Taxes and Fed cuts: What Questions Advisors Are Really Asking

As 2025 enters its final stretch, advisors are balancing equity markets being near all time highs with a shifting monetary policy and expensive valuation backdrop. In this article, we explore the top market questions from our advisor clients.

1. Are there tax opportunities this year?

Q4 is when many advisors tend to shift focus to after-tax returns. When reviewing portfolios heading into year-end, we believe taxes deserve as much attention as risk, concentration, and valuation. Time may be running out to save on taxes. November and December have historically been seasonally strong months for performance in markets, meaning any back-up in prices are valuable opportunities to lock in losses or gains rather than wait for year-end.

Figure 1: Don’t run out of time to save on taxes – November and December have historically shown to be strong months for the stock market

Seek to manage capital gains taxes

Even if investors haven’t sold positions, actively managed mutual funds can still distribute taxable gains. In 2024, 76% of U.S. active equity mutual funds paid out capital gains, averaging 7.5% of net asset value.¹ For investors in the top tax bracket (around 24% combined rate), that’s roughly a $17,850 tax on a $1 million position.²

As these distributions approach, advisors may consider using the final quarter to transition clients from mutual funds to more tax-efficient ETFs with similar underlying exposures, which have tended to distribute fewer capital gains and may help improve after-tax results.³

Seek to anticipate year-end distributions early and consider switching to vehicles with stronger tax efficiency.

Losses are hiding in plain sight

Even in an up year for the U.S. equity market, we believe there are still opportunities to harvest losses under the hood. The S&P 500 is up double digits, but about 40% of its constituents are down over the past 12 months.⁴

• Energy is negative on both a year-to-date and one-year basis.⁵
• Health care is down across the YTD, 1-year, and 3-year time frames (Figure 1).⁶

These pockets of weakness can provide useful offsets to realized gains. Additionally, consider reinvesting into diversified ETFs with similar exposures which can help maintain portfolio alignment.

Figure 2: Tax loss harvesting opportunities in equities

Even in fixed income, tax-loss opportunities exist. Bonds tend to generate income through coupon payments, which can help lift total return, but tax-loss harvesting is based on price return, not total return. That means a bond can show a positive total return yet may still be eligible for harvesting if its price is lower than your purchase cost.

• Broad bond indexes are higher this year in price terms and total return (U.S. bonds +3.8% in price), but certain Treasury exposures remain lower. Both 10- to 20-year Treasury bonds are flat over the past year, and 20+ year Treasuries are down about -2.3%.⁷

As Q4 progresses, reviewing capital gains exposure, harvesting opportunities, and the tax efficiency of investment vehicles can help strengthen after-tax returns going into 2026. Head over to our tax evaluator tool to get started.

2. How deep will the Fed cut?

Markets continue to debate whether the Federal Reserve will deliver another cut in December, following the quarter-point move in September and October.

• As of early November, futures markets are pricing in roughly a 67% chance of a quarter-point cut in December, down from a 92% probability priced into the market before the October Fed meeting. Longer dated futures estimate 2-3 more cuts in 2026.⁸

The direction of policy is clear: toward easing. But we believe the pace remains uncertain.

That uncertainty has deepened with the government shutdown, which disrupted the flow of key data that typically help guide the Fed’s decisions. Major agencies such as the Bureau of Labor Statistics, Bureau of Economic Analysis, and Census Bureau paused or delayed the release of reports on employment, inflation, and trade, leaving policymakers with a foggier lens into current economic conditions. The length of the shutdown may affect the length of the data pause.

Economists warn that each week of the shutdown may shaved 0.1–0.2 percentage points off quarterly GDP growth.⁹ So, the longer the shutdown lasts, the larger the potential effect to GDP.

The potential drag from the shutdown on confidence and federal spending could weigh the odds towards more cuts than less, in our view.

3. What areas still offer value as markets hit all-time highs?

With markets hovering near record highs and valuations elevated across most asset classes, investors may be finding fewer places that look inexpensive. Gold trading above $4,000 an ounce highlights just how broadly prices have risen.¹⁰ In this environment, we see opportunities in select areas that still appear relatively cheap, including international markets and volatility strategies.

Consider international equities for cheaper valuations

The S&P 500’s heavy tilt toward large-cap technology stocks continues to push valuations well above global averages.

• The tech sector weight in the S&P 500 is now more than twice that of MSCI ACWI ex-U.S.
• Trailing Price/Earnings (P/E): ~30x for the S&P 500 vs.17x for MSCI ACWI ex-U.S.
• Price-to-book: 5.5x for the S&P 500 vs. 2.2x for MSCI ACWI ex-U.S.¹¹

High-quality earnings growth has helped justify these levels, but we feel the U.S. still screens as expensive on nearly every valuation metric.

• Even U.S. large-cap value is expensive, trading at a 29% premium to its 10-year average forward P/E.¹²

Outside the U.S., both developed and emerging markets trade at much lower valuations.

• International equities offer exposure to sectors like industrials, financials, and consumer staples that tend to be underrepresented in U.S. indices.
• These markets have historically offered higher dividend yields and lower volatility when measured over full economic cycles.¹³

Relative to the U.S., we feel that international equities remain “cheap” by traditional valuation standards, while also providing opportunities to seek long-term diversification.

Cheap volatility

While we maintain our preference for U.S. growth stocks and the AI theme, we also feel right now is an attractive opportunity to consider volatility strategies.

Despite the S&P 500 trading near all-time highs, measures of implied volatility remain subdued.

• 3-month skew—the difference between downside and upside option demand—sits near or slightly below its long-term average. Consistent with a sanguine equity view, skew is currently only about or slightly lower than the long-term average.¹⁴
• The VIX-to-P/E ratio shows that adjusted volatility is near 30-year lows.¹⁵ VIX-to-P/E ratio helps tell us how much risk investors are pricing in relative to how optimistic they are about stocks.

Overall, assets that have tended to perform well when volatility rises, like minimum volatility strategies, are worth considering in our opinion.

Contributors: David Jones, Jon Angel, and Annie Khanna