The start of a new year often inspires reflections on the past, with renewed effort to apply any lessons we’ve learned to try to anticipate what the future might bring. In the realm of financial markets, learning never stops, and one of the most significant lessons from the past five years or so—which includes the extraordinary pandemic impact— is the importance of filtering out the incessant noise of our hyper-connected world. Constant push notifications, algorithmically curated news, and media exaggerations—such as noting every 100-point move in the Dow, which now represents a negligible percentage change—can cloud judgment.

Sometimes, even the most respected economists and money managers must be tuned out too, since their well-intentioned forecasts are frequently incorrect. Last year was a perfect example of this, as many strongly predicted an unavoidable economic slowdown driven by rising interest rates stifling growth and consumers depleting their excess savings. Fortunately, those dire predictions didn’t materialize. In fact, the economy—buoyed by ongoing strong consumption—grew at an above-average pace. Financial markets took note, and the S&P 500 appreciated over 20% for the second consecutive year—a rare occurrence that has only happened eight times in history.

As of this writing, economic growth appears set to continue, with recent data indicating a healthy job market and the potential for improved business sentiment and spending in 2025. Moreover, according to Federal Reserve data, total household net worth has risen by 45% since December 2019, fueled by gains in the stock market and rising home values. These persistent strong economic trends have caused recession worries to dissipate and this should result in higher levels of corporate confidence, and thus spending. Despite this positive outlook, we still anticipate that the “noise” will reach new heights as the incoming Trump administration embarks on what could become one of the most unconventional presidential terms in modern history.

In turn, the general media will likely continue to spotlight ongoing potential risks and challenges, because negativity always attracts the most attention. While some initiatives proposed during the campaign could harm the economy if implemented in their original form, we believe the new administration will ultimately strive to achieve a legacy of economic prosperity and hence will take measures to avoid too much disruption of this evolving period of remarkable economic growth and innovation. Notably, many leaders of the nation’s most successful companies are also becoming far more involved in political dynamics than in the past. Even though anyone’s motives can always be questioned, their personal interests are nonetheless basically aligned with the shareholders of the companies they run, and this should translate into relatively good news for Wall Street overall.

And yet, the far-reaching nature of some proposed initiatives and their potential ability to disrupt normal government function is of some concern to us. However, for example, recent comments suggest that realizing just half of the promised $2 trillion of cuts targeted by the newly proposed Department of Government Efficiency (DOGE) would still be considered “an epic outcome” and implies that this administration’s most aggressive ambitions may be paired back to something much more digestible. This is almost always the case, since campaign promises have historically been more aspirational than practical, rarely getting materialized in their original form.

At Sand Hill, we must sift through all of this each and every time there is a new administration and draw some big general conclusions and work through developments; and we remain focused on positioning our clients’ assets to balance potential growth with some protection against unpredictable and possible adverse outcomes. Over the past two years, our non-consensus view that the economy would avoid a recession proved correct. However, recognizing the risk of historical trends, we also maintained only a slight equity overweight to sensibly safeguard clients’ portfolios. Today’s environment is similar—the economy’s foundation is strong, but new and still unknown governmental policy introduces potential risks.

Beyond the influence of government, there is no doubt that we are also simultaneously living through an extraordinary time in history, driven by several unique growth drivers. These include artificial intelligence (AI), which—regardless of its eventual ascendancy (including any ongoing advances such as DeepSeek or other innovations)—is already prompting substantial spending across a wide range of industries, plus GLP-1 drugs which hold significant promise for treating a broad spectrum of inflammatory diseases. On top of this, the Baby Boomer generation has an impressive estimated $80 trillion in assets, and as a result their retirement spending is expected to help smooth overall consumption trends over the next decade. In many ways, these trends would be hard to upend anyway, and the fact that many technology leaders are increasingly more involved in Washington suggests that facilitating innovation should remain a priority and core competency of the United States.

We are continuing to position our asset allocations with a slight overweight to equity as we expect corporate earnings growth to remain strong this year. While earnings growth is projected to be in the mid-teens for large-cap stocks, a more meaningful recovery in earnings growth is being projected for U.S. small- and mid-cap stocks. For this reason, combined with attractive valuation relative to history, we have also increased our exposure to this part of the equity market. On the other hand, bond returns have been quite challenging for the last three years as interest rates rose significantly. Even as short-term interest rates have been coming down recently, the bond market has questioned just how much more the Federal Reserve will lower interest rates and this has actually contributed to long-term interest rates rising. In our view, though, we are likely close to peak long-term interest rates for this economic cycle. We expect bonds to be protective during times of volatility and continue to think that it makes sense for most investors to have some reasonable exposure to this traditional asset class.

Again, we plan to be mindful of the constant “noise”—just as we always have—and instead focus mainly on fundamentals, economic data, and corporate earnings to help guide our ongoing decision-making process and portfolio management on your behalf. We wish you and your families a healthy, prosperous, and happy year ahead.