US equities have been performing well, reaching new highs as investors await important inflation data. The recent ceasefire agreement between Israel and Hezbollah has positively influenced investor sentiment. However, there is uncertainty due to potential tariff threats from President-elect Donald Trump.
The macroeconomic environment is favorable for US equities, with overall inflation expected to gradually approach the Federal Reserve's target of 2%. The release of the personal consumption expenditures (PCE) price index is significant, especially following last month's mixed consumer and producer price data. The primary driver of inflation continues to be shelter costs, but forecasts suggest a moderation in shelter inflation next year.
The US economy is experiencing solid growth, driven by consumer spending. Projections indicate that the US economy will expand at just below 3% for the entirety of 2024. The Federal Reserve is expected to implement rate cuts to support ongoing economic expansion. Minutes from the Fed's November meeting reveal a consensus among officials regarding the likelihood of further interest rate cuts. The prevailing expectation is a 25 basis point rate cut in December, followed by quarterly cuts throughout 2025.
Artificial intelligence is expected to be a significant tailwind for equities. Analysts project that the S&P 500 could reach 6,600 by the end of 2025. Technology, utilities, and financials are favored sectors due to their alignment with structural growth drivers and strong earnings growth outlook.
The anticipated impact of tariff increases is expected to result in a one-time rise in price levels rather than sustained inflationary pressures. The interplay between inflation data, Federal Reserve actions, and sector performance will shape the investment landscape in the coming months. Overall, the current trajectory of US equities, along with a favorable economic backdrop and strategic sector positioning, presents a compelling narrative for investors.