If a year ago I had been told that the United States would be embroiled in a war with no clear exit in the Middle East, that oil prices would be above one hundred dollars a barrel, that interest rates would rise sharply and that inflation would exceed 3%, my outlook for the US economy would have been, at the very least, quite pessimistic.
And yet, consensus forecasts for GDP growth place it above 2%, clearly ahead of other developed economies around the world. Moreover, I believe that consensus estimates have been too conservative. According to my calculations, the US economy could grow between 2.5% and 3% this year and next, thanks to the strength of the labour market, which has exceeded expectations, the good financial situation of households, and the significant investment that companies are making in artificial intelligence.
The growth of the US economy outpaces that of other developed countries
What factors explain the remarkable strength of the US economy? The reasons are multiple, but in my opinion, these are the three most important:
1. The US labour market defies all expectations
The latest employment data in the United States, published on 4 September, was simply spectacular. The US economy created 162,000 jobs in August, three times more than consensus estimates. The largest job growth was concentrated in the leisure and hospitality sectors, public administration, education, and healthcare. The unexpected strength of the employment data contributed to changing expectations about US monetary policy. The acceleration in job growth and the increase in inflation were the two main reasons that led the US Federal Reserve to raise interest rates at its meeting on 16 September, marking the first increase in more than three years.
The strength of the labour market is important, as even with a more moderate pace of job creation, around 75,000 jobs per month, this progress continues to generate a considerable volume of additional income, which in turn drives consumption. If we do the calculations, this translates to consumption growth close to 2% on an annualised basis, a quite favourable level historically, especially at a time when high inflation is eroding households' purchasing power.
The strength of the labour market also reinforces the idea that the Federal Reserve could continue raising interest rates without harming employment, which would favour the entity returning to prioritise the fight against inflation, which currently stands at 3.4%, well above its 2% target. Meanwhile, the unemployment rate in the United States remains at 4.1%, a level generally associated with full employment. If these trends continue, the Federal Reserve could raise interest rates again in the coming months, and all signs point to the US economy being strong enough to handle this scenario.
2. The financial situation of households remains strong despite rising inflation
Despite the increase in inflationary pressures, the financial situation of the American consumer continues to show remarkable resilience. Wage growth has remained stable at an annualised rate of 3.7% to 4.1% until August 2026, which has generally placed it above inflation. Therefore, despite facing a higher than usual level of inflation, consumption has maintained relative strength, which is also reflected in the level of household spending. We have observed some weakness in low-income households, which have been particularly affected by rising energy prices, but middle- and high-income households appear to have adapted well to the new scenario, compensating for this weakness.
This trend is due to several factors, including the increase in financial wealth linked to rising equity markets, especially 401(k) retirement savings plans, the appreciation of housing, the recovery of the labour market, increased tax refunds, and other stimulus measures implemented by the government. The majority of American consumers see no reason to reduce their spending levels. According to the US Department of Commerce, consumer spending rose by 0.2% last month, reaching a record high of $16.8 trillion, above consensus forecasts.
Consumer confidence, however, remains negative, which is understandable considering the accumulated increase in prices that Americans have faced since the COVID-19 pandemic. According to the consumer price index, prices have risen by about 30% in the last six years. Between 2012 and 2019, however, the increase was about 14%. It is no surprise that consumers are unhappy with such a sharp rise in prices, but the truth is that I tend to place less importance on consumer confidence surveys than on objective economic data.
3. Spending on artificial intelligence reaches unprecedented levels
The scale of investment related to artificial intelligence is unprecedented. Most of the capital expenditure, which could reach $800 billion this year, is directed towards building massive artificial intelligence data centres and related projects across the United States. Despite growing political opposition, the pace of investment does not seem to be slowing down. On the contrary: expectations for spending related to artificial intelligence have only been revised upwards, and it is likely that this will also happen in 2027 and 2028.
This level of investment provides a strong boost to the US economy. In fact, I believe we are not fully appreciating the impact that the rise of artificial intelligence could have. It could take years before economists find a reliable way to quantify this segment, which is growing at such a speed. It is just a rough estimate, but I believe we could be underestimating GDP growth by between 0.5 and 1 percentage point. How can we measure the value generated every time someone uses an artificial intelligence token to create a more efficient financial model in much less time than a person would need? It is possible that, in ten years, we will conclude that a growth rate of 4% to 5% more accurately describes the current economic reality. Even during the dot-com era, it was difficult to quantify the economic value created by the enormous volumes of data circulating around the world.
On the other hand, it is evident that the big tech companies, which are making most of the investment, consider that what is at stake is their own survival. The so-called hyperscalers (Amazon, Alphabet, Meta, Microsoft, and Oracle) are among the most profitable companies in the world, and they are engaged in an intense race for leadership in artificial intelligence. Given everything at stake, it seems unlikely that any of these companies will reduce their investment pace in the short term.
How does all this affect the US equity markets?
Historically, US equities have tended to rise during periods of economic strength and growth. The economic cycle is usually divided into four phases: initial, intermediate, final, and recession. I believe the US economy is currently in the intermediate phase of the cycle, an environment that is typically favourable for equities. In this phase, returns above 10% are common, and that is what we are seeing now: the S&P 500 has accumulated a rise of 14.1% since the beginning of the year and 18.6% in the last twelve months, as of 25 September. My outlook becomes more cautious as we approach the final phase of the cycle, which, in my opinion, could begin at some point in 2028.
There is no doubt that there are certain risks, such as a new escalation in the Iran war, further increases in oil prices, sharp interest rate hikes, and the possibility that artificial intelligence may not turn out to be as profitable as the companies themselves expect. Any of these factors could end the favourable investment environment we have experienced in recent years.
That said, the evolution of the economy and the markets do not always go hand in hand. The high concentration currently present in the market entails certain risks, so it is advisable to adopt a diversified investment approach that avoids over-reliance on indices heavily concentrated in a small number of companies.
For now, all signs point to the US economy continuing to exceed expectations, thanks to the strength of the labour market and consumption, as well as the artificial intelligence revolution, which could significantly boost growth in the coming years.