FOMC Raises 2026 GDP Growth Forecast to 2.3 Percent

US real GDP surged 3.8% annualized in Q2 2025, rebounding from a 0.6% Q1 contraction, driven by strong consumer spending and lower imports. Atlanta Fed nowcasts Q3 growth at 3.5%, signaling continued resilience amid weak job growth.

Economic indicators point to decelerating U.S. growth in late 2025, driven by cooling labor markets, tariff impacts, and softening consumer spending, as shown by rising jobless claims and weakening LEI. This fosters equity market volatility, with S&P 500 pullbacks amid trade war fears, though resilient earnings and potential Fed easing limit recession risks. Investors face opportunities in dips but must navigate policy uncertainty affecting valuations.

• GDP Growth: 2.4% in 2024 (actual, solid pace continuing into 2025 per FOMC)
• GDP Projection 2025: 2.9% median (vs 1.6% revised upward to 1.7% earlier, or 1.8% Conference Board)
• Unemployment Rate: Low and stable (risks weighted to upside per FOMC, job gains strong)
• Inflation (PCE): Eased but elevated (core risks to upside, median 2025 at 3.6% confidence interval)
• Leading Economic Index: Declined 0.3% in Sep 2025 to 98.3 (faster 2.1% drop over 6 months, signaling slowdown)
• Coincident Economic Index: Rose 0.1% in Sep 2025 to 115.1 (slower 0.3% growth over 6 months vs prior)
• Sector Avg Valuation: ~50-52 across 11 sectors (e.g., Healthcare 52, Financials 49; balanced near 50-51 composite)

Labor Market Resilience

Employment growth is systematically weakening despite moderate overall activity. The US Bureau of Labor Statistics reports 11 states experiencing year-over-year employment declines in Q1 2025, up from three states in the previous quarter, with Moody's Analytics identifying 22 states in recession. However, labor productivity surged 2.4% in Q2 2025 while employment grew only 1.0%, suggesting companies are achieving output gains through efficiency rather than hiring—a dynamic that masks underlying labor market softness.

Inflation Dynamics

Inflation remains sticky above Federal Reserve targets. September 2025 CPI rose 3.0% year-over-year, the highest since January, with the New York Fed's Survey of Consumer Expectations showing 3.4% short-term inflation expectations and 3.0% five-year expectations. The FOMC projects core inflation at 2.5% for 2026, slightly lower than September's 2.6% forecast, but current momentum suggests the Fed's 2.0% target remains elusive in the near term.

Sector Valuation Landscape

Most sectors cluster around fair valuation with composite scores near 50, indicating balanced risk-reward profiles. Financials (1,020 stocks) and Healthcare (1,084 stocks) dominate by count but show modest valuations of 49 and 52 respectively, while Technology (753 stocks) trades at 52 valuation with a 50 composite score. The outlier is the unnamed sector with 24 stocks averaging 60 valuation and 53 composite—suggesting either concentrated quality or elevated risk.

Growth Outlook

The FOMC revised 2025 GDP growth upward to 1.7% from 1.6%, with 2026 projections notably higher at 2.3% versus September's 1.8%. However, the Conference Board's Leading Economic Index fell 2.1% over six months through September, signaling slowing activity ahead and suggesting the 2026 upside may face headwinds from tariff adjustments and softer consumer momentum.

Market valuations remain moderate across sectors, averaging 50-53 on composite scores, with Healthcare leading at 51 amid November's defensive rotation and outperformance. Value and small-caps show relative attractiveness versus growth and large-caps. Watch Fed rate cut signals, year-end earnings revisions, and Santa Claus rally potential amid volatility.