The economy seems to be firing on all cylinders — but a veteran JPMorgan strategy chief says one underappreciated risk could cause a serious global slowdown

• The US system looks strong, judging by GDP growth, profits, productivity, and nan labour market.
• JPMorgan Asset Management is upbeat heading into 2025, but a awesome consequence looms.
• Strategy main David Kelly shared why investors should beryllium worried astir a waste and acquisition war.

It looks for illustration nan astir evident threats to nan system person been neutralized for now, but a seasoned strategy main fears that an under-the-radar consequence poses a threat to nan world description .

This economical backdrop bears small resemblance to nan so-called stagflationary environment of 2022, a twelvemonth wherever US GDP shrank successful nan first 2 quarters arsenic inflation deed multi-decade highs.

Fast guardant to precocious 2024, and GDP has grown by astatine slightest 3% for three of nan past 4 quarters and is expected to do truthful again successful nan 3rd quarter, according to JPMorgan Asset Management. The patient estimates that user spending, which accounts for astir 2 thirds of US GDP, besides apt accelerated to 3.5% connected an inflation-adjusted ground past quarter, up from 2.8% successful Q2.

Meanwhile, value maturation is remarkably adjacent to nan Federal Reserve's 2% target, which allowed nan US cardinal slope to start nan liking complaint easing rhythm pinch a bang successful mid-September.

Perhaps astir encouraging is that nan labour marketplace appears to beryllium healthy. Job additions easy exceeded estimates successful September, and nan unemployment complaint is in cheque astatine 4.1%.

Corporate net growth, productivity growth, and business fixed finance each look to beryllium headed successful nan correct guidance arsenic well. The aforesaid is existent of costs growth, which JPMAM recovered has topped ostentation for nan past 17 months, underpinning coagulated user spending successful nan process.

These signals person fixed David Kelly, JPMAM's main world marketplace strategist, awesome confidence.

The economical outlook "seems remarkably benign pinch coagulated economical growth, debased unemployment, resilient profits, a slow drift down successful inflation, and gradual easing from nan Federal Reserve," Kelly said successful written commentary connected October 28. The marketplace seasoned added that location aren't "signs of an imminent alteration successful nan economy's path."

A 'tariff'ying risk

That seemingly picturesque backdrop helps explicate why nan S&P 500 has risen 22% this twelvemonth and is adjacent grounds highs. But Kelly believes investors can't fto their guards down.

"Investing has ever been arsenic overmuch astir consequence arsenic astir return, and nan cardinal to semipermanent occurrence is being prepared for both," Kelly said successful his commentary.

Kelly said to beryllium wary of elevated banal valuations — which he and his colleagues astatine JPMAM said past week could put a lid connected early returns — and nan market's dense tilt toward mega-cap maturation companies, moreover though that has been changing successful caller months.

However, neither of those overhangs is much superior than nan imaginable fallout from a home aliases world governmental shock. When asked past week astir nan biggest consequence to his semipermanent outlook, Kelly quickly arrived astatine an answer: a fierce world waste and acquisition warfare marked by escalating tariffs.

"No matter which group of economists you person sitting here, each 1 of 'em will show you that tariffs are not a bully idea," Kelly said astatine JPMAM's annual semipermanent superior marketplace assumptions conference connected October 21. "You tin usage it arsenic a threat, though it's benignant of for illustration a atomic threat — nan full constituent is, if you really extremity up utilizing it, you benignant of screwed up somewhere."

Economists usually disapprove of tariffs, which are taxes connected overseas imports, successful astir cases. Tariffs committedness to make gross for nan location state while aiding home industries, but they tin thrust up user prices and punctual counter-tariffs that lead to waste and acquisition wars.

In a worst-case scenario, tariffs would consequence successful higher prices and little maturation owed to nan discarded and inefficiency that they create while hurting importers and exporters successful some countries.

"A waste and acquisition warfare could origin america to push up our ostentation forecast and push retired our maturation forecast astatine nan aforesaid time," Kelly said astatine nan conference.

While Democrats and Republican presidents person leaned connected tariffs successful nan past, it's erstwhile President Donald Trump who's promising to instrumentality important tariffs successful this predetermination cycle.

While immoderate opportunity nan threat of fierce tariffs would thief nan US unafraid amended waste and acquisition terms, others are skeptical — if not outright scared.

Such tariffs would origin "seismic shocks to nan US economy," Tom Orlik, nan main economist astatine Bloomberg Economics, said earlier this month. Charles Schwab world finance strategy main Jeffrey Kleintop cited tariffs arsenic a apical risk backmost successful June. The nonpartisan Peterson Institute spoke retired against Trump's tariff proposals, arsenic did nan right-leaning Wall Street Journal editorial board.

Although investors whitethorn want to return nan anticipation of tariffs much seriously, Kelly noted that moreover if they're a awesome headache, stocks and nan system should still beryllium good successful nan agelong term.

"I could person said 'pandemic' 5 years ago, if I'd been incredibly prescient," Kelly said astatine nan conference. "But oddly enough, nan world system bounced backmost anyway. And truthful it wouldn't really person been a very bully point to interest about."