Wilmington Trust released its 2024 Capital Markets Forecast (CMF) “US Economic Exceptionalism: Can the reign continue?” which highlights the current state of the U.S. economy and the factors contributing to its ability to adapt, but warns that a number of potential risks exist, which could impact the country’s economic growth.
The CMF tells a story about the U.S. economic qualities, driven by:
- Economic Exceptionalism – A prosperous U.S. economy due to factors such as diminishing economic scarring, labor flexibility, and the role of AI in driving productivity and innovation.
- Equity Market Superiority – The nation’s dominant ability to create technological advancements, adaptability in its overall labor market, and history of achieving greater profitability could continue to serve investors in large U.S. companies.
- Risks and Opportunities – Historic levels of stimulus and significant repricing of U.S. equity valuations will be critical to assess and monitor.
“The U.S. economy’s continued ability to deliver growth and withstand disinflation has demonstrated to be a compelling force for attracting capital toward U.S. large-cap equities,” said Tony Roth, Wilmington Trust’s Chief Investment Officer. “However, the overall narrative remains incomplete without acknowledging challenges to the long-term sustainability of this equity outperformance, including chronic deficit spending, total debt surpassing annual GDP, and the current interest-rate environment.”
“The power of technological investment, notably with artificial intelligence (AI), forward looking policy frameworks, and a flexible labor market, will propel significant productivity gains and pave the way for a renewed era of U.S. equity leadership,” noted Roth.
Drivers of Exceptionalism
For decades, the United States has been an economic leader — displaying more consistent growth than other developed countries. There are three broad components to consider as forces that have shaped this:
- Growth Pillars: Infrastructure, capital markets, demographics, education, and labor flexibility are critical pillars to shaping economic excellence. Robust higher education, a flexible labor market and pioneering AI development have contributed to the US’s dominance here. In the coming year these structural advantages are projected to drive economic performance.
- Policy Framework: Fiscal responsiveness of economies is also a key driver of relative performance, and the U.S. has showcased strengths targeted toward income and consumption. However, increased government debt poses challenges to long-term growth.
- Innovative Capacity: Innovation is a crucial component of economic productivity as economies with robust digital infrastructure and significant investments in research and development are well-positioned. The growing significance of AI will shape the economic landscape, and the U.S. has demonstrated to be early adopters for these tools, which could continue to drive growth and productivity in 2024.
Equity Market Superiority
U.S. equities have continued to demonstrate remarkable performance by attracting investor capital and expanding global market capitalization. The drivers of this growth can be attributed to three economic characteristics, which all relate directly to U.S. resilience:
- Valuation Expansion: The largest source of U.S. equity outperformance is justified by factors including its dominant position in innovation and swift policy response in the aftermath of the last two recessions. A potential “Goldilocks” scenario – characterized by slower but sustained growth and continued disinflation that allows the Fed to ease policy – could lead to a valuation rebound for sectors left behind in 2023, potentially benefiting large-cap investors.
- Profitability: At the core of U.S. equity outperformance also lies a steady commitment to profitability, shaped by favorable fiscal and monetary policies, flexible labor markets, and strategic tax advantages for corporations. The U.S. maintains a commanding global position in innovation and is strategically positioned to maintain its advantage in technology development and adoption, which may continue to create positive economic tailwinds.
- Currency and Liquidity: The interplay of currency strength and liquidity dynamics plays a pivotal role in U.S. equity outperformance. The dollar has continued to appreciate against a trade-weighted basket of currencies, which has provided a notable advantage to U.S. equities for dollar-based investors. Liquidity has not only supported U.S. equity returns but has also contributed to a climate of moderate inflation.
However, the extent of dominance might see some moderation or fluctuation over a longer timeframe than one year.
Risks and Opportunities
While key growth pillars largely remain sound and are likely to continue powering the U.S. economy in the coming years, there are also varying economic risks — particularly around growing debt and impaired ability to respond to future shocks. Concurrently, demographic shifts pose challenges to debt sustainability and labor force growth.
Market risks also provide some vulnerabilities for the U.S. market. Valuations and interest rates – while currently viewed as manageable — have the ability to dislodge the U.S. from the top ranks of global economies. Despite this, U.S. equities have a structural advantage and diversification may be looked upon as a tested strategy.
The potential for a U.S. economic recession has been reduced, but not eliminated. In the case of a recession, Wilmington Trust notes that the U.S. economy has the foundational elements to bounce back more quickly than other countries facing their own sets of economic challenges.
To read the full report, please click on the following link.
