Remy Blaire: The Federal Reserve officially initiated its first rate hike in three years and raised the benchmark rate to combat persistent inflation, as well as signaling higher borrowing costs through 2027.
Now, historically, new tightening cycles trigger near-term market volatility. At the same time, continued economic resilience as well as expanding market breadth are creating new opportunities across both equities as well as short-term fixed income.
Joining us live this afternoon here at the New York Stock Exchange to break down her macro outlook and portfolio strategy is Mona Mahajan, Principal and Head of Investment Strategy at Edward Jones.
Great to have you here. Thank you so much for joining me.
Mona Mahajan: Great to be here. Thank you.
Remy Blaire: Well, first and foremost, let's start out by looking at monetary policy, especially by the Federal Reserve.
Right now, we are looking at the 10-year Treasury yield back above that 5% level. So there's a lot to keep our eyes on.
But when it comes to monetary policy, what is your outlook?
Mona Mahajan: Yeah. You know, look, I think the Fed raised rates for the first time since 2023 last week. And what we noted was a couple things.
One, it was a unanimous vote. So that means they really took a stance to, we think, enhance the credibility against this inflation battle.
Number two, despite raising rates and despite pointing to maybe one or two more rate hikes this cycle, they increased GDP growth outlook. They kept the outlook for unemployment rate flat at a pretty healthy 4.1%.
So at least the Fed is pointing to an economy that can continue to grow, even at an outsized pace, despite the two or three rate hikes.
And the final thing I'll mention is we do think that the rate-hiking cycle that they're undertaking will likely be more of a mid-cycle adjustment rather than a full-blown Fed rate-hiking cycle, which we think the economy and earnings can absorb.
Remy Blaire: Yeah. And indeed, even this afternoon, we're paying attention to not just comments regarding policy, whether it's monetary policy or even fiscal policy, but we're keeping an eye on geopolitics and the price of oil.
So yet once again, we are looking at both Brent as well as WTI creeping higher. And that does cloud the outlook moving forward.
So you mentioned a key word there, and that is resilience. Tell us about the resilience that we're seeing in the equity markets.
Mona Mahajan: Yeah, absolutely.
You know, look, I think the equity markets have climbed several walls of worry. They're facing, as you noted, higher oil prices, potential for headline inflation to creep higher from here, yields back above 5%, and a Fed that is starting to raise rates again.
But at the end of the day, what we know is the stock market is driven by two variables primarily: earnings growth and valuation expansion.
And this year, in fact, we're looking at an S&P earnings growth rate of 30% plus. So usually we don't see that type of strong earnings growth unless we're coming out of a downturn or recessionary environment like we were in 2021, 2022, post-COVID.
The other factor is valuations. Valuations this year have actually come in a bit.
So 30% earnings growth, valuations down 10% to 15%, gives you still the potential for positive S&P returns. And in fact, we are up about 10% to 12% on the S&P year to date.
So as we think about the year ahead, a similar but slowing pace of growth. S&P earnings growth is on track for about 15% next year, and maybe some steady valuations.
So we'll see how that one plays out.
Remy Blaire: Yeah. And Mona, as we count down to the end of the third quarter of 2026, we will be getting more economic data next week on GDP as well as the jobs report.
And that will help inform us as well as the Federal Reserve.
And as you mentioned, when it comes to earnings, hard to believe, but we will be officially entering the upcoming earnings season soon.
So while I have you here, I do want to ask you about the bond market because this is an area that all of us are paying attention to, whether we're looking at yields here in the U.S. or around the globe.
So when it comes to duration versus risk, what are you looking at along the yield curve?
Mona Mahajan: Yeah, absolutely.
You know, look, I think historically, first of all, yields above 5%, that's where equity markets do start to pay attention.
And so we are going to look to see if valuations come under pressure, if equities or growth comes under pressure.
But to your point on where we would find opportunities, I would say right now, when we think about where there are some attractive duration opportunities, we are still leaning towards the shorter-duration part of the market.
So if you think about zero- to two-year Treasury bonds, they still have a nice pickup versus cash. And to us, that's where there's a compelling opportunity.
We're not yet there to say get, you know, long, longer-duration parts of the market.
But all that being said, with yields back above 5%, keep in mind, post-financial crisis, in the 10 years or so, Fed funds rate was close to zero. The 10-year Treasury yield was close to 1.5% to 2%.
Now we're actually getting an interesting yield for those that are looking for income.
If you're in retirement, near retirement, or just are interested in some yield pickup, you have some opportunities to consider.
So not a bad area for savers or income investors.
Remy Blaire: Yeah. And I do want to expand your perspective when it comes to what we're seeing in terms of earnings resilience as well as sectors.
So obviously, this year has been the year of energy when we're talking about sector advances for the S&P 500, but also IT as well as the AI trade.
So outside of mega-cap tech, what are you seeing right now?
Mona Mahajan: Yeah. You know, some of the things that we're thinking about, of course, is we want to make sure we are diversified across tech and non-tech parts of the market.
And, you know, as we always say, the only free lunch for investors still is diversification.
But I think as we think about the years ahead, of course, at the beginning of this AI cycle, the semiconductors, infrastructure parts of AI have done quite well.
As we think about the next phase of AI adoption, which is still quite low, we look at the sectors that may benefit from the productivity gains.
So one sector we like now is industrials, which we think has the potential for manufacturing efficiencies, if you think about robotics, but also will benefit from AI CapEx spend as well as reshoring of manufacturing.
So industrials we like alongside communication services, which is that typical, more traditional AI play. So a balance of both.
Remy Blaire: And Mona, finally, before I let you go, when we're talking about the American consumer, they have a lot to contend with, whether we're talking about rising energy prices or inflation.
And given that the Fed funds futures are pointing to upcoming rate hikes, where do you stand when it comes to the American consumer and the economy?
Mona Mahajan: Yeah. You know, look, I think the consumer as a whole has been holding up well.
We've seen that in retail sales figures. We've seen that in the consumption quarter of GDP growth. We are not seeing cracks broadly.
Now, when we bifurcate that a bit and, or dig a layer deeper, we are seeing more traditional, what we call that K-shaped economy.
So that part of the economy that has exposure to the stock market or even real assets like houses, they are feeling a wealth impact and are feeling pretty good.
The other side of the K, which doesn't have as much of those assets and is not participating in the stock market, they are feeling the pinch still from these higher inflation levels that continue to be in place even five years after COVID.
And so we are hopeful that, to Kevin Warsh's point, if we can keep inflation contained and hopefully get it back to that 2% target, that part of the K will benefit from that move in inflation.
Now, to get there, we may have to endure a period of elevated yields.
Remy Blaire: Well, I appreciate your time. Thank you so much for joining us here at the New York Stock Exchange.
Mona Mahajan: Absolutely. Thank you so much.
Remy Blaire: Thank you.
