Despite a slowdown in the US economy, UBS believes the chance of a "Roaring '20s" outcome is actually increasing.
"The roar is getting a little louder," the bank says, with long-term trends still aligning with their criteria for such a prosperous decade.
These criteria include real GDP growth averaging 2.5% or better, inflation of 2-3%, a 10-year Treasury yield around 4%, and the Federal funds rate at 3-4%. So far, the US is on track.
While recent economic strength is due to cyclical factors, unexpected immigration boosting labor supply and stronger-than-expected fiscal legislation are providing a temporary tailwind. More importantly, UBS sees signs of structurally higher growth taking root.
Their analysis hinges on four supply-side megatrends: a capital spending boom, surging AI adoption, stronger business dynamism, and productivity gains. They've created a "roar score" to track progress on these factors.
"Our conclusion is that a Roaring '20s regime is marginally more likely than it was in 4Q23," UBS reports. Strong household finances, increased AI investment, surging capital expenditures, and continued risk capital availability all bolster this outlook.
Even though productivity growth hasn't taken off yet, disinflation progress and a potential shift to a less restrictive monetary policy by the Fed further increase the likelihood of a prosperous decade.
A wildcard remains the future path of fiscal policy, with high deficits potentially requiring consolidation. However, UBS believes policy will ultimately be a headwind, not a dealbreaker.
UBS believes the US economy might be slowing down, but the foundation for a "Roaring '20s" is being built. While not guaranteed, UBS urges investors not to underestimate this potential, drawing a parallel to the productivity boom of the late 1990s that followed an earlier period of economic slowdown.