Despite the Federal Reserve implementing one of the most aggressive interest rate hike cycles in 45 years, the American economy has remained resilient. Real GDP is expected to grow robustly by about 2.9% in 2024, slightly higher than in 2023. This economic strength persists even in the face of significant challenges in sectors such as Commercial Property, regional Banks, and many small companies and startups.

While supportive fiscal policies may have helped, two factors can also explain the resilience of the American economy:

• The less regulated "shadow banking" system, including private equity firms, may help buffer the impact of the Federal Reserve's tightening policies by providing alternative financing sources for businesses.
• Wealth is increasingly concentrated in large corporations and affluent families, which often Hold too much Cash and may be less sensitive to interest rate changes. Therefore, they are likely able to support the economy through continued Consumer spending.

Key question for 2025: What impact will rate cuts have?

Historically, a significant rise in the unemployment rate often heralds a decline in Consumer spending and economic activity. However, in 2024, even as the USA's unemployment rate rises from 3.7% to 4.2%, overall Consumer spending remains strong.

This may be partly attributed to the wealth concentration mentioned above, which can stimulate total Consumer spending. It may also be partly due to the contributions of immigrants to the economy; it is estimated that immigrants added 1% to last year's real GDP.

Key question for 2025: Will the Trump administration's immigration reform dampen economic growth?

The shift of the USA economy from manufacturing to services may render traditional economic indicators less effective in predicting economic trends, such as the leading economic index of the Conference Board and the manufacturing index of the Institute for Supply Management.

These indicators show that the USA economy has been contracting for some time, but driven by the decrease in the number of service and increasingly dominant multi-industry companies, the USA economy continues to expand.

Key question for 2025: will the incoming Trump administration's push for deregulation accelerate the concentration of economic power among a few dominant players, thus weakening the effectiveness of broad economic measures and exacerbating income inequality?

Even with the Federal Reserve raising interest rates and engaging in quantitative tightening (QT) to reduce money supply, financial conditions have surprisingly eased. This can be attributed to the U.S. Treasury's strategic move to increase the issuance of short-term Treasury bills, as demand for this cash-equivalent surpassed 5% yield, leading money market funds to rapidly purchase short-term Treasury bills.

Even under tightened monetary policy, this deficit financing method helps to maintain ample cash flow in the financial system, making it easier for companies and consumers to obtain credit.

Key question for 2025: if, as suggested by incoming government officials, the U.S. Treasury shifts to a more balanced debt issuance plan, including more long-term bonds, will financial conditions tighten in 2025 despite lower interest rates?

The enthusiasm for generative AI and other innovative technologies has led to a significant concentration of market gains in a few large Technology companies, driving up their valuation multiples. Typically, higher interest rates may raise the threshold for future profits, making such high-valued Stocks vulnerable.

However, despite the anticipated delay in the interest rate cut cycle, the Federal Reserve's projected 'neutral interest rate', which neither stimulates nor suppresses the economy, has also increased, yet the valuations of these companies continue to rise, pushing the S&P 500 Index to unexpected heights.

The key question for 2025: Will the new year bring unexpected shocks that bring these PEs closer to long-term trends?