The U.S. economy continues to show surprising resilience, despite clear signs of significant slowing in the labor markets. In addition to growth outpacing that of most other developed countries, the domestic economy continues to impress relative to its own historic growth rates. Much of this impressive strength is being driven by investments in technology, especially artificial intelligence, and the build-out of the U.S. power grid.
Meanwhile, gains in productivity are helping to offset overall inflation pressures, as is the declining rate of shelter inflation. That said, we remain mindful of the risk of higher inflation, as the combination of new fiscal stimulus and lower interest rates by the Fed are likely to further stimulate an already rapidly growing economy, at a time when both tariffs and a significant drop in population growth are already putting upward pressure on prices.
A possible trade war with China is another potential source of economic disruption, while consumer spending, which is of critical importance to domestic growth, remains quite robust, although it is increasingly concentrated in the wealthiest segments of the population.
While domestic stocks are very expensive (relative to earnings) by historic standards and there are certainly some indications of speculative froth in certain segments of the stock market, we remain cautiously optimistic on domestic equities, due to our expectations of accelerating corporate profits and lower short-term interest rates. In addition, unlike last year, longer-term interest rates are moving lower in response to the renewal of the Fed’s rate cutting cycle, which should help equity investors, fixed-income investors, and mortgage holders.
With today’s high equity valuations and very concentrated market leadership, geographic and asset class diversification is an increasingly important component of risk management. Maintaining a balanced approach and aligning portfolios with both current conditions and long-term goals can help navigate uncertainty and capitalize on emerging trends.
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