Economy performing better than expected, Morningstar says

The U.S. equity market is “priced to perfection,” as a combination of an economy that held up better than expected, growth in the demand for artificial intelligence software and easing monetary policy led to stronger than expected equity market returns.

That was the word from Dave Sekera, Morningstar chief U.S. market strategies, during a recent webinar that provided a look into what investors can expect in the first quarter of 2025.

Sekera said he sees some “tailwinds going into 2025, but those tailwinds are starting to recede and I think that will keep the market from moving much higher in the near term until earnings start catching up to valuations – most likely in the second half of the year.” Some of those tailwinds, he said, include the slowing rate of monetary easing policy, the market pricing in fewer interest rate cuts this year than what had originally been projected and inflation that he described as “remaining sticky for the past couple of months.”

Speaking of “sticky inflation,” Sekera said Morningstar predicts inflation will move downward into 2025. This projection is based on a combination of ongoing supply side relief and predicted slowing of economic growth over the first half of the year.

But although Morningstar is predicting the rate of economic growth will slow in the first half of 2025, the U.S. will not see a recession, Sekera said. Morningstar predicts the rate of economic growth will bottom out at a quarterly annualized rate in the second quarter of this year. The economy will begin to reaccelerate in the second half of 2025 as the Fed’s easing reverberates through the country.

Still expecting a soft landing for the economy

Morningstar continues to expect “the quintessential soft landing,” said Preston Caldwell, Morningstar’s chief U.S. economist, but that outlook is contingent on a low risk of large tariff hikes or other economic policy disruptions.

“I think there are a number of factors to explain the strength of the economy,” Caldwell said. “First, on the supply side, we’ve seen strong growth in productivity and labor supply and, to some extent, supply has created its own demand. On the demand side itself, we’ve seen a number of factors – the most significant one is that consumers remain eager to spend. But I think several of these factors will diminish in impact in 2025 and 2026, pushing growth slower. We expect growth to rebound in 2027-28 as the effects of Fed rate cuts kick in.”

Morningstar expects inflation to cool down in 2025, reverting back to the Fed’s target of 2%, and remaining at 2% in following years. But again, Caldwell said, that projection depends on whether large tariff hikes go into effect.

Other factors supporting Morningstar’s projection of a soft landing yet slow growth, Caldwell said, include:

• Gross domestic product growth to trough at 1.6% year over year in Q4 2025/Q1 2026.
• High interest rates continue to weigh on the economy.
• Consumers are overstretched and savings rates are down, leading to households cutting back spending.
• Softening in the labor market in terms of job growth and wage growth will occur toward the end of 2025.

 

© Entire contents copyright 2025 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.