By Chris Iggo, CIO of core investments at AXA IM
The US economy’s performance in recent years has been exceptional, growing by over 9% in real terms between the end of 2020 and the end of 2023.
Importantly, there has been no recession despite the Federal Reserve’s aggressive adjustment to monetary policy. By the time US voters go to the polls in November, the current post-pandemic expansion will have lasted for 17 quarters.
In current dollar terms, US gross domestic product expanded by almost a third in three years. It is no wonder the US stockmarket has performed so well.
According to Bloomberg, the total return from the S&P 500 over that period was 31%, notwithstanding the sizeable correction in 2022.
In 2023 alone, the S&P 500 delivered a total return of 26%. It has been exceptional. But can investors expect the US to continue to lead in terms of economic performance and market returns?
There are four reasons why they might be unwise to bet against it.
Post-pandemic demographics
Several important and powerful trends and policy steps boosted the US’s trend rate of growth during and after the pandemic.
An underestimated structural factor has been demographics. There has been a surge in the US population in recent years.
Growth in total population is estimated to have been above approximately 0.9% in 2023 and is expected to be 1.2% this year and 0.9% in 2025. Between 2024 and 2054, the population is expected to rise from 342 million to 383 million.
Over the next decade, average annual population growth is projected to be 0.6% per year, the biggest contributor being net immigration.
This is important because net immigration tends to mean a healthy growth rate in working age population. This contrasts with other developed economies where either overall population growth is lower or the share of the population outside of working age is increasing (such as China).
See also: The tech giants are facing an ‘existential event’
US immigration, like anywhere, is a politically sensitive topic. There may be new attempts to control immigration after November’s election, but the die is cast.
Over 15.6 million non-farm payroll jobs were created since the end of 2020 with the annual growth rate of job creation running at 3.2%. Expanding the labour force has allowed this job growth to take place without the unemployment rate falling below its pre-Covid-19 low.
The US has expanded its workforce more than other major economies, allowing growth to be strong and remain extremely competitive. And having a strong labour market has supported consumer spending, which has grown at an average annualised real rate of 3.7% since 2020. Consumer spending flows into corporate revenues.
Driving digitalisation
Also important in determining overall economic performance is productivity growth. Here technology has played a major role.
The US has first mover advantage in many technological innovations. Ongoing digitalisation of services and the advent of AI-driven technologies are important, and US companies have led the way.
The employment of new technology at an aggregate level can be gauged by what companies are spending their investment dollars on.
According to the Bureau of Economic Analysis (BEA), investment spending on intellectual property products (including software) increased by 24.7% between 2020 and end-2023. In the BEA’s estimates of industry growth rates, the information technology sector grew at annual rates of 14.7% in 2021, 7.5% in 2022 and 6.2% last year, contributing 0.33% of the overall GDP growth rate of 2.5%.
After negative growth in 2022, as GDP slowed in response to monetary tightening, productivity accelerated last year. The BEA estimates year-on-year labour productivity growth of 2.3% and 2.6% in the last two quarters of last year. More workers are being more productive.
Political backing
Various policies introduced by the Biden Administration – particularly the Bipartisan Infrastructure Law, the Inflation Reduction Act and the CHIPS and Science Act – have also driven growth.
These are longer-term forces given the life cycle of projects designed to grow renewable energy, and invest in roads, railways, and the digital network. As of last September, investment in more than 450 new or expanded clean energy projects had been announced, totalling over $160bn. Renewable energy sources now account for 25% of total US electricity generation.
The supply-side flexibility afforded by a growing labour force and technology-enabled and policy-driven productivity growth has served investors in the US well.
See also: Does the ‘magnificent seven’ tech wobble signal a turning point?
Equity investors have benefitted from strong corporate profitability. Corporate profit growth has slowed but the profit share in GDP has remained above 12% since the end of the pandemic.
Sectors such as information technology and healthcare provide investors with long-term earnings growth opportunities that are not matched in other markets.
For sustainability and impact-focused investors, the US equity market provides many opportunities to gain access to companies that are developing the technology and services that help mitigate climate change and biodiversity loss.
Bond market dominance
Fixed income investors will find greater liquidity, depth, and diversification in the US corporate bond market than anywhere else.
The health of US companies has underpinned credit quality in both the high grade and high yield markets. Corporate bond credit spreads have declined since 2022 and, in the high yield market, spreads do not account for any rise in default rates to more normal long-term averages. But that reflects the quality of borrowers, good credit fundamentals and a healthy macroeconomic backdrop.
Should we expect this exceptionalism to persist? There are clear threats coming from the potentially unstable path of US federal government borrowing and the rising cost of servicing debt.
See also: Janus Henderson: US reports record-high dividend growth in 2024
The geopolitical situation is uncertain and the trade war with China could easily worsen. Domestically, any social unrest like the disorderly transfer of power seen in the wake of the 2020 Presidential election could be harmful to economic growth. Inflation may not let the Fed cut interest rates as quickly as investors had hoped.
However, the demographic story is a long-term one, as is the technology story. And despite the pushback against responsible investing in some quarters, the US is clearly on an irreversible path towards decarbonisation.
These are all positive drivers for investors. Growth equities, corporate bonds and the high returns offered by the public and private leveraged finance markets should all continue to thrive because of the undeniable strength of corporate America.
The US has outperformed, and it is hard to bet against it continuing to do so. Just look at the external value of the dollar. Against other major currencies, the dollar is close to a 20-year high. The US is exceptional, and the greenback is king.
