Schroders Investment Management noted that despite early-year concerns over rising U.S. tariffs, a weaker dollar, and global capital outflows, the U.S. economy maintains robust growth prospects, with the S&P 500 and Nasdaq indices hitting record highs. The Federal Reserve's rate-cut decision could further buoy investment markets, as historical trends show that rate reductions during economic expansions (rather than recessions) typically have positive equity market effects.
Schroders highlighted "growth potential" as companies with undervalued long-term prospects, where investors can identify "capital growth opportunities" by focusing on firms with sustainable competitive advantages to outperform benchmark returns.
While some analysts express concerns over softening U.S. job market indicators, labor conditions remain tight overall. However, trade uncertainties and potential additional tariffs pose significant risks to the economy and markets.
Before the start of President Trump's second term, the U.S. effective tariff rate stood at a historically low 2%, but by early autumn this year, it had climbed to around 12%. Economists estimate that every 10% tariff increase typically raises inflation by ~1% and reduces GDP growth by ~0.5 percentage points.
Another key risk is potential Fed policy missteps. With the U.S. economy performing strongly despite elevated rates, some question whether further cuts are necessary. The Fed's median neutral rate estimate—neither stimulative nor restrictive—is ~3%, but current rates exceed 4-5% amid strong growth, suggesting a 3% target may be overly accommodative. Persisting with this view could spur inflation, leading to policy errors.
Inflation risks appear underappreciated by markets. While dollar weakness presents challenges, U.S. multinationals may benefit from increased overseas revenue as their goods and services become more competitively priced abroad.
For investors, focusing on corporate fundamentals—rather than short-term market sentiment—delivers superior long-term returns. Stock prices ultimately track earnings, and top-tier companies often share traits like high industry barriers, superior products, market share gains, and pricing power, enabling resilient profitability across cycles.
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