United States economy unaffected by geopolitical dominoes United States economy unaffected by geopolitical dominoes http://www.georgiaprime.com/ga/static/images/ga/ga-logo-amp.png http://www.georgiaprime.com/ga/daf\images\insights\article\dominoes-small.jpg January 21 2026 January 23 2026

US economy unaffected by geopolitical dominoes

We think GDP growth could reach 3.3% in 2026.
Published January 23 2026

Bottom Line

Underlying economic and financial-market fundamentals are strong, as growth is accelerating, productivity is soaring, inflation is falling and the Federal Reserve is cutting interest rates. But stocks, bonds and the volatility index (VIX) have sold off over the past fortnight. That suggests investors are choosing to ignore the solid data and focus on the geopolitical dominoes. They had plenty to consider with the World Economic Forum’s annual confab in Davos, Switzerland, this week. President Trump’s main stage speech drew the most attention. It was wide-ranging, but his desire to acquire Greenland left the world unsure about other global hotspots, prominently Venezuela, the Russia/Ukraine war, China/Taiwan and the deadly protests in Iran.

Ignore the noise and nonsense Back home, economic growth is accelerating, with GDP rising across 2025, from a loss of 0.6% in the first quarter to gains of 3.8% in the second quarter and 4.4% in the third quarter. The Atlanta Fed’s GDPNow fourth-quarter estimate is 5.4%; Federated Hermes forecasts 3.1%. We think the GDP growth rate for 2026 will be 3.3%, well above the Blue Chip consensus’ 2.1% estimate.

Why are we so constructive? Consumer spending (which accounts for 70% of GDP growth) remains robust. Despite the well-documented bifurcation between high- and low-end consumers, we think the 2025 holiday shopping season was solid. The top 10% of Americans, who account for half of consumer spending, continue to spend thanks to the wealth effect created by surging stock and home prices. But the lower half of the income spectrum should benefit when the tax incentives from Trump’s One Big Beautiful Bill Act (OBBB) kick in this spring. Midterm elections could spark additional fiscal stimulus, along with America250 and World Cup soccer spending later this year.

Soaring productivity Corporate capital expenditures are accelerating thanks to the 100% expensing provision in the OBBB. Consequently, productivity has improved from a decline of 2.1% in last year’s first quarter to outsized gains of 4.1% in the second quarter and 4.9% in the third quarter.

Less drag from trade The trade deficit for October 2025 plunged to a 16-year low of $29.4 billion, down 78% from its record high of $136.4 billion in March 2025. So, the annualized drag from trade has shrunk from an estimated 65 basis points during last year’s first quarter to only 29 basis points on an annualized basis over the past seven months through last October.

Housing inflection point? The US had a housing recession in five of the past six quarters, and the affordability index has not been this bad in 40 years. But with the Fed lowering interest rates and a basketful of initiatives expected from the Treasury Department, housing could emerge from its tomb during the spring and summer selling seasons.

Labor market turning around? Last year’s sizable labor market struggles may be bottoming. Initial jobless claims remain low, and layoffs are decreasing. After nearly a year of declines, hiring trends improved in December for federal government, foreign-born and less-educated workers. 

Confidence has troughed The University of Michigan Consumer Sentiment Index has improved from a three-year low of 51 in November 2025 (just off a 44-year low of 50 in June 2022) to a six-month high of 56.4 in January 2026. The NFIB Small Business Optimism Index rose from a six-month low of 95.8 in April 2025 to a four-month high of 99.5 in December 2025.

Potent corporate results The fourth quarter reporting season is only about 15% completed, but results are running well. So far, revenues for those companies have averaged growth of 8.0% year-over-year (y/y) (consensus was 7.7%). For comparison, revenues in the third quarter averaged 8.4% y/y. Earnings increased 15.0% y/y in the fourth quarter (consensus gain of 8.3% expected), versus a 13.4% gain in the third quarter. Net profit margins are increasing in the fourth quarter, due to an improvement in productivity and a moderation in wage growth.

Raising our estimates for economic growth The equity, fixed income and liquidity investment professionals who comprise Federated Hermes’s macroeconomic policy committee met yesterday to discuss accelerating growth in the US. The government reports that third quarter 2025 GDP grew at a rate of 4.4%, the strongest quarterly rise in two years, compared with a gain of 3.8% in the second quarter and a decline of 0.6% in the first. 

  • The Commerce Department will flash fourth quarter 2025 GDP growth on February 20, nearly a month behind schedule because of the lingering impact from last year’s government shutdown. We raised our forecast from 1.8% to 3.1%, while the Blue-Chip consensus raised its from 0.8% to 1.0% (within a range of -0.1% to 1.9%). The Atlanta Fed’s GDPNow tracking estimate increased from 3.9% to 5.4%, due to the sharp reduction in the balance of trade deficit. 
  • Consequently, we raised our full-year 2025 GDP growth forecast from 2.2% to 2.5%, while the Blue-Chip consensus raised its from 1.9% to 2.3% (within a range of 2.3% to 2.4%).
  • Core CPI finished 2025 at 2.6%. We reduced our year-end 2025 estimate for core PCE inflation from 2.9% to 2.8% (compared with actual core inflation of 2.8% in November, down from 2.9% in August 2025), while the Blue-Chip consensus left its unchanged at 2.7% (within a range of 2.6% to 2.8%).
  • After a buoyant Christmas, and with brutal winter weather and only a small 2.8% Social Security benefit adjustment in January, consumers could temporarily tighten their purse strings until their spending resumes in March due to an early Easter. So, we trimmed our forecast for first quarter 2026 GDP growth from 3.1% to 3.0%, while the Blue-Chip consensus raised its from 1.5% to 1.9% (within a range of 0.5% to 3.1%).
  • The fiscal stimulus from President Trump’s One Big Beautiful Bill could result in larger-than-normal tax refunds. So, we increased our projection for second quarter 2026 growth from 2.9% to 3.1%, while the Blue-Chip consensus raised its from 1.8% to 1.9% (within a range of 0.8% to 2.6%).
  • We think construction, manufacturing and employment will improve over the summer months. So, we raised our forecast for third quarter of 2026 growth from 3.0% to 3.1%, while the Blue-Chip consensus increased its from 1.9% to 2.0% (within a range of 1.3% to 2.5%). 
  • We increased our estimate for fourth quarter 2026 growth from 2.9% to 3.1%, while the Blue-Chip consensus raised its from 1.9% to 2.0% (within a range of 1.4% to 2.7%).
  • As a result, we raised our projection for full-year 2026 growth from 2.9% to 3.3%, while the Blue Chip increased its from 1.8% to 2.1% (within a range of 1.4% to 2.7%). 
  • We reduced our year-end 2026 forecast for Core CPI inflation from 2.6% to 2.5%, while the Blue Chip lowered its from 2.9% to 2.8% (within a range of 2.4% to 3.3%). We also lowered our year-end 2026 estimate for Core PCE inflation from 2.5% to 2.4%, while the Blue Chip reduced its estimate from 2.8% to 2.7% (within a range of 2.4% to 3.1%). 

Read more about our views and positioning at Capital Markets.

Connect with Phil on LinkedIn

Tags Equity . Markets/Economy .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

Consumer Price Index (CPI): A measure of inflation at the retail level.

The National Federation of Independent Business (NFIB) conducts surveys monthly to gauge how small businesses feel about the economy, their situation and their plans.

Personal Consumption Expenditures Price Index (PCE): A measure of inflation at the consumer level.

The University of Michigan Consumer Sentiment Index is a measure of consumer confidence based on a monthly telephone survey by the University of Michigan that gathers information on consumer expectations regarding the overall economy.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

Stocks are subject to risks and fluctuate in value.

The value of investments and income from them may go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future results. 

This is a marketing communication. The views and opinions contained herein are as of the date indicated above, are those of author(s) noted above, and may not necessarily represent views expressed or reflected in other communications, strategies or products. These views are as of the date indicated above and are subject to change based on market conditions and other factors. The information herein is believed to be reliable, but Federated Hermes and its subsidiaries do not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. This document has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. 

This document is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities, related financial instruments or advisory services. Figures, unless otherwise indicated, are sourced from Federated Hermes. Federated Hermes has attempted to ensure the accuracy of the data it is reporting, however, it makes no representations or warranties, expressed or implied, as to the accuracy or completeness of the information reported. The data contained in this document is for informational purposes only, and should not be relied upon to make investment decisions. 

Federated Hermes shall not be liable for any loss or damage resulting from the use of any information contained on this document. This document is not investment research and is available to any investment firm wishing to receive it. The distribution of the information contained in this document in certain jurisdictions may be restricted and, accordingly, persons into whose possession this document comes are required to make themselves aware of and to observe such restrictions. 

United Kingdom: For Professional investors only. Distributed in the UK by Hermes Investment Management Limited (“HIML”) which is authorised and regulated by the Financial Conduct Authority. Registered address: Sixth Floor, 150 Cheapside, London EC2V 6ET. HIML is also a registered investment adviser with the United States Securities and Exchange Commission (“SEC”).

European Union: For Professional investors only. Distributed in the EU by Hermes Fund Managers Ireland Limited which is authorised and regulated by the Central Bank of Ireland. Registered address: 7/8 Upper Mount Street, Dublin 2, Ireland, DO2 FT59. 

Australia: This document is for Wholesale Investors only. Distributed by Federated Investors Australia Services Ltd. ACN 161 230 637 (FIAS). HIML does not hold an Australian financial services licence (AFS licence) under the Corporations Act 2001 (Cth) ("Corporations Act"). HIML operates under the relevant class order relief from the Australian Securities and Investments Commission (ASIC) while FIAS holds an AFS licence (Licence Number - 433831).

Japan: This document is for Professional Investors only. Distributed in Japan by Federated Hermes Japan Ltd which is registered as a Financial Instruments Business Operator in Japan (Registration Number: Director General of the Kanto Local Finance Bureau (Kinsho) No. 3327), and conducting the Investment Advisory and Agency Business as defined in Article 28 (3) of the Financial Instruments and Exchange Act (“FIEA”). 

Singapore: This document is for Accredited and Institutional Investors only. Distributed in Singapore by Hermes GPE (Singapore) Pte. Ltd (“HGPE Singapore”). HGPE Singapore is regulated by the Monetary Authority of Singapore. 

United States: This information is being provided by Federated Hermes, Inc., Federated Advisory Services Company, Federated Equity Management Company of Pennsylvania, and Federated Investment Management Company, at address 1001 Liberty Avenue, Pittsburgh, PA 15222-3779, Federated Global Investment Management Corp. at address 101 Park Avenue, Suite 4100, New York, New York 10178-0002, and MDT Advisers at address 125 High Street Oliver Street Tower, 21st Floor Boston, Massachusetts 02110.

Issued and approved by Federated Advisory Services Company

1513961167