On Monday, Erste Group provided an outlook for the US economy, anticipating a weakening performance in the coming years. According to their analysis, the US is likely to experience a noticeable slowdown with growth cooling to 1.7% in 2025, settling at the lower end of the Federal Reserve's potential growth estimates.
The forecast extends into 2026, with growth expected to further decelerate to 1.5%, influenced by the economic policies proposed by former President Trump, particularly from the second quarter of 2025.
The firm's analysts project that the Federal Reserve will maintain its current monetary policy trajectory, implementing regular rate cuts of 0.25% throughout the summer of 2025, followed by quarterly reductions of the same magnitude until the end of the year.
These measures are anticipated to halt around the neutral rate. The analysts attribute the expected rate cuts to the trends of falling inflation and moderately rising unemployment that they believe will continue into 2025.
Erste Group also forecasts a lower inflation rate for the next year at 2.1%, compared to this year, with a slight increase to 2.2% in 2026. The analysts note that both short- and long-term inflation expectations in the capital market, such as two-year inflation contracts and five-year inflation starting in five years, have remained stable since the US elections.
This stability also extends to long-term yields, which, after a brief increase, have shown little change, suggesting that the medium-term effects of Trump's economic policies may have already been factored into the government bond market.
The report includes potential risks that could lead to higher prices, such as the quick and full implementation of higher US tariffs. Nonetheless, the overall expectation is for a decline in yields and a progressive normalization of the US yield curve, supported by largely stable inflation expectations and continued key interest rate cuts by the Federal Reserve.
In other recent news, Bank of America (NYSE:BAC) analysts have suggested a potential 25 basis point reduction in interest rates in December, following their analysis of the October Consumer Price Index (CPI) data. This comes as China's $1.39 trillion stimulus measures did not meet investor expectations, according to Macquarie analysts, causing declines in Asian stock markets.
Furthermore, Erste has observed a mild response in the European corporate bond markets to the recent U.S. election results, with the firm noting monetary policy and the solid status of European companies as the main drivers.
Bank of America has also indicated that the U.S. elections could lead to significant emerging market fund outflows in the near term. Meanwhile, Citi analysts predict a trend toward lower inflation and policy rates in Europe following Trump's second presidential term. This prediction is in line with Goldman Sachs (NYSE:GS)' revised forecast for 30-year conforming mortgage rates to 6% for 2024 and 6.05% for 2025, following a Federal Reserve rate cut.
Analysts at Morgan Stanley (NYSE:MS) and Wells Fargo (NYSE:WFC) have analyzed this significant rate cut, predicting further reductions despite a strong labor market. These recent developments provide investors with crucial information about earnings and revenue, as well as insights into potential shifts in monetary policy.
InvestingPro Insights
To complement Erste Group's economic outlook for the US, let's examine some key metrics for the SPDR S&P 500 ETF Trust (SPY (NYSE:SPY)), which tracks the performance of the S&P 500 index and serves as a barometer for the broader US stock market.
According to InvestingPro data, SPY currently has a market capitalization of $621.62 billion, reflecting its significant presence in the investment landscape. The ETF has demonstrated strong performance, with a year-to-date price total return of 24.4% as of the latest data. This robust return aligns with the current economic strength, though it may moderate in line with Erste Group's projections for slower growth in the coming years.
InvestingPro Tips highlight that SPY has raised its dividend for 14 consecutive years and has maintained dividend payments for 32 consecutive years. This consistent dividend growth could provide a cushion for investors during the anticipated economic slowdown. The current dividend yield stands at 1.19%, which may become more attractive if the Federal Reserve implements the projected rate cuts, potentially leading to lower yields in other asset classes.
Another InvestingPro Tip notes that SPY is trading near its 52-week high, with the price at 97.6% of its peak. This suggests that despite forecasts of cooling growth, the market remains optimistic. However, investors should be cautious, as the valuation implies a poor free cash flow yield, which could be a concern if economic growth slows as predicted.
For readers interested in a more comprehensive analysis, InvestingPro offers additional tips and insights that could be valuable in navigating the projected economic changes.
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