AOR Update: US economy and US equities set to lead again

The US economy has demonstrated resilience compared to other developed nations, driven by robust economic growth and corporate profits, leading to significant stock market gains. Key components sustaining this growth include strong consumer spending, productivity gains, and fiscal stimulus, although a growing labor supply may face challenges. The ClearBridge Recession Risk Dashboard signals a positive outlook, suggesting GDP growth could exceed current forecasts, supported by fiscal policies under a Trump administration and a rate-cutting cycle by the Federal Reserve.

Despite concerns over wage pressures potentially impacting corporate profit margins, productivity gains have been strong, suggesting that unit labor costs remain favorable. This productivity, coupled with a stable labor market, supports continued economic expansion. However, potential risks include a cooling labor market due to declining immigration, which could affect job creation and economic growth.

Fiscal stimulus, particularly through potential tax cuts under the Trump administration, is expected to bolster the fiscal impulse, contributing to economic growth. While the pace of fiscal stimulus has slowed, the potential for tax cuts could enhance economic prospects.

The US economy is projected to remain healthy in 2025, with GDP growth potentially exceeding the consensus estimate of 2.0%. Although the stock market may experience volatility following strong returns, a robust economy and widening earnings participation are likely to support US equities, particularly benefiting small caps, value stocks, and the equal-weighted S&P 500 Index. Diversified portfolios may continue to be rewarded in this environment.