Things We Are Watching

• The Federal Reserve recently cut rates by 25 basis points to 3.75%, continuing its gradual shift toward a more accommodative policy. This decision follows moderating inflation and slower economic growth. Three policymakers dissented, preferring to keep rates unchanged, which highlights internal disagreement over the pace of easing. The Fed emphasized that future decisions will be data-driven, but the rate cut reflects increased confidence that inflation is improving without significant labor market weakness. Markets are now focused on the potential pace of further cuts in 2026 and the upcoming leadership transition. With a new Fed Chair taking office next year, investors face uncertainty about whether the new leadership will maintain the current policy approach or shift priorities, which could influence future interest rates and market conditions.
   
• Stock market valuations appear elevated as year-end approaches. The S&P 500’s forward price-to-earnings (P/E) ratio stands at 30.4, well above its decade average of 18.7. Optimists suggest this could become the “new normal” if AI drives sustained productivity and profit growth, making current valuations seem justified over time. However, high P/E ratios leave less margin for error, so any earnings slowdown or rise in interest rates could trigger a market pullback or a period of stagnant prices until earnings improve.
   
• After years of low yields, bonds are once again offering meaningful income. The current higher interest-rate environment allows high-quality bonds to provide attractive yields without excessive risk. This has restored their traditional role in portfolios as both a source of stability and reliable income. As we enter the new year, we are monitoring how declining term rates may impact bond prices and yields, and whether bonds will continue to be a strong complement to equities in diversified portfolios.
   
• Although the broader market is near all-time highs, most recent gains have come from a small group of large companies. The top 10 stocks in the S&P 500 now represent about 32% of the index’s earnings and 41% of its total market capitalization, driving the majority of recent gains. This concentration heightens risk, as market performance relies more on a few companies rather than broad participation. If leadership narrows further, markets may become more susceptible to pullbacks if sentiment shifts around these dominant stocks.
   
• The Consumer Price Index (CPI) report showed U.S. inflation eased to 2.7% year-over-year in November, with core inflation at 2.6%. Both figures were below economists’ expectations and lower than September’s results. Economists cautioned that these readings may be distorted, as a 43-day federal government shutdown halted data collection. As a result, key price data, including October’s CPI, was estimated rather than measured. The upcoming December CPI release will be significant, as it is expected to provide more comprehensive data and a clearer view of inflation trends heading into 2026.

Evan Mills, MBA
is a Financial Advising Analyst at Scholar Financial Advising.

Ask An Analyst

In this month’s edition, Noah Lewis discusses the topic:
529 Plans: What Parents Should Consider

A 529 college savings plan is one of the most powerful and widely-used tools when it comes to funding a child’s education. While opening an account is simple, there are a few things to consider when utilizing them to meet your personal goals.

Deductibility of Contributions
There are a few standard details when it comes to 529s: funds can be allocated into the plan’s available investment options, your investments grow tax-free, and funds can be withdrawn tax-free when used to pay for qualified education expenses. However, you should also know that certain states allow for a tax deduction or credit for contributions to a 529 plan associated with that state. As of today, over 30 states provide such an advantage. By understanding your state’s benefits, you can optimize your after-tax cost of saving.

The Annual Gift Tax Exclusion Limit
While 529 plans have no formal contribution limits, each contribution you make can have an impact on your lifetime estate tax exemption because the contributions are treated as gifts. The annual gift tax exclusion is currently $19,000 per donor per beneficiary, meaning a married couple can donate a combined $38,000 to each child before eating into their lifetime estate tax exclusion. The five-year super-funding rule also allows you to front-load up to $190,000 in one year without tapping into that exemption. Keeping these limits in mind can help you plan for contributions while being sensitive of your broader financial picture.

When your Child Receives a Scholarship
As previously stated, withdrawals from 529 plans can be taken tax-free for qualified education expenses. But what if your child receives a scholarship and you don’t need to use the funds as expected? Fortunately, the IRS allows you to withdraw an amount equal to the scholarship without incurring the 10% penalty that typically hits when withdrawing for a non-qualified purpose. While the funds would not be distributed tax-free, this feature makes 529 plans more appealing by providing some flexibility in the event that your child receives a scholarship.

Investment Allocation
Much like a retirement account, a 529 plan’s investment allocation should change depending on how close the child is to needing the funds. For example, if the child has just been born, it may be appropriate to set a relatively aggressive investment allocation (assuming the funds are intended for higher education). As college approaches, the allocation should typically move toward more conservative, lower-volatility investments to help protect the balance. While the high volatility and growth of the early years tend to be beneficial for an account’s value, the last thing you want is a large market downturn to deplete your designated funds right before they’re needed. For that reason, it’s worth considering whether the account’s investment allocation needs to be shifted as your child approaches college.

Making use of Leftover 529 Funds
If your youngest or only child finishes school with money still remaining in their 529, you have more options than waiting for a future grandchild to use the account. As of 2024, up to $35,000 of leftover 529 funds can be rolled into a Roth IRA for the beneficiary over multiple years. The 529 must have been open for at least 15 years, and the beneficiary must have earned income each year to support the rollover amount, which is also subject to annual Roth contribution limits. This new provision offers a valuable safety valve and helps reduce the worry of overfunding a 529.
 

Noah Lewis
is a Financial Advising Analyst at Scholar Financial Advising.