Gauging the U.S. Economic Momentum: Nowcasts, Forecasts, and Implications for Equity and Commodity Markets

The U.S. economy is currently navigating a complex crossroads. While short-term GDP nowcasts suggest robust momentum, long-term projections paint a markedly slower trajectory. This divergence-between the Atlanta Fed's Q3 2025 GDPNow estimate of 3.5% and the Congressional Budget Office's (CBO) 1.6% annualized growth forecast for 2025–2055-highlights a critical gap in economic expectations. For investors, this chasm signals both risks and opportunities. The U.S. slowdown, already evident in weakening domestic demand, contrasts sharply with the resilience of emerging markets (EM), which are outperforming on the back of structural advantages. Tactical portfolio positioning must now account for this asymmetry, hedging against U.S. headwinds while capitalizing on EM's momentum.

The Nowcast-Long-Term Forecast Divergence

The Atlanta Fed's GDPNow model, a real-time barometer of economic activity, estimates U.S. GDP growth at 3.5% for Q3 2025. This figure, however, starkly contrasts with the Philadelphia Fed's 1.7% average annual growth projection for 2025 and the CBO's long-term outlook of 1.6% per year from 2025 to 2055. The CBO attributes this slowdown to demographic headwinds-slower labor force growth-and diminishing productivity gains, compounded by the drag of rising federal borrowing. While the 2025 reconciliation act has provided a temporary boost to consumption and investment, these tailwinds are unlikely to offset the structural drag over the next three decades.

This divergence underscores a critical risk: investors may be overestimating the durability of current growth. The CBO's projections suggest that the U.S. economy is already transitioning into a lower-growth equilibrium, a reality that could materialize faster than markets anticipate.

Weakening Domestic Demand: A Harbinger of Slower Growth

The U.S. economy's near-term momentum is already showing cracks. The Conference Board's Leading Economic Index (LEI) declined by 0.3% in September 2025, marking two consecutive months of contraction. This weakening is driven by deteriorating consumer and business sentiment, a contraction in the ISM New Orders Index, and a slowdown in manufacturers' new orders. The Conference Board itself now forecasts U.S. GDP growth to fall from 1.8% in 2025 to 1.5% in 2026, a trajectory that aligns more closely with the CBO's long-term view than the Atlanta Fed's nowcast.

Fiscal constraints and trade policy uncertainty have further weighed on growth in the first half of 2025. These factors, combined with the CBO's warning about the drag from federal borrowing, suggest that the U.S. economy is entering a phase of deceleration. For equity investors, this implies heightened sensitivity to earnings disappointments, particularly in sectors tied to domestic demand, such as consumer discretionary and industrial stocks.

Emerging Markets: A Contrasting Story of Resilience

While the U.S. faces headwinds, emerging markets have defied gloomy expectations. Economic growth in EMDEs (excluding China) is projected at 3.5% for 2025, supported by resilient services sectors, diversified export markets, and accommodative monetary policies. For instance, Argentina's inflation has plummeted from nearly 300% in 2024 to 13.7% in 2026, enabling rate cuts and fiscal stability. Similarly, regional trade agreements and deeper integration have insulated many EM economies from global trade tensions.

The services sector has been a key driver of EM resilience. Information and business services, in particular, have provided a stable foundation for growth, even as traditional manufacturing faces headwinds. This diversification has allowed EMs to maintain momentum despite a slowdown in China and a weaker U.S. economy.

Equity and Commodity Markets: EM Outperformance and U.S. Vulnerabilities

Emerging market equities have outperformed U.S. counterparts in 2025, with the MSCI EM index rising 28% year-to-date compared to the S&P 500's 16% gain. This outperformance is driven by a weaker U.S. dollar, high real yields in EM, and improved balance sheets for sovereigns and corporates. Meanwhile, U.S. growth has faltered under fiscal constraints and trade policy uncertainty, creating a structural divergence that favors EM.

Commodity markets have also tilted in EM's favor. A weaker dollar has supported EM local currency assets, while 19 of 21 EM central banks are expected to cut rates in H2 2025, enhancing the local-carry trade. However, risks remain: a sharp U.S. slowdown or Chinese deceleration could dampen EM exports and commodity prices. For now, though, the macro environment remains favorable for EM-focused strategies.

Tactical Portfolio Positioning: Hedging U.S. Risks, Capturing EM Opportunities

The widening gap between U.S. nowcasts and long-term forecasts necessitates a tactical shift in portfolio positioning. Investors should:
1. Hedge U.S. Slowdown Risks: Overweight sectors insulated from domestic demand, such as utilities and healthcare, while underweighting cyclical sectors like industrials and consumer discretionary.
2. Capitalize on EM Momentum: Allocate to EM equities and commodities, particularly in sectors tied to services and regional trade. Currency-hedged EM strategies can mitigate dollar volatility.
3. Balance Exposure with Commodity Diversification: Commodity-linked assets, especially those tied to EM demand (e.g., copper, energy), offer a hedge against U.S. slowdowns while benefiting from EM growth.

The CBO's long-term outlook and the Conference Board's near-term warnings suggest that the U.S. economy is entering a period of structural adjustment. Meanwhile, EM's resilience-backed by services growth, export diversification, and accommodative policies-presents a compelling case for tactical overweights. Investors who act now can position themselves to navigate the U.S. slowdown while capturing the upside of a more dynamic global economy.