Market Pessimism on the American Economy: Is It Overstated? Strategies for Investing Now

The Current Economic Landscape in the U.S.

Markets are questioning the likelihood of a recession in the United States.
Recently, the inflation that once drove central banks’ monetary policy decisions is being overshadowed by the focus on economic growth.
Investors expect the Federal Reserve to cut rates by nearly 2.5 points by September 2025, with a significant cut of 50 bps possibly occurring at the upcoming September meeting.

It is evident that the U.S.
labor market has normalized, and its cooling has impacted wage growth, which, while still above pre-pandemic levels, has decelerated.
Current wage growth mirrors levels seen in July 2019, suggesting a stabilization phase that could see potential re-acceleration, as indicated by a 3.8% increase in August.

Understanding Unemployment Rates

Despite the decreasing strength of the labor market, rising nominal wage demands might now be embedded in labor negotiations.
This consideration has made some Fed members hesitant about rate cuts, particularly given the recent acceleration in consumer spending with cooling inflation.

A pertinent question remains: why has the U.S.
unemployment rate exceeded 4%? The rise is not attributed to increased layoffs, but rather to a surge in labor supply due to immigration.
Furthermore, leading indicators do not currently signal a recession risk in the short term.

Seasonal Market Factors

Seasonal factors cannot be ignored.
Typically, September and October are unfavorable and volatile months, particularly in an election year, adding uncertainty to corporate investment decisions.

Thus, market pessimism about the American economy could be exaggerated, alongside excessive optimism regarding corporate earnings expectations.
Current projections for 2024 suggest a GDP growth target of 2.5%, requiring the U.S.
economy to expand nearly 3% in the second half of the year—a rather optimistic estimate.

Performance Expectations and Risks

Profit growth expectations remain high with forecasts of a 16% year-on-year increase by the end of 2025.
However, achieving these profit growth targets will necessitate an extraordinary expansion of profit margins, largely driven by the transformative impact of Artificial Intelligence on productivity.

Investors focusing on Growth stocks, particularly in tech, are effectively betting on significant earnings expansion amidst a slowing economy.
The main risk for those who have extended the duration of their portfolios is that the U.S.
economy may not experience the slowdown required to justify the market’s currently priced-in interest rate cuts.
The Fed remains cautious due to previously mentioned dynamics and the potential impact of trade tariffs and expansive fiscal policies on inflation control.

Global Economic Outlook

This risk isn’t confined to the U.S.; it is a global concern where pessimism about the economy may not be warranted despite signs of slowdown in many regions.

As the economy shows resilience amid rising interest rates, it remains susceptible to external shocks, such as the closure of the Japanese carry trade.

Strategic Positioning and Investment Insights

In this volatile market context, maintaining positions in defensive stocks is advisable.
Rebalancing towards equity Value or the 493 stocks within the S&P 500 may prove beneficial, as earnings expectations for these stocks are rising while the “Magnificent Seven” companies are showing deceleration.

Avoiding stocks related to Artificial Intelligence and electric vehicles could also be wise, considering the potential for earnings disappointments.
In the bond market, the risk-reward of extending duration is less appealing as current short-end yields remain attractive, allowing for stable yield buffers.

While commodities struggle amidst recession concerns and ongoing economic challenges in China, the recent repricing, potential for less globalization, and high shipping costs suggest that commodities could be a viable alpha source for portfolios.
Precious metals continue to serve as a hedge against risk.

Finally, in light of the uncertain environment leading up to the U.S.
elections, adopting multi-asset strategies that diversify risk across asset classes will be critical.
Directional strategies should be cautious regarding geographic exposure, favoring flexible bond strategies with mid-range durations under six years.