• Like stocks, ETF inflows have increased in recent weeks.
• Strategists, including BlackRock’s Gargi Chaudhuri, are optimistic about the economy.
• Here’s how investors should allocate their assets as we enter the new year.

Investors I poured money into the market at an unprecedented pace since Donald Trump’s victoryBut one seasoned investment chief believes there is much more at play than politics.

According to asset management giant BlackRock, inflows into exchange-traded funds (ETFs) broke the record set in 2021 with more than a month and a half left. The world’s largest ETF issuer recently stated that an unprecedented $77 billion went into ETFs in the week after the election. This increase coincided with the S&P 500’s best week in 2024.

Markets were particularly enthusiastic right after election day. A staggering $22.3 billion went into U.S. ETFs last Wednesday, including BlackRock’s hugely popular iShares Russell 2000 ETF (IWM) had its most active day of trading and inflows since 2007, with small caps rising 5.8%.

But BlackRock’s Gargi Chaudhuri doesn’t think President-elect Trump deserves all the credit for this surprising market rally. Chief investment and portfolio strategist at Americas said in a recent interview that U.S. stocks had several powerful catalysts Before Trump won.

“Obviously there’s been some pretty sharp movements over the last week,” Chaudhuri told Business Insider. “But even when we look back at the quarter before that or the beginning of this year, I think there are very solid fundamentals supporting this move.”

Chaudhuri said strong growth in the economy and corporate earnings are among the most prominent drivers of the market, along with low interest rates and falling inflation. End-of-year rallies are also very common. especially in years when the market is strongAs Truist recently noted.

Another compelling explanation for this recent momentum in the market is that investors reduced risk as uncertainty increased ahead of the election, then quickly changed course when they gained clarity on the path forward sooner and more decisively than expected.

“Investors reducing their portfolio risks going into the elections was perhaps one of the reasons why we saw this pretty strong re-risking in the markets, especially after we got the election results,” Chaudhuri said.

Why are softer economic readings a red herring?

As the new year approaches, Chaudhuri remains quite confident in the US economy, although a few recent developments appear to have given some ammunition to the glass-half-empty camp.

GDP growth and employment gains have fallen recently, but this is not a major concern for Chaudhuri. Economy Did not expand as much as expected in the third quarterbut GDP still rose At a healthy clip of 2.8%. And one October employment figures are weak This situation appears to be largely due to severe weather events that inconvenienced thousands of workers.

Moreover, more moderate growth is a sign that the economy is not overheating; This is welcome news for the Federal Reserve, which is seeking to ease financial conditions without stoking inflation. Such moderations do not give Chaudhuri pause about the direction of the US economy.

“Given how strong the economy already is and how high rates are, it would be very normal for us to continue to see further normalization in the labor market,” Chaudhuri said. he said.

The investment chief added: “We haven’t quite seen job destruction happening yet. You’re still seeing wages rising; you’re not seeing redundancies rising in any meaningful way.”

After another outstanding performance this year, the most compelling reason to stick with U.S. stocks is corporate earnings growth. profits increased by approximately 7% in the third quarterthis is too much mid-single digit figure analysts expected.

“One of the things the stock market does over and over again is it continues to surprise us in terms of earnings growth,” Chaudhuri said. “I think companies continue to find very innovative ways to manage their spend. Especially given the spending on artificial intelligence, they’ve found a way, which is a form of capital spending, to find ways to enable companies to have greater productivity.”

Where to invest for a rosy 2025?

Two sectors with abnormally strong earnings prospects financial information And industrialistssaid Chaudhuri. These economically vulnerable groups enjoyed some of the larger post-election population increases. Wall Street is investing in sectors that should benefit from the hot economy.

And yet smaller stocks were on the heaterChaudhuri believes this large, undervalued companies Considering their superior earning scheme, this is the best place to go.

“The big cap for a longer period of time is where we think earnings growth will continue to get higher and better,” Chaudhuri said.

While earnings aren’t under the spotlight like they were when interest rates were at their peak, they’re still on Chaudhuri’s mind. Large stocks generally have better returns than their smaller counterparts, and the investment chief thinks the cream will eventually rise to the top.

“This catch-up trade, which is happening in small quantities right now, has some legs,” Chaudhuri said. “I think this could continue until maybe the end of this month or even the end of next month.”

“But we need to see earnings growth to believe that small-cap rallies will continue, and over 50% of small-cap indices are still not very profitable,” Chaudhuri continued.