of just a few weeks, concerns about the U.S. economy have shifted from being overheated to now plunging into a recession.
Sandip believes these fears are overblown and unwarranted. The bark of tariffs will likely be bigger than the bite. Renewed fiscal stimulus, deregulation and productivity growth will eventually push growth higher in the coming years.
Watch now to hear Sandip’s more balanced, strategic and constructive outlook in a discussion with Phil Mackintosh, Chief Economist at Nasdaq; Brian Joyce, Managing Director on the Nasdaq Market Intelligence Desk; Steven Wieting, Chief Economist & Chief Investment Strategist at Citi Wealth; and host of Nasdaq Trade Talks, Jill Malandrino.
To learn more about our views on the market or to speak with an advisor about our services, visit our Contact Page.
Individual securities offer powerful advantages for ultra-high-net-worth investors.
If you’ve been investing for a while, at some point you were probably told that mutual funds were not only an easy answer, but also a wise one, promising a strong return with minimal effort and monitoring. This advice is not wrong, but it doesn’t apply to everyone.
After mutual funds rose to popularity in the bull market of the 1990s, they became a staple of individual retirement accounts (IRAs), which were rapidly replacing traditional pensions. IRAs and other mass-market purposes are exactly what mutual funds are designed for, and they typically perform well toward those goals. But they don’t make sense for investors with the resources to gauge the market on their own.
“One of the things that differentiates Whittier Trust is our belief that clients should own individual positions versus mutual or co-mingled funds,” says David Ronco, Senior Portfolio Manager at Whittier. “Buying individual securities for our clients allows us to save them money with respect to fees and taxes while creating a customized, transparent investment solution.”
“As a portfolio manager, I have an in-depth understanding of all major asset classes including equities, fixed income, real estate, and alternatives,” Ronco continues. “For each client’s portfolio, our team hand-picks the best individual investments to meet their goals.”
Here, Ronco explains four key benefits of owning individual securities.
Customization
Mutual funds are designed to reach a broad cross-section of market participants. “The only customization they offer is a choice between general goals such as growth or income,” Ronco explains. “They don’t take into account your philosophy, your risk tolerance, or the many other factors that can make you a standout investor. They are truly the lowest common denominator of investing.”
Overall Cost
Many mutual funds have high expense ratios, layered on top of wealth management fees. “We call that fee layering, and it’s not an issue with individual securities, which have no embedded fees,” Ronco says. “So right off the bat, moving to individual securities significantly increases the compounding return potential of a client’s portfolio.”
Tax Efficiency
“Individual securities are also more tax efficient than mutual funds by far,” says Ronco. “Mutual funds are essentially not concerned with tax efficiency. They generate capital gains and losses as they trade securities throughout the year, and they have to distribute those net capital gains evenly to all shareholders, even those investors that didn’t engage in any buying or selling.”
Whittier clients benefit from direct ownership of their holdings, which allows precise control over capital gains enabling flexible tax loss harvesting and tax-free compounding. Our portfolio managers strategically leverage these advantages through constant analysis of client positions, ensuring proactive, year-round tax optimization, not just a reactive approach at tax time.
Transparency
Individual securities offer Whittier clients ultimate transparency so their stakes in specific industries and companies are completely clear. “We can provide detailed, real-time information about every security our clients hold,” explains Ronco. “Mutual funds, on the other hand, are a bit of a black box, often reporting 60 to 100 underlying positions under a single, vague name or symbol.”
Growing Your Portfolio
At Whittier, no two client portfolios are the same, and the individual securities selected by portfolio managers and the Whittier investment team reflect the understanding we have of each client’s assets and goals, built through long-term relationships.
“We help families preserve and grow the wealth that they have worked hard to create,” Ronco says. “I consider it a privilege to share the expertise of our Whittier team and my own in-depth understanding of all asset classes—including equities, fixed income, real estate, and alternatives—to help clients build wealth.”
If you’re ready to explore how Whittier Trust’s tailored investment strategies can work for you, start a conversation with a Whittier Trust advisor today by visiting our contact page.
From Investments to Family Office to Trustee Services and more, we are your single-source solution.
A calculated approach to risk management allows investment objectives to be met regardless of the conditions.
Managing risk is one of the most important portfolio management objectives. Risk is simply the possibility that an outcome will differ from what is expected or hoped for.
“Investment risk is like the wind on top of a mountain,” says Caleb Silsby, chief portfolio manager at Whittier Trust Company. “It’s unpredictable and often cannot be seen or even anticipated. The more calm the environment is around you, the less prepared you are likely to be when it hits.”
But with the right guidance and preparation, risk can be managed and planned for in a way that allows investment objectives to be met regardless of the conditions—to be understood rather than feared.
Whittier Trust offers a calculated approach to risk management that has served clients well through many market cycles. “We emphasize three interconnected mechanisms,” Silsby says, “And this trifecta has proven time and time again to generate strong returns for our clients.”
Recognizing the Risk Continuum
Most clients want more return than the bond market but less risk than the stock market. To achieve this outcome, Whittier Trust starts with an investment philosophy centered around owning quality companies. “With high-quality companies, you can own more of a higher returning asset class in your portfolio than you would with riskier, lower quality equities,” explains Silsby. “Whittier’s research team analyzes the history, management, and financials of these companies. When we refer to a stock as high-quality, it means the company has a clean balance sheet, strong management team, lasting competitive advantage, and strong returns on capital deployed.”
Minding the Bear
Correlation is a statistical tool for portfolio managers that indicates the degree to which securities move in relation to one another. Whittier Trust believes that in bear markets, correlations move to one (a perfect positive correlation), and the dollar tends to strengthen. “We are also mindful of currency impacts that often catch unwitting investors by surprise during bear markets,” says Silsby.
Whittier Trust has managed money through multiple market cycles and has seen the commonalities of bear markets. We employ thoughtful portfolio construction that anticipates a risk-off environment where risk assets will tend to move in synchrony. We set up portfolios with the anticipated market shifts in mind, which allows us to plan for the unexpected. During the 2022 bear market, the Whittier investment team anticipated the Federal Reserve’s aggressive interest rate hikes in response to inflation and maintained a constructive outlook despite widespread concerns and panic about a deep recession. Our disciplined approach emphasized a balanced perspective, suggesting that fears of stubborn inflation and severe economic downturns might be overstated. In 2023, amidst significant challenges such as regional bank collapses, Whittier Trust assessed the broader financial system’s resilience, predicting these crises would be “bumps in the road” rather than catastrophic events. This perspective proved revelatory, as markets rebounded, with the S&P 500 delivering a 26.3 percent total return for 2023. By aligning their investment strategies with key economic indicators and maintaining a steady hand, we have reinforced our reputation as a reliable partner in wealth management during challenging market cycles.
Playing the Long Game
Whittier’s formula for managing risk is focused on long-term investments. The market generates returns much more often than it doesn’t, making long-term investments one of the best ways to grow wealth. Silsby advises: “If you can be a long-term, patient investor who avoids being a forced seller, then the true risk to manage around is permanent loss of capital. Such losses most commonly arise through forced selling, uncontrolled equity dilution, or too much leverage.” Forward-thinking investors can ride out market volatility and take advantage of compounding returns, dividend growth, and capital appreciation.
As the oldest multifamily office headquartered on the West Coast, Whittier Trust Company has refined our approach to managing both short- and long-term risks over nearly four decades. As in everything we do, our guiding purpose as fiduciaries is to understand and meet clients’ overall goals and best interests, while working to ensure the resilience of their portfolios. With the long-term in mind, we can help protect clients, their families, and their legacies through uncertain economic trends and market fluctuations with tailored investment plans and our exceptional commitment to personal service.
To learn more about how Whittier Trust has approached portfolio management and managing risk for over thirty years as a multi-family office, start a conversation with a Whittier Trust advisor today by visiting our website.
To learn more about how Whittier Trust's calculated approach to risk can make a difference for your investment portfolio, start a conversation with a Whittier Trust advisor today by visiting our contact page.
From Investments to Family Office to Trustee Services and more, we are your single-source solution.
Whittier Trust’s internal investment team selectively partners with outside managers to yield higher returns. We call it our hybrid architecture. Our clients call it the best of both worlds.
Internal + External Investing
The investments we make on behalf of our clients fall into two categories: those our internal investment team manages directly and those we allocate to outside managers. Most investment managers employ only one of these strategies, which makes our dual approach relatively uncommon—enough so that we gave it our own name: hybrid architecture.
Equities, fixed income, and real estate are the three major asset classes directly managed by Whittier Trust’s investment team. For one other major asset class—alternatives—we allocate to external managers. The alternatives asset class includes private equity, venture capital, private debt, and hedge funds.
“We know that this internal-external distinction can seem abstract,” says Sam Kendrick, Whittier Vice President and Portfolio Manager, “But it perfectly embodies Whittier’s unique history and client-centric approach. We’ve been in the multi-family-office business since 1989, and we’ve continuously evolved our structure to find the approach that gets the best result for our clients. We used to outsource the management of stocks and bonds—stocks to mutual funds, and bonds to brokers. But after years of analysis, we felt confident we could beat Wall Street’s returns, especially on an after-tax basis. We moved the management of stocks and bonds in-house. Since doing that, we haven’t looked back.”
Custom Solutions for UHNWI Clients
One of the primary reasons outsourcing equity management can lead to worse results is that it limits the ability to customize investment exposure around clients’ unique needs.
The investment products that Wall Street creates don’t cater to Whittier’s particular clients, who are interested in returns after taxes. “Wall Street products pursue the highest headline return possible to gather assets while ignoring the tax consequences,” Kendrick says. “This is because only a quarter of the U.S. stock market is owned by taxable investors. Unfortunately, the result is excessive turnover and capital gains, leading to lower after-tax returns.”
What’s more, in an equity mutual fund structure, investors have no control over the timing of gains. Capital gains are realized and distributed at the whim of other investors in the fund. This is unacceptable for most Whittier clients, who tend to have vastly different taxable incomes each year due to liquidity events and private investments. By investing in individual stocks for clients, rather than equity funds, we’re able to create dispersion: A few stocks will go up many multiples of the original investment while others go down. This allows us to sell losing stocks to offset gains while winning stocks can be donated to avoid capital gains entirely, all of which leads to an increase in after-tax returns.
Whether it’s low-basis, legacy stocks, or ownership interests in private businesses, many of our clients have meaningful existing exposures in specific companies and industries. Buying an equity mutual fund or ETF will indiscriminately add to existing concentrations, needlessly increasing risk. Actively managing portfolios of individual stocks allows us to strategize exposure to best suit each client’’ specific balance sheet.
Maximum Return on Fixed-Income Investments
The way the Whittier Trust team manages fixed income internally comes from knowing the goals of our clients and working backward. “Our clients want the maximum return from fixed income with minimal risk,” says Kendrick. “They don’t specifically want to own munis, treasuries, or preferreds.” While most funds only buy one type of bond, regardless of the relative attractiveness to other types, our team looks for bonds that deliver the best returns for each client with their specific tax situation in mind. We analyze opportunities outside municipal bonds, factoring in the added tax to make apples-to-apples comparisons, and then choose the best investments. The result is a portfolio that’s not only higher returning but also more diversified.
Deep Experience with Real Estate
Whittier has been actively investing in real estate since our origin as a single-family office more than a century ago, and we use that expertise to buy individual buildings that our clients own directly. With ownership limited to Whittier clients, we have the control to build real estate portfolios on a deal-by-deal basis, diversifying by property type and geography according to clients’ needs. And because there is no fund structure and no outside investors, we decide when to sell based only on when is best for our clients.
Partnering on Alternative Investments
With Whittier’s successful record managing investments internally, the obvious question is why wouldn’t we keep everything in-house? Why allocate to outside managers for alternative investments? “The reason comes from our client-focused approach,” Kendrick explains. “Throughout our history, we’ve managed alternative investments in both ways, internally and externally, and the results for our clients have been better using external managers.”
Whittier’s scale allows us to meet with hundreds of outside managers a year—spanning hedge funds, private equity, and private debt—and select the best ones for our clients. These high-quality managers, selected from the most attractive alternative investment sub-asset classes, offer an impressive array of opportunities for diversification and above-market returns. Allocating to outside managers means we can be both broad and nimble in an asset class that is evolving and expanding, rather than internally managing alternatives, thereby restricting ourselves to only a handful of strategies and sub-asset classes. And because we don’t charge additional fees on alternatives, we continue to ensure that our incentives are aligned with our clients’.
It's the best of both worlds: With Whittier Trust’s hybrid architecture, clients get customized, direct exposure to stocks, bonds, and real estate, as well as access to the best private equity, private debt, and hedge fund managers with no extra charges. It’s a structure that has evolved organically over time to best serve our clients’ needs. “You reap higher returns because we can minimize taxes and eliminate layers of investment products and embedded costs,” Kendrick says. “Our clients get the kind of results you’d expect from the single-family office model of direct ownership, but with the scale advantages of a multi-family office. And as we continue to grow and learn about our clients, we’re always looking for new solutions that will further their goals.”
For more information about how a hybrid team of internal professionals and the right external experts can help your investment portfolio, start a conversation with a Whittier Trust advisor today by visiting our contact page.
From Investments to Family Office to Trustee Services and more, we are your single-source solution.
The U.S. economy has now remained resilient to the massive post-pandemic inflation shock for well over two years. As a result, the economic outlook has changed dramatically from the inflation peak in June 2022. We trace this progression to assess where we stand now and what lies ahead.
The longest economic expansion on record from 2009 to 2020 established a new, lower trend-line real GDP growth rate of just below 2% for the U.S. economy. Against this benchmark, investor expectations have shifted sequentially through the following four phases of real GDP growth from 2022 onwards.
Inevitable recession - Negative growth, well below 0%
Soft landing - Below-trend growth, above 0% but below 2%
No landing - Trend growth, around 2%
“Launch” landing - Above-trend growth, above 2%
We describe the last scenario as a “launch” landing in our lexicon and believe the new post-pandemic economic cycle will normalize at real GDP growth above 2% in 2025 and beyond.
While this evolution of the economic outlook may have surprised many investors, it almost played out as we expected three years ago. We were firmly of the opinion that inflation would subside rapidly as pandemic-induced supply shortages resolved on their own. We believed the U.S. economy had become more insulated from interest rate increases as consumers and corporations locked in low, long-term, fixed rates for their loan obligations. We had all but ruled out a recession and believed that growth was likely to surprise to the upside.
The momentum of the economy in 2024 was strong enough to overcome the uncertainty of the U.S. elections. If anything, the unexpected GOP sweep in November raised hopes of an even stronger economy on the heels of continued fiscal stimulus and deregulation. Company profits in 2024 were almost in line with lofty forecasts and earnings growth expectations for both 2025 and 2026 are still high at 13-15%.
It is no surprise then that the U.S. stock market delivered strong performance yet again in 2024. The S&P 500 index rose by 25.0%; the Nasdaq index, which includes the Magnificent 7 group of technology leaders, gained 29.6%; and the Russell 2000 index of small companies was up 11.5%. In fact, the S&P 500 index has now delivered the rare outcome of back-to-back total returns of at least 25% in two consecutive years.
The continued strength in the U.S. economy and stock market brought a lot of cheer to investors in 2024. However, it has now led to two major concerns in 2025.
Investors got clear evidence in July 2024 that the Fed could soon start cutting interest rates when headline CPI inflation registered its first post-pandemic monthly decline. From that point on, investors aggressively priced in multiple rate cuts under the benign scenario of continued disinflation and solid Goldilocks growth which was neither too hot nor too cold.
These expectations began to unravel towards the end of 2024. As investors began to price in a Trump win and then eventually saw the GOP sweep, interest rates began to rise in anticipation of a number of knock-on effects related to the election outcome.
a. Higher economic growth from continued fiscal stimulus, a new regime of deregulation and technology-led growth in productivity
b. Higher fiscal risks from larger fiscal deficits
c. Higher inflationary pressures from both higher growth and new policies on tariffs and immigration
At the same time, prospects of higher economic growth and higher corporate profits pushed stock prices and valuations higher.
In the last four months (from mid-September to the time of writing), interest rates have risen by more than 1%. Market expectations of Fed rate cuts have now declined to less than two; in fact, many are now assigning a non-zero probability to rate hikes in 2025. And in the stock market, strong returns have pushed valuations higher; the forward P/E for the S&P 500 stood at 21.5 at the end of December 2024.
These data points now pose the following risks to investors.
Will interest rates stay high or go even higher? Will high(er) interest rates bring down the stock market and eventually stall the economy?
Even if the stock market survives the burden of high interest rates, will it buckle under the weight of its own (high) valuations?
We address these two key questions on the way to developing our 2025 economic and market outlook.
Interest Rates
The recent low in the 10-year Treasury bond yield was 3.6% on September 16, 2024. After a strong jobs report on January 10, 2025, the 10-year Treasury yield almost reached 4.8%. This 1.2% increase is significant because it is unusual for long-term rates to move higher after the onset of a Fed easing cycle.
We see this historical anomaly more clearly in Figure 1.
Figure 1: 10-Year Treasury Yield Before and After First Fed Cut
Source: FactSet; Average includes rate cuts from June 1989, September 1998, January 2001, September 2007 and July 2019; as of January 10, 2025
Long-term interest rates normally decline when the Fed starts cutting rates. The simultaneous decline in both short-term and long-term interest rates is intuitive. Fed rate hikes usually slow the economy down to the point where rate cuts become necessary to prop it up. Fed rate cuts normally coincide with economic weakness and, therefore, a decline in long-term rates.
The divergent trend in Figure 1 is another reminder about the inefficacy of monetary policy in this economic cycle. At the outset, post-pandemic inflation was more attributable to supply side disruptions and fiscal stimulus than it was to monetary stimulus. Then, Fed rate hikes and higher interest rates didn’t cause the type of demand destruction that one would have normally expected. And now, expectations of higher growth are being driven by factors other than monetary policy.
We make an argument in the following sections that we are shifting to a higher gear of growth in this economic cycle. We observe in passing that the drivers of economic growth are also shifting. We believe the baton for higher future growth has now been handed off from monetary policy to higher productivity growth, deregulation and fiscal stimulus.
The first stage of our interest rates analysis is to understand why they are going up.
Nominal interest rates are comprised of two components: 1) inflation expectations and 2) real interest rates. We look at each of these factors separately.
Inflation Expectations
Under normal conditions, the 10-year Treasury yield will generally exceed inflation expectations for the next 10 years. Longer term policies drive these inflation expectations more than shorter term trends. In the current setting, inflation fears have been elevated by prospects of higher growth, immigration policies that may reduce the supply of workers and the implementation of proposed tariffs.
We do not believe that 10-year inflation expectations have changed materially in the last few months. For a while now, we have thought the Fed’s 2% inflation target was likely to be elusive. Our fair estimate of 10-year inflation expectations is slightly higher at around 2.25%.
We believe the market is mispricing a higher level of expected long-term inflation. We support our more benign view on inflation with the following observations.
i. We know high universal tariffs can be inflationary and harmful to domestic growth. We don’t believe they will be implemented as originally proposed; they will ultimately be selective, targeted and reciprocal. We believe the threat of tariffs is likely a negotiating tactic; it is aimed more at opening up foreign markets than at sourcing revenue. The bark of expected tariffs will probably end up being a lot worse than its actual bite.
We believe that the impact of immigration policy on the economy will also be less severe than anticipated.
ii. Inflation has been trending higher in recent months. We believe there may be some unusual base effects at play in these short-term trends. CPI prices fell in the fourth quarter of 2023, then rose sharply in the first quarter of 2024 and have been fairly steady thereafter. As a result, year-over-year changes in CPI inflation may come down in the coming months.
In any case, these recent trends are unlikely to materially affect inflation over the next 10 years. Counter to growing investor concerns, expectations for 5-year inflation, starting in 5 years from now, have remained well-anchored at about 2.3% even as long rates have gyrated violently.
iii. And finally, we maintain our high conviction that technology will continue to create secular disinflation in the coming years. We are hard pressed to think of enough inflationary tailwinds to overcome this one powerful disinflationary force.
We next look at the other potential drivers of the increase in long-term interest rates.
Real Interest Rates
Real interest rates are primarily influenced by long-term changes in the level of economic activity. Increases in economic growth rates cause the real interest rate (and, therefore, the nominal rate as well) to increase and vice versa. In fact, one of the more useful heuristics in the capital markets is that long-term nominal interest rates are typically bounded by the long-term nominal GDP growth rate expectations.
For the sake of completeness in our analysis, we make a small detour here to resolve one other nuanced driver of changes in real interest rates — changes in the risk premium. If investors perceive fiscal risks to be higher, they will in turn demand a greater compensation for bearing that risk through higher interest rates.
There is a great deal of angst that the incoming administration will continue to increase government spending and the fiscal deficit. We tackled this concern about greater fiscal risks comprehensively in our 2024 Fourth Quarter Market Insights publication.
For a myriad of reasons, we concluded that fiscal risks are not as elevated as feared and unlikely to trigger higher inflation or higher interest rates. We believe that any pricing of a higher risk premium into higher nominal yields today is unwarranted.
We resume our focus on the topic of economic growth.
In a material shift in our thinking, we now see the U.S. economy shifting to a higher growth gear in the next decade. In the pre-Covid economic cycle, real GDP growth in the U.S. averaged an anemic sub-2%. We expect real GDP growth will now exceed 2.5% over the next 2-3 years and conservatively average 2.25% over the next decade.
These forecasts imply an upward shift of at least 0.5% in real GDP growth from the prior cycle. At first glance, this may seem overly optimistic because of the obvious headwind of an ageing population.
We know the natural or potential growth rate of an economy has two basic components: 1) growth in the labor force and 2) productivity gains of existing workers. We concede that unfavorable demographics and potentially adverse immigration policies will likely reduce the size of the future labor force.
This places the onus for higher GDP growth squarely on the second factor of increased productivity. In fact, with flat to negative growth in the labor force, productivity will need to increase by 0.5-1.0% to boost GDP growth rates by 0.5% or more. How feasible is this outcome and why?
We make the following arguments numerically and fundamentally to support the feasibility of such an outcome. We begin with a look at trends in productivity growth going back about 75 years in Figure 2.
Figure 2: Productivity Changes in the Non-Farm Business Sector
Source: U.S. Bureau of Labor Statistics; as of December 2024
The light blue bar in Figure 2 shows the average annual productivity growth rate in the last 75 years is 2.1%. However, productivity growth does fluctuate a lot around this long-term average. As a rule of thumb, it declines during recessions and periods of slow growth (1970s and the Global Financial Crisis – GFC) and rises during periods of growth and innovation (1980s and 1990s).
We can also see that big swings in productivity growth rates of +/-1% are feasible. Productivity growth rose by more than 1% during the era of Internet Innovations and fell by more than 1% post-GFC.
We believe the new post-Covid economic cycle will foster both innovation and growth for a number of reasons. Technology was deployed at a rapid pace during the pandemic with a positive impact on business operations e.g. hybrid work arrangements, automation and robotics.
Recent advances in AI have also set the stage for significant productivity gains in the coming years. Investments in AI so far have focused on the “infrastructure” phase to facilitate training, learning and inference. We are now moving into the “application” phase where AI systems and agents will monetize this infrastructure to create practical solutions and economic value across the enterprise.
Finally, stimulative deregulation policies from the new administration will also streamline business processes and unlock operational efficiencies. The trifecta of technology, AI and deregulation can easily unlock an increase in productivity growth of approximately 1%.
Our forecast for the real interest rate over the next 10 years is 2.25%, in line with our real GDP growth estimate.
We now have forecasts for both inflation expectations and the real interest rate. Coincidentally, they are both around 2.25%. Our fair estimate for the 10-year Treasury yield is simply the sum of these two components.
We expect the 10-year Treasury yield will settle in the 4.5-4.6% range by the end of 2025. We don’t expect it to go much higher than the 4.8% level of January 10; it will instead recede by a small margin.
We are clear that an increase in real rates is a bigger factor in driving interest rates higher than a change in inflation expectations. We do not believe that inflation is headed higher; it will instead move lower in a bumpy manner. Based on our inflation outlook, the Fed will have more room to cut rates in 2025.
Higher real rates signal a stronger, healthier economy. Stronger economic growth bodes well for corporate profits. We believe that our inflation forecast of 2.25% and 10-year Treasury yield forecast of 4.5% will still be supportive of stock prices.
We close out our analysis and outlook for 2025 with a look at stock market fundamentals.
Stock Market Valuations
U.S. stocks have performed well in the last two years. While their returns have been naturally rewarding, those same high returns have also created risks going into 2025.
On the heels of two consecutive years of at least 25% total returns, U.S. stocks now appear expensive. Many valuation metrics are in the highest quintile of their historical ranges. We take a closer look at a couple of these valuation measures.
At the outset, we acknowledge the topic is complicated and nuanced. Our research is always deep, thorough and rigorous. However, our insights here are curtailed by the finite scope of this article.
We are mindful that the four most dangerous words in investing are widely believed to be “this time is different.” And yet, we also know that a number of time-tested paradigms haven’t worked in the post-pandemic economy and markets. The absence of a recession so far on the heels of an inverted yield curve even after a long lag of two years is a case in point.
We do our best to straddle this balance between respecting historical norms and yet thinking creatively and fundamentally about what might indeed be different this time around.
A commonly used valuation indicator was originally identified by Warren Buffett in a 2001 Fortune magazine essay. The Buffett Indicator measures the market value of all publicly traded U.S. stocks as a percentage of U.S. GDP. When the metric is high, stocks are vulnerable to a sell-off.
The Buffett Indicator has attracted significant attention in recent weeks as it went surging past a level of 200%. In other words, the market capitalization of all U.S. stocks is now more than double the level of total U.S. GDP. The Buffett Indicator suggests that U.S. stocks are now significantly over-valued.
We respect the broad message here that U.S. stocks are not cheap. However, we believe that a couple of relevant insights provide a more balanced perspective on this valuation metric.
The Buffett Indicator is anchored only toU.S. GDP in its denominator. However, many U.S. companies compete effectively in foreign markets. Since a growing number of U.S. companies are multi-national, a material and increasing portion of S&P 500 earnings is generated overseas. Clearly, the market value of all U.S. stocks in the numerator is not bounded by just the size of the U.S. economy. This mismatch causes the Buffett Indicator to rise steadily over time.
We look at another fundamental difference over time that may more rationally explain the trend in the Buffett Indicator.
We know stock prices follow corporate profits; as go profits, so do stock prices. Much like the construct of the Buffett Indicator, we track U.S. corporate profits as a percentage of GDP in Figure 3.
Figure 3: U.S. Corporate Profits as a Percent of GDP
Source: U.S. Bureau of Economic Analysis; as of Q3 2024
U.S. companies have continued to become more and more profitable. Almost analogous to the doubling of the market value of all U.S. stocks as a percent of GDP, U.S. corporate profits as a percent of GDP have also nearly doubled from 6.0% to 11.3%.
We believe these fundamental connections between the growth of U.S. corporate profits and the rise in U.S. stock values help us better understand and interpret the Buffett Indicator.
In a similar vein, the Forward P/E (“FPE”) multiple has attracted a lot of attention in recent months. At 21.5 as of December 2024, it is also in the highest quintile of its historical range.
There are two concerns related to the FPE ratio. One, it relies on future earnings (“E”) that were already deemed lofty before the rise in interest rates. And two, even if E comes through as expected, the FPE ratio itself is at risk of compressing through a decline in prices (“P”). We address each of these risks separately.
We have already made our case for a higher gear of growth in the preceding sections. The sustainable spurt higher in real GDP growth from a revival of productivity growth should also spill over into earnings growth.
Consensus analyst forecasts call for an earnings growth rate of 14.8% in 2025 and 13.5% in 2026. We believe these growth rates can be achieved; there is still room for profit margins to expand and augment higher economic, productivity and revenue growth.
We are in general agreement with the market that the P/E ratio will decline in the coming months. We also know that higher starting valuations lead to lower future returns. We are clear that stock returns going forward will be more muted than those seen in recent years.
However, we disagree with the market on both the likely magnitude and speed of decline in the P/E ratio. Investors worry that the 2024 FPE multiple of 21.5 could slide all the way down to its long-term average of around 16. They also fear that the resulting bear market could unfold quickly over just a few months.
We believe that the compression of the FPE multiple will be neither so drastic nor so abrupt. U.S. companies are now more profitable than they have ever been; aggregate free cash flow margins exceed 10% and return on equity is almost 20%.
On the heels of secular innovation, growth and profitability, we believe the fair value of the S&P 500 FPE multiple is now higher at 18-19. We also believe that any decline in the FPE from 21.5 to 18-19 will be more gradual. We expect positive earnings growth to offset the more orderly compression of the FPE multiple.
We illustrate the difference in our stock market forecast and the market consensus in Figure 4.
Source: Bloomberg; from 1988 onwards; as of December 2024
Figure 4 shows the historical association between the FPE ratio and subsequent 10-year returns from 1988 onwards. A quick visual inspection validates our intuition. Higher initial valuations do lead to lower future returns.
The historical data is heavily influenced by two mega crises that took place just a few years apart – the Bursting of the Internet Bubble (BIB) in 2000-2002 and the GFC in 2007 2009. In each instance, earnings declined significantly as did stock prices and valuations.
The empirical relationship in Figure 4 suggests that the current FPE ratio of 21.5 (shown by the grey vertical bar) may lead to stock returns as meager as 2-3% annualized over the next 10 years. A key assumption in this projection is that both earnings (E) and valuations (FPE) will fall as dramatically as they did in the BIB and the GFC.
Our fundamental analysis does not reveal significant downside in E or the FPE multiple. Our earnings outlook identifies more positive fundamentals (e.g. growth in profit margins and productivity) than negative ones (e.g. excessive leverage). We also believe that the fair value of the S&P 500 FPE ratio is now fundamentally higher than it was in prior decades.
We, therefore, expect a higher stock market return over the next 10 years in the range of 8-10% shown by the red bar in Figure 4. We believe that earnings growth of 8-10% and a dividend yield of 1-2% will offset valuation declines of 1-2% annually in the coming decade.
Our stock market outlook for 2025 is also optimistic. We believe expected earnings growth and the dividend yield will create a tailwind of almost 15%. Since interest rates have moved sharply in recent months, we realize the valuation compression in the near term may be as large as -5%. We aggregate these drivers to forecast a 10% total return for the S&P 500. We expect the S&P 500 to reach a level of 6,400 by the end of 2025.
We conclude with a summary of our outlook for the economy, inflation, interest rates and the stock market.
Summary
The economic and market outlook is becoming less dispersed and more homogenous across investors. As an example, there are virtually no proponents of a recession today. It is harder to offer too many differentiated views against such a backdrop.
We summarize the key tenets of our outlook here.
Economy
We expect real GDP growth of 2.5% or above in the next 2-3 years in a significantly pro-growth regime.
Real GDP growth will normalize at a level of around 2.25% over the next 10 years.
We see a clear shift in the drivers and gears of economic growth. The impetus for higher growth in this cycle will come from deregulation, fiscal stimulus and an increase in productivity growth of 0.5-1.0%.
Inflation
We do not see an inflection in inflation up to higher levels.
Inflation should subside in a bumpy path to the 2.3-2.4% level by the end of 2025.
We believe the fair value for inflation expectations over the next 10 years is 2.25%.
We believe the market is mispricing a higher level of future inflation.
The impact of tariffs and immigration will be more muted.
Meaningful base effects will pull inflation lower in the second half of 2025.
Technology will continue to be a powerful secular disinflationary force.
Interest Rates
We estimate the real interest rate to be around 2.25% over the next 10 years.
We believe the fair value for the 10-year Treasury yield is 4.5-4.6%.
The bond market is overestimating the risk premium related to a perceived increase in fiscal risks.
Interest rates are likely to come down from their 4.8% level.
Based on our inflation outlook, the Fed will have more room to cut rates. We expect 3-4 rate cuts by the Fed in 2025.
A Fed policy misstep in the form of rate hikes or bond yields above 5% as a result of overzealous bond vigilantes could trigger a financial accident and curtail growth.
Stock Market
We believe that earnings growth and valuation fears in the stock market are overblown.
As a result, our expected returns for stocks are higher than consensus over both the 1-year and 10-year horizons.
We expect valuations to come down but not as dramatically or quickly as investors fear.
We believe earnings growth will match or exceed expectations in the near term.
We expect the S&P 500 to reach 6,400 by the end of 2025 and generate a 10% total return.
Earnings growth and dividend yield will create a nearly 15% tailwind for stocks in 2025.
Multiple compression of around -5% will detract from stock returns in 2025.
We expect U.S. stocks will generate annual returns of 8-10% over the next 10 years.
We reject the view that a severe valuation overhang will limit annual U.S. stock returns to 2-3% over the next 10 years.
We respect the difficulty of forecasting during normal times, and especially so in the midst of uncertainty. We will assimilate these views into our investment decisions with appropriate caution and adequate risk control.
We believe that 2025 will finally see a normalization of the U.S. economy after the recent pandemic and inflation shocks. We look forward to the prospects of investing in more normal markets.
To learn more about our views on the market or to speak with an advisor about our services, visit our Contact Page.