Five forces that could stimulate the US economy

The US economy has demonstrated surprising resilience in the six months since President Trump unveiled a long list of tariffs against virtually every trading partner. In the aftermath of “Liberation Day,” fears of an imminent recession have eased as investors have started to envision a future without a tariff-induced trade war.

“Tariff uncertainty hasn’t fully abated but the administration has moved away from brinkmanship in favour of negotiations,” says Cheryl Frank, equity portfolio manager.

Slowing job growth and consumer spending patterns suggest the economy is weakening. However, there are reasons for optimism, Frank notes. From the passage of the tax bill to declining interest rates, there is less uncertainty on many fronts compared to earlier this year. Below are five forces that could pave the way for continued economic expansion.

US economic growth has continuously surprised to the upside

Sources: Capital Group, Bloomberg. Consensus reflects sell-side U.S. Real GDP year-over-year growth estimates. Real GDP (gross domestic product) is the inflation-adjusted value of the goods and services produced by labor and property located in the United States.

1. A dovish Fed starts rate-cutting cycle

The Federal Reserve’s latest rate cut arrived at a moment of economic softness – namely sluggish job growth. Officials guided additional cuts through 2028, signifying a dovish stance.

Rate cuts usually lead to higher company spending and hirings, and more sales of big-ticket items such as cars and homes. “There’s a long list of companies waiting for rates to drop, especially those tied to the housing market,” Frank notes. Potential beneficiaries include retailers such as Home Depot, heating and cooling system manufacturers such as Carrier Global and paint companies such as Sherwin-Williams.

Markets have rewarded investors when rate cuts happen outside of a recession. On average, the S&P 500 Index returned 27.9%, while the Bloomberg US Aggregate Index returned 16.7%.

Monetary easing outside of a recession has fuelled gains

Sources: Capital Group, Bloomberg Index Services Ltd., Morningstar, Standard & Poor's. Return calculations reflect annualized total returns over periods in which the US Federal Reserve had stopped raising rates and began to actively cut rates, measured from the peak federal funds rate target to the lowest federal funds rate target for each cycle. Specific easing cycles include August 1984 to August 1986 (non-recessionary), May 1989 to September 1992 (recessionary), February 1995 to January 1996 (non-recessionary), March 1997 to November 1998 (non-recessionary), May 2000 to June 2003 (recessionary), June 2006 to December 2008 (recessionary) and December 2018 to March 2020 (recessionary). Benchmarks used are the S&P 500 Index (US stocks), MSCI World ex USA Index (international stocks), Bloomberg US Aggregate Index (US bonds) and the average investment rate of 3-month US Treasury Bills (cash). As of 31 December 2024.

Still, there are concerns borrowing costs may not decline to levels that rekindle spending. After all, the Fed cut interest rates in September 2024, only to see the benchmark 10-year US Treasury, which underpins borrowing costs, rise instead. The culprit? A string of unexpectedly strong economic data prompted investors to recalibrate policy expectations, pushing rates higher.

So far this year, the 10-year Treasury has declined roughly half a point to 4.26% on 1 October from its level of 4.79% in January. A more amiable Fed, particularly if the administration has more sway with rate-setters, could explore unconventional tools to suppress long-term yields, says Damien McCann, fixed income portfolio manager. “It’s not a prediction, but a possibility worth considering.”

2. Tax bill functions as a “massive stimulus check”

A notable feature of the One Big Beautiful Bill Act is the inclusion of retroactive tax cuts for 2025, with refunds to taxpayers expected in early 2026.

Other aspects of the bill, such as exemptions for overtime and tips, translate to unusually large tax refunds totaling over $200 billion in early 2026. “It could function as a massive stimulus check,” Frank says. The one-time cash infusion may serve as a powerful psychological boost to consumer confidence and provide some relief to tariff-related inflation.

The bill also favours companies that invest in the US by lowering their taxable income. Specifically, companies can quickly expense spending on research and development, capital investments, and new factories.

As a result, technology and defence companies may see a boost in free cash flow.

Not all sectors are winners, as the bill rolls back some prior incentives for clean energy and health insurance. Moreover, the plan increases the national debt significantly over the long run, which could fan inflation and weigh on growth.

3. Deregulation can spur growth outside of AI

A weakening regulatory environment could benefit several companies, including those left out of the artificial intelligence boom.

“Many businesses not on the cutting edge of technology have been left behind,” says Brittain Ezzes, equity portfolio manager. “Broadly, deregulation could help companies feel more comfortable making new investments.” Sectors that could benefit include energy, industrials and telecommunications.

Investors are also closely tracking bank deregulation since prudent adjustments could increase lending activity across industries – a potential tailwind for the economy. Wells Fargo Bank has faced years of regulatory scrutiny and was limited in its ability to grow revenue. But Ezzes sees potential: The bank hired a new management team in 2019 that worked to restore its reputation. The removal of its asset growth restriction coupled with a more favorable regulatory climate, Wells Fargo could expand its lending base and earnings potential.

“With the deregulation push by the US administration, companies may feel less constrained in making investment decisions,” McCann adds. So far this year, cable giants Charter Communications and Cox Communications are set to merge, and Union Pacific aims to forge a coast-to-coast rail system via its acquisition of Norfolk Southern. Both deals underscore a broader wave of consolidation that may test the boundaries of antitrust concerns. On the flip side, McCann notes, fewer regulatory eyes mean investors need to be more vigilant of the potential risks.

4. Rising defence budgets are a long-term tailwind

As NATO partners boost defence budgets, demand for products across a range of industries should jump, Frank says.

In June, NATO allies committed to increasing defence spending from 2% to 5% of GDP by 2035 — a dramatic shift reflective of mounting geopolitical tensions as tariffs threaten supply chains and strain alliances. Germany, in particular, has taken the lead. It previously disclosed aggressive fiscal stimulus focused primarily on defence and infrastructure. 

NATO allies more than double defence spending commitments

Sources: Capital Group, NATO. Figures for 2024 are estimates based on most recently available data, as of 28 August 2025. New 5% commitment was announced 27 June 2025. Percentage of GDP is based on constant prices and exchange rates, indexed to 2021. NATO defines defence expenditure as payments made by a national government specifically to meet the needs of its armed forces, those of Allies or of the Alliance. Critical infrastructure defence consists of investments to protect critical infrastructure, defend networks, fund innovation and strengthen the defence industrial base.

Rising defence budgets represent a long-term tailwind for many US companies, since the majority of advanced defence systems are made in America. US contractor RTX, known for its sophisticated radar and missile defence systems, has seen demand climb as European and Middle Eastern nations pursue modernisation efforts. The growing adoption of drone technology is also expected to benefit US-based Northrop Grumman as well as UK-based BAE Systems.

In Germany, defence backlogs are mounting. Rheinmetall, a leading manufacturer of advanced systems, reported a backlog increase of 29.9% to €63.2 billion as of 30 June 2025.

5. AI investments continue to climb

Spurred by the arrival of ChatGPT, the AI economy has become a powerful engine of US growth As of 30 June 2025, technology spending — which includes research and development and datacenters — accounted for roughly 7.5% of US GDP, surpassing the dot-com era peak and poised to rise further.

“AI systems have made remarkable progress, but we’re still very early innings of the AI deployment over the next decade,” says Mark Casey, equity portfolio manager. He expects widespread adoption of AI across industries, which could drive productivity gains and innovation.

However, the economic impact will be uneven, with some companies benefiting greatly while others face disruption or decline. Over the next decade, Casey anticipates the AI ecosystem will grow but also exhibit cyclicality, with periods of optimism followed by occasional setbacks when expectations temporarily outpace reality.

An economy on the move

The US economy is in a vulnerable condition. Typical forces that propel growth – job creation, consumer confidence and business investments – have stalled. New potential tailwinds are untested, with long-term ramifications to the nation’s fiscal health and geopolitical alliances. Inflation remains elevated, with the full impact of tariffs yet to come. Meanwhile, AI’s influence on stock markets and GDP complicates the picture.

Still, there are reasons for optimism as the US has proved naysayers wrong time and again. Over the long run, investors who remained fully invested during periods of heightened uncertainty and market volatility have often emerged stronger. “I believe in staying 100% invested,” Frank says. “Even when markets get a little too excited or too fearful, discipline and a focus on fundamentals help me navigate the volatility.”