Mayo Center Forecast: Economic Expansion Likely But Not Without Risks

Forecasting U.S. economic growth for the year ahead is always an uncertain endeavor. Doing so in 2025, with a new presidential administration, supercharged technological upheaval and ample global instability adds a thick layer of fog to the outlook.

Leading the annual event at the University of Virginia Darden School of Business in early February, Rodney Sullivan, executive director of the Richard A. Mayo Center for Asset Management, reminded the alumni audience that U.S. economic growth had largely surprised on the upside in recent years, and explored the factors pointing to both continued growth — and potential declines.

Rodney Sullivan, Executive Director for the Mayo Center of Asset Management

“The economy has been much stronger than people expected, and it could continue to surprise on the upside,” said Sullivan, who also serves as co-editor of the Journal of Alternative Investments.

The top factors that point toward continued expansion in the U.S. economy in 2025 include potentially lower taxes, deregulation, moderating inflation, strong consumer spending and business earnings and productivity gains, said Sullivan.

The downside factors could include various unforeseen disruptions, including the murky future for tariffs, labor market disruption related to immigration policies, and economic malaise in key parts of the world such as Europe and China.

“The question is, will the plusses continue to outweigh the negatives?” Sullivan said.

In recent years, coincident economic indicators — factors such as payroll, personal income and retail sales — have all pointed toward steady growth. Those indicators are largely underpinned by a strong labor market, Sullivan said, with consumers earning more income and spending freely.

The U.S. unemployment rate stood at just over 4% for much of 2024, and reached historic lows in 2023.

Further, many saw their household wealth buoyed in recent years by refinancing home mortgages at historic low rates during the COVID-19 pandemic, and more recently earnings on savings due to the rise in interest rates. High levels of government spending and a rise in productivity driven by increased business investment have also strengthened the fundamentals in recent years.

“All of these factors have been stronger than people expected,” Sullivan said, and while inflation remains stubbornly higher than hoped for the overall economy, it has slowed considerably from its high rates experienced during 2022.

A big question for those seeking clues to the future is whether the artificial intelligence boom and corporate spending on technology tools translates into further productivity gains. If the hype around the adoption of AI tools translates into tangible productivity gains for a wide set of businesses, positives could include continued inflation easing and a boost to corporate earnings.

Whether the AI revolution leads to a meaningful and lasting boom remains unknown, of course, and the impact on the labor market for companies suddenly able to do much more with fewer humans could have unknown ripples in the overall economy.

Other potentially negative unknowns in the near-term include historically high levels of government debt and resulting interest payments and a rise in bond yields that have increased the cost of borrowing, among other impacts.

Predicting equity returns is similarly fraught territory, but exploring the factors likely driving markets — notably corporate profits, interest rates, the overall global economy and price-to-earning valuations — may offer clues for the year ahead. Sullivan noted the outperformance of U.S. equities in recent years, momentum significantly driven by a handful of tech stocks and the enthusiasm over AI. While returns to the S&P 500 were stronger than most expected in 2024, absent the so-called Magnificent 7 stocks — Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla — growth was a more modest 10%. Investors will be watching profit margins in corporate earnings closely to see if the outperformance by the technology giants can continue.

With small- and mid-cap stocks currently less expensive on a price-to-earnings ratio, Sullivan said he was interested to see what happens when and if smaller publicly traded companies harness the promised gains of generative AI. What might the “democratization of AI” mean for the 493 S&P 500 companies outside the Magnificent 7, Sullivan asked.

While cautioning that it was essentially impossible to predict future economic outcomes given the variables at play, Sullivan said “probabilities” suggested continued healthy economic expansion.

However, a trade war or any number of destabilizing events could put a quick end to what has been largely sustained economic growth since the depths of the COVID-19 pandemic.

“Things could go from great to not great really quickly,” Sullivan said.