As the U.S. economy approaches 2025, it faces a complex landscape of potential threats and opportunities. As always, our huge and complex economy and system of government make it extremely difficult to predict what may happen, but we do have some key factors to watch. In this blog, we’ll look at reasons both for optimism and concern.
The Upside: Opportunities
President-elect Trump ran on an agenda of tax cuts and deregulation, and this has created confidence on Wall Street.
A poll of equity strategists conducted by Reuters shows real optimism. Survey participants expect the S&P 500 to have a decent year, closing at 6,500, up over 8% from its close on November 25th. If this comes true, it will extend a rally that is already over 2 years long and has seen the benchmark rise by over 60%.
Trump’s 2017 Tax Cuts and Jobs Act is set to sunset in 2025, but leaders in Congress have pledged to extend or make the legislation permanent. If enacted, those tax cuts are expected to stimulate the financial, technology, and energy sectors. Trump has made “drill, baby, drill” the rallying cry of his administration, and increased supply could lead to lower input costs and cheaper energy for American consumers.
America has the largest reserves of oil and natural gas in the world, an estimated 2.175 trillion barrels. We have enough oil to last 227 years at the current rate of consumption. The U.S. also has the largest known oil shale deposits in the world, which contain a waxy oil precursor called kerogen. Oil does more than provide gas for our cars and trucks; it is the key input to thousands of products used in virtually every aspect of our modern lives.
We can only speculate what the potential benefits of artificial intelligence will be, but there is the promise of significant productivity gains and an explosion of new pharmaceuticals and other life-enriching products. We can expect to see continued investment into technology of all kinds.
Key factors typically operate as both threats and opportunities. If interest rates fall, that’s generally good for home buyers, businesses, and consumers. But if they rise, as we’ve seen in the past few years, they can put pressure on everyone and everything. Finding the right policy, one that reduces both inflation and interest rates is the key challenge of the government.
Challenges
Big decisions come with big risks, and Trump’s trade policies may have big impacts on U.S. industry, employment, inflation, immigration, and national security. Getting tariff policy right is perhaps the biggest challenge Trump will face in his first two years.
If adopted, new tariffs on imports from China, Mexico, and Canada could create supply chain disruptions and higher prices. Tariffs can and have led to trade wars in the past, which typically slow global growth.
Inflation, which has slowed, is still felt by Americans at the grocery store and gas pump and in the costs of everything from used cars to happy meals. Rising wages and tariff-induced higher prices on imported goods could bring inflation back. And it could also impact interest rates and economic growth.
We must remember that there is a war in Ukraine that threatens the peace and security of Europe. Those troubles and heightened tensions in the Middle East could lead to more volatility in energy markets, disruptions to supply chains, and general instability. None of those things are good for your portfolio.
The U.S. is burdened with $36 trillion in debt, and that debt is growing rapidly. Interest on the debt now exceeds defense spending. In addition, consumer, auto, credit card, and student loan debt can all combine to pinch consumer spending, which in turn can lead to slower or even negative growth.
Since its founding, America has shown remarkable resilience. A dozen foreign wars, a five-year Civil War, multiple assassinations, recessions, depressions, pandemics, and any number of natural disasters have slowed us down but never stopped us. Over the past 100 years, the U.S. stock market, despite all its ups and downs, has doubled 14 times.
To be successful, our new government must navigate significant challenges, particularly in trade relations and inflation management. But the U.S. has remarkable assets, abundant energy, a highly functioning and transparent marketplace, and most of all, and most importantly, over 300 million free people. We’ve demonstrated a unique ability to overcome adversity, and to create wealth.
