Vista Tips

US Economy and US Equities Set to Lead Again

ClearBridge Investments is bullish on the US economy and US equity market, expecting an upside surprise to GDP growth in 2025 and broadening earnings participation among stocks.

Key Takeaways:

• A resilient US economy has stood out against other developed nations in recent years with stronger economic growth and healthier corporate profits that have fueled outsize stock market gains.
• We believe that three of the four key components of exceptional relative US economic growth—the consumer, productivity gains and a solid fiscal impulse—should remain intact while the fourth (growing labor supply) is likely to come under pressure but should not derail the expansion in 2025.
• Backed by a green and improving signal for the ClearBridge Recession Risk Dashboard, we are bullish on the US economy in the year ahead and expect GDP growth to deliver an upside surprise relative to current forecasts. Coupled with broadening earnings participation, we expect US equities to maintain their positive momentum.

Trump win, Fed pivot support resilience

• The anticipated recession did not occur in 2024, with the US economy achieving a soft landing.
• Economic expansion is expected to remain strong in 2025, supported by:
  • Fiscal stimulus from Donald Trump’s election win and a Republican Congressional sweep.
  • Monetary stimulus from the Federal Reserve's pivot to rate cuts.
• The US economy has been resilient compared to other developed nations, with stronger corporate profits and stock market gains.
• The ClearBridge Recession Risk Dashboard, an economic health indicator, remains in green/expansionary territory and has improved throughout 2024.
• Four key drivers of US economic growth in recent years:
  • Strength of the US consumer.
  • Productivity gains.
  • Growing labor supply.
  • Solid fiscal stimulus.
• In 2025, three of these drivers (consumer strength, productivity, and fiscal support) are expected to remain robust, while labor supply growth may slow but not derail economic momentum.
• The US consumer remains a major strength:
  • Initially driven by savings and pandemic-related government support.
  • Now supported by a strong labor market, with wage growth and job creation fueling spending power.

Wage growth remains healthy, with average hourly earnings growing at 4.0% year-over-year in October 2024.

• Sticky wage gains have raised concerns about potential pressure on corporate profit margins.
• The key factor for profit margins is not wage levels but unit labor costs (wages relative to a worker’s output).
• Productivity gains have been strong in recent quarters, aligning with long-term historical averages (1950– 2009) rather than the weaker post-financial crisis trends.
• Lower job churn is expected to sustain healthy productivity levels as experienced, tenured employees tend to be more productive.

• Labor Market Concerns:
  • Lower labor churn is expected to slow the pace of hiring, potentially making the labor market appear less robust.
  • Declining immigration, worsened by recent Biden policies and expected Trump administration actions, could cool job creation, and slightly hinder economic growth in 2025.
• Fiscal Stimulus Outlook:
  • The incoming Trump administration is likely to deploy fiscal stimulus through individual tax cuts, increasing the fiscal impulse and boosting economic growth.
  • Fiscal stimulus has been a key driver of growth, supported by recent acts like the Inflation Reduction Act and the CHIPS Act, though its impact has started to wane.
  • Tax cuts facilitated through budget reconciliation could reinvigorate fiscal support in 2025.
• Economic Growth Outlook:
  • The US economy is projected to remain healthy in 2025, with potential GDP growth exceeding the 2.0% consensus estimate.
  • Robust economic foundations should continue to support US equities, particularly small caps, value stocks, and the equal-weighted S&P 500 Index, which have gained relative strength since mid-2024.
• Stock Market Implications:
  • December historically performs well for stocks, following strong gains in November.
  • Some market volatility is expected in early 2025 as investors digest 2024's returns.
  • Broadening earnings participation and a resilient economy provide a positive outlook for equities over the intermediate term.

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