The U.S. Economic Resilience: A Case for Rebalancing Portfolios Toward Growth-Driven Sectors

The U.S. economy has defied expectations in 2025, with the Atlanta Fed's GDPNow model projecting a staggering 5.4% annualized real GDP growth for Q4 2025-a sharp reversal from its earlier 2.7% estimate just three days prior. This upward revision underscores a broader narrative of economic resilience, driven by robust consumer spending, surging private investment, and a reinvigorated manufacturing sector. For investors, the implications are clear: portfolios must be recalibrated to capitalize on the sectors fueling this growth while hedging against potential volatility.

The Drivers of Resilience: Consumption, Exports, and AI-Driven Productivity

The Atlanta Fed's GDPNow model highlights two primary contributors to the 5.4% projection: personal consumption expenditures (PCE) and net exports. Despite persistently high interest rates, U.S. consumers have maintained their spending momentum, a trend attributed to strong labor market conditions and pent-up demand in sectors like housing and durable goods. Meanwhile, net exports have surged due to a weaker dollar and increased global demand for American-made goods, particularly in advanced manufacturing.

However, the most transformative force behind this resilience is private investment in AI infrastructure. Data from the Atlanta Fed and third-party analyses suggest that AI-related capital expenditures-spanning semiconductors, data centers, and software- contributed approximately 30% to Q2 2025 GDP growth. Hyperscalers and industrial firms are aggressively deploying AI to enhance productivity, with McKinsey estimating that AI could add 0.5–1.0 percentage points annually to global GDP. This shift is not speculative; it is already reshaping capital flows and sector dynamics.

Capital Allocation Strategies: Aligning with the New Economic Paradigm

Given the Atlanta Fed's 5.4% projection, investors must adopt a dual approach: leaning into growth-driven sectors while maintaining defensive positions to mitigate risks.

1. Overweight AI-Adjacent Sectors

The surge in AI adoption has created a "virtuous cycle" of demand for specialized hardware and energy infrastructure. Semiconductors, for instance, have outperformed broader markets, with firms like NVIDIA and AMD benefiting from surging demand for AI chips. Similarly, data-center construction and energy systems (e.g., renewable power for cooling) are critical enablers of AI scalability according to Confluence Investment Management. As T. Rowe Price notes in its 2026 Global Market Outlook, "AI-driven sectors are not just growth stories-they are structural shifts in capital allocation".

2. Leverage Passive Flows in Large-Cap Equities

The dominance of passive investment strategies in 2025 has amplified the performance of large-cap growth stocks, particularly in the technology sector. The S&P 500's gains have been disproportionately driven by AI-related firms, reflecting a "winner-takes-all" dynamic. Investors should consider increasing exposure to index funds and ETFs that capture this momentum, while selectively rotating into smaller-cap AI enablers with strong fundamentals.

3. International Developed Equities and Dollar-Neutral Plays

A weakening U.S. dollar and accommodative global monetary policies have made international developed markets attractive. Countries with strong fiscal stimulus and AI adoption (e.g., Germany, South Korea) offer diversification and growth potential. Additionally, dollar-neutral strategies-such as hedged equity positions in non-U.S. markets- can capitalize on currency tailwinds while reducing exposure to domestic volatility.

#### 4. Hedging with Gold and Treasuries Despite the bullish outlook, geopolitical risks and potential AI-driven valuation corrections necessitate hedging. Gold and U.S. Treasury positions remain effective hedges, particularly as the Federal Reserve's dovish pivot (projected to cut rates to 3.6% by year-end 2025) supports bond markets. Intermediate-term Treasuries, in particular, offer a balance between yield and duration risk.

The Road Ahead: Balancing Optimism with Prudence

While the Atlanta Fed's 5.4% projection signals a strong near-term outlook, investors must remain cautious. The long-term impact of AI on productivity remains uncertain, and valuations in AI-driven sectors have stretched to historic levels. As the Asset Allocation Committee of Confluence Investment Management advises, "The key is to maintain a dynamic portfolio that scales with macroeconomic signals while preserving liquidity for opportunistic rebalancing".

In conclusion, the U.S. economy's resilience is not a fluke but a reflection of structural shifts in technology and capital allocation. By prioritizing AI-adjacent sectors, leveraging passive flows, and hedging against macroeconomic risks, investors can position themselves to thrive in this new paradigm.