February 28, 2025

As we settle into 2025, markets are balancing optimism with caution. Your Investment Team at Align is analyzing key trends shaping portfolios this month and what they mean.

Key Trends to Watch

1. The “January Effect” Points to Cautious Optimism

History suggests that a positive January often sets the tone for the year—a pattern known as the “January Barometer.” This year’s 2.8% January gain for the S&P 500 has historically led to an average 12.8% return for the remaining 11 months. While past performance isn’t a guarantee, 80% of years with positive Januarys since 1926 finished in the green.

2. Stocks and Bonds Are Stuck in Sync

The correlation between stocks and bonds remains near historic highs (3-year rolling correlation of 0.72). This challenges traditional risk management principles, requiring smarter diversification than before.

What we consider:

  • Multi-strategy alternatives can provide yield and total return diversification that are not correlated to asset class majors.
  • Shortening bond duration and adding credit exposure can reduce risk while maintaining yield.
  • Repositioning equity strategies for less volatile growth with higher quality fundamentals.

3. AI’s Energy Appetite Sparks Utility Surges

The AI boom is reshaping utilities and infrastructure. Energy companies are looking attractive, with demand that is driven by soaring power requirements from data centers and tech giants. Tech and Communication companies plan to invest significantly in AI more this year than they did last year.

4. Large Caps Keep Delivering

U.S. large-cap growth stocks continue to lead, driven by robust earnings (up 25.6% in 2024). Meanwhile, small caps struggle with profitability—30% of Russell 2000 companies are unprofitable, which leaves opportunities open for actively managed stock-picking funds.

Align’s Planning Corner

  • For employers: Are your 401(k) contributions enough? Consider pairing financial wellness programs (like our MoneyNav platform) with a responsible investment option to meet your retirement goals.
  • For investors: Our primary focus is your bond allocations—shorter durations and “plus sectors” like high yield could better balance risk in 2025’s volatile rate environment. We are looking at upgrading some holdings in the equity sleeve too.
  • Our take: We like equity fund managers that focus on quality with earnings momentum (like tech and communications) for larger companies, while staying selective in smaller companies. In fixed income, managers should diversify sources of yield and expand credit exposure to mitigate volatility and look for “bond convexity” plays. With that in mind, we have spent the last couple months assessing potential enhancements to client portfolios. Get ready for some tweaks in the coming weeks!

Fun Fact of the Month

“Hurkle-durkling” is a Scottish term that means to lounge in bed when you should be up and about. It’s a fun-sounding term that’s been used since the mid-1800s.