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Macro views

Economic outlook: Tomorrow never knows

December 17, 2024 - 4 min read

What will happen to the markets in 2025? Portfolio Manager Jack Janasiewicz and Portfolio Strategist Garrett Melson join Investment Strategist Brian Hess to explore the near-term economic outlook for the US.


Key takeaways:

  • The US economy has shown strong growth, consistently outperforming expectations with real GDP growth around 3% over the past six quarters
  • Consumer spending has been a major driver, fueled by robust income growth
  • Although there may be tactical opportunities to allocate outside the US, the long-term outlook remains more favorable for US markets


Market reactions and Trump trades

Starting points are important to consider when assessing the potential impacts of the policy agenda for the incoming Trump administration. However, we do have a “blueprint” from 2016 to refer to.

For example, in 2016 we saw the theme of “US secular exceptionalism” play out, and we believe that, to a certain extent, we’ll experience that again. The growth backdrop in the US is better than most other countries, which we believe lends itself to an edge in asset performance.

“Things like seeing the yield curve steepen, inflation expectations picking up at the margin, US performing better than the rest of the world, small-caps over large-caps, the stronger dollar, those sorts of things, which played out back in 2016, are likely playing out again this year,” says Jack Janasiewicz. “The question is, how long will it take for those things to run [their] course?”

What's said on the campaign trail doesn't necessarily translate into what's put forward from a policy perspective. Trump has implied tariffs will be implemented slowly over time, and recent discussions with Canada’s Justin Trudeau and Mexico’s Claudia Sheinbaum indicate “they’re willing to work with this.” Overall, we believe the market is getting more comfortable with tariffs being used as a negotiation tactic. 


Economic growth, consumer spending and housing

Economic growth has been robust this year, consistently outperforming expectations. Over the past six quarters, real GDP growth has been around 3%, which is impressive compared to the pre-Covid trend of about 2.4%. We’ve also seen core PCE inflation decline from 4.8% to 2.8%. However, there are some headwinds expected to moderate this growth in the near term.

Consumer spending has been a major driver of economic growth, fueled by robust income growth. “If there's one thing the consumer does well, it's to spend incomes,” says Melson. “While we've heard a lot about pandemic savings being spent down, that was really a story of the consumption in the early part of the recovery.”

This cycle has been income-driven, with organic income growth supporting spending. However, there has been a recent trend where consumption has outpaced income growth, which is unsustainable in the long term. As a result, there might be a moderation in the pace of consumption in the coming months. This moderation is expected to slightly reduce the contribution of consumer spending to overall economic growth.

The housing market has been in a state of stasis, with activity depressed due to high mortgage rates, which are currently close to 7%. The high interest rates have sidelined a lot of demand. The market is not experiencing a destruction of demand but rather a delay until rates move lower, possibly in 2025.


US vs. international markets

Is it time to start allocating in international markets? “There might be times when it makes sense to allocate outside of the US, but I think the long-term core backdrop is still supportive for US markets going forward,” says Janasiewicz.

There are potentially some structural headwinds that may persist for international markets. The US economy is more resilient due to its domestic-driven nature, while Europe faces challenges due to its export reliance. The divergence between the US and Europe has been substantial, with the US showing stronger growth and productivity gains. The significant productivity growth in the US has allowed for higher wage growth without the associated inflation. This productivity growth is a result of various factors, including the response to the Covid-19 pandemic and deregulation efforts.

CFA® and Chartered Financial Analyst® are registered trademarks owned by the CFA Institute.

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily reflect the views of Natixis Investment Managers or any of its affiliates. The views and opinions are as of December 2024 and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted, and actual results may vary.

All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided. Investors should fully understand the risks associated with any investment prior to investing.

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