US Economic Resilience Pushes Rate Cut Expectations to 2027
Stronger-than-anticipated business activity in July suggests the US economy is expanding at a healthy pace, reducing the likelihood of near-term interest rate reductions and shifting investor focus toward companies with robust balance sheets.
The US economy is expanding more rapidly than anticipated, a development that significantly reduces the probability of Federal Reserve interest rate cuts in the immediate future. New data from S&P Global indicates that business activity accelerated in July, reinforcing the likelihood that borrowing costs will remain elevated for an extended period. This stronger-than-expected growth complicates the central bank’s efforts to manage inflation while supporting economic stability.
S&P Global’s flash Purchasing Managers’ Index (PMI) report for July showed the composite PMI rising to 53.6 from 51.9 in June. This marks the highest reading in eight months and signals annualised GDP growth of approximately 2% for the third quarter. The improvement was broad-based, with the services PMI rising to 53.6 and manufacturing remaining solid at 53.8, suggesting that growth has become more sustainable across major sectors of the economy.
Despite the positive growth indicators, the report highlighted persistent inflationary pressures that may deter policymakers from easing monetary policy. Input costs rose at the fastest pace in 14 months, while supplier delivery delays reached their worst level in nearly four years, attributed to disruptions in the Middle East. Businesses also reported the strongest selling-price increases in years, complicating the Federal Reserve’s task of bringing inflation back to its 2% target.
The labour market presents a mixed picture, with unemployment hovering around 4.2% and hiring improving for the first time in three months. However, business confidence climbed to an eight-month high even as record numbers of people leave the workforce. These factors, combined with the resilient economy, have led some economists to project that the first rate cut may not occur until 2027. Markets currently expect the Fed to leave rates unchanged at its late-July meeting.
For investors, the data suggests a pivot towards companies with strong balance sheets, consistent free cash flow, and pricing power, which tend to perform well in a higher-for-longer rate environment. While heavily indebted businesses may struggle as financing costs remain elevated, a durable economy supports corporate profits. Investors are advised to focus on high-quality businesses capable of growing earnings through various economic conditions rather than betting on immediate shifts in Federal Reserve policy.
