U.S. economy shrugs off geopolitics, but for how long? By Investing.com

Barclays expects U.S. Q1 GDP growth of 2.3% annualized, above GDPNow, while keeping its 2026 and 2027 growth forecasts at 2.4% and 1.5% respectively. Consumer demand remains soft at 0.8% annualized through February, though AI-related capital goods spending is described as especially strong; the bank also lifted U.S. budget deficit projections to $2.0 trillion for fiscal 2026 and 2027. Barclays still sees the Fed holding rates in April, with 25 bps cuts in September 2026 and March 2027, but flags a risk of a longer pause amid geopolitical uncertainty around Iran and ceasefire talks.

Analysis

The bigger takeaway is not that growth is resilient; it is that the composition of support is shifting from private demand to policy and capex. That matters because policy-led cushions are stickier for headline GDP than for earnings breadth: defense and tariff-related spending can keep aggregate activity afloat while leaving consumer-sensitive cyclicals and smaller discretionary names lagging. The market should expect a widening gap between firms leveraged to public-sector budgets and those dependent on household traffic and volume recovery.

AI infrastructure remains the cleanest second-order beneficiary. If capital goods demand tied to data centers is still “riding high” while consumer spending is sub-1% annualized, the earnings dispersion inside industrials, semis, and power/thermal supply chains should continue to widen. That argues for favoring picks-and-shovels exposure over broad cyclical beta, especially because the main macro risk is not recession but an elongated plateau where rates stay restrictive and end-demand remains uneven.

The underappreciated risk is that fiscal cushioning can mask softness long enough to delay rate cuts, which is bearish for rate-sensitive housing, small caps, and levered consumer credits. If the Fed stays on hold beyond current expectations, the trade is less about a sharp risk-off event and more about duration compression: assets priced off a quick easing cycle may need to re-rate lower over the next 1-2 quarters. Conversely, any escalation in geopolitical tensions that forces another leg of emergency spending would likely reinforce the same winners rather than create a new macro shock, which is why the base case is persistent dispersion, not broad liquidation.

Key Decisions for Investors

• Go long XLI vs. XLY for the next 1-3 months: industrial/policy spending and AI capex should outperform consumer-exposed discretionary names if household demand stays subtrend. Use a market-neutral structure to isolate the spread.
• Add to semicap/AI infrastructure exposure via AMAT or KLAC on any 3-5% pullback; the risk/reward favors continued capex resilience even if the broader macro stays sluggish. Tighten risk if order commentary rolls over for two consecutive months.
• Short IWM or buy put spreads on IWM 2-4 months out: prolonged higher-for-longer rates disproportionately pressure small caps with weaker refinancing profiles and less access to budget-driven demand.
• Maintain a relative long defense basket against consumer cyclicals, e.g. LMT/NOC vs. M/ROST, over the next 1-2 quarters; fiscal redirection toward defense should support backlog visibility while discretionary names face softer traffic and margin pressure.
• Avoid chasing duration-sensitive rate cuts beneficiaries until the Fed clearly signals easing; if cuts slip by one meeting, consider a tactical short in TLT or long puts on rate-sensitive real estate proxies as a hedge against the more prolonged hold scenario.