Fundamentals, policy and confidence: how is the US economy faring?

The debate had been around whether the economy was set for a soft landing, that is, a material decline in the growth rate relative to the previous year, but nothing like a recession, or a much more negative outcome. 

Instead, as investors pondered their new year’s resolutions, policymakers in the US appeared to have delivered a ‘no landing’ scenario – that is, increased interest rates to combat inflation, but without causing a recession. 

This was not all good news for US equities though. A speech earlier this month by Federal Reserve chair Jay Powell indicated that rate cuts are less of a priority than the market had expected, leading to a mini sell-off in equity markets. 

A view had taken hold among many investors that a modest economic slowdown would not hinder the progress of already buoyant equity markets, as it would trigger interest rate cuts.

But if rate cuts are off the table for now – and if not, at least confined to the corner behind the metaphorical gravy boat – US equity market outperformance would have to be a function of company and economic fundamentals, rather than low discount rates. 

Coming into 2025 markets initially had benign expectations for the US economy, but more recently uncertainty around the policy direction of the Trump government has started to be felt, both in markets and in the real economy, says Guy Miller, chief market strategist and economist at Zurich.

He says: “Financial markets hate uncertainty, of course, but so do people in the real economy. Consumers are hearing about the DOGE [US Department of Government Efficiency] job cuts plans. If you have a job anywhere in government, there is uncertainty now.

“And they hear about tariffs, now they may not understand the economics very well, and they may not think that the tariff on, [for example], Canadian goods will actually be 25 per cent, but they do understand that tariffs mean higher prices.

“Two recent consumer surveys show inflation expectations have jumped appreciably. That impacts people’s desire and willingness to spend. And from a business point of view, if you have a facility in Canada or Mexico, or were thinking of building one there, what do you do now?”