by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our take on China’s decision to revise its growth target. We then discuss the US economy in light of the latest ISM survey and ADP report. Next, we provide an update on Iran, examine another key breakthrough for crypto, and assess US shale’s ability to meet incremental demand following the Middle East conflict. We close with a summary of key US economic data and notable moves across global markets.

China Rethinks Target: The world’s second-largest economy has lowered its GDP target for the first time since 2023. On Wednesday, Beijing announced it would cut its growth target to a range of 4.5% to 5.0%, down from the previous target of 5.0%. The downgrade is being viewed as a signal that the government is willing to tolerate slower expansion as it pivots its growth model to address current challenges, including global pushback against its export-led strategy and a struggling real estate sector.

• Beijing’s move to set a lower growth target range is widely seen as giving policymakers more room to tackle structural problems such as industrial overcapacity and weak domestic demand — issues that have also drawn criticism from key trading partners. At the same time, China’s state-led growth model has come under intensifying scrutiny, with the IMF recently urging Beijing to scale back sizable industrial subsidies and shift toward a more consumption-led model.
• A transition in China’s growth model would be desirable, but it is unclear if the government is prepared to make the pivot. Consumers are seeing their net worth erode as the real estate sector continues to struggle, depleting household savings. Meanwhile, rather than stepping in with stimulus to restore confidence, Beijing has chosen to trim subsidies for consumer goods, raising questions about its commitment to supporting households through the transition.
• That said, the shift represents an opportunity for China to negotiate a trade pact with the US as Presidents Xi Jinping and Donald Trump prepare to meet in a few weeks. The White House has signaled that any new agreement will require China to reform its export model and improve access for US business interests. Consequently, a lower growth target may signal China’s willingness to alter its economic model in exchange for reduced tariffs.
• While the market ramifications of China reducing its growth target may not be immediate, we believe the move is a net positive if it paves the way for more productive trade talks. A potential agreement would benefit both equity markets but would be particularly impactful for US tech companies. In particular, a deal that loosens restrictions on Chinese rare earth minerals, critical components for emerging technologies, would provide a significant boost to the sector.

Economic Momentum: There are growing signs that the economy is gaining momentum as firms become more confident about future planning. The latest ISM Purchasing Managers’ Index showed business activity accelerating at its fastest pace since 2022, rising from 53.8 to 56.1 in February. Meanwhile, new data from ADP revealed that private employers added 63,000 jobs last month, well above the downwardly revised 11,000 in January, marking the strongest gain since July and suggesting companies are increasingly optimistic about future demand.

• The latest ISM services report points to a clear pickup in demand. Key components such as inventories, backlogs, and new export orders are all in expansion territory, indicating a broad-based surge in activity. At the same time, the prices‑paid index has fallen below its 12‑month average, signaling that cost pressures, while still elevated, are starting to ease.
• Meanwhile, private payroll data show that healthcare remains the primary driver of job growth, adding 58,000 positions in February. Construction also contributed significantly, with a gain of 19,000 jobs, while the information sector added another 11,000. In contrast, employment across most other sectors either declined slightly or remained largely unchanged from the previous month.
• Despite ongoing economic improvement, business sentiment is being tempered by significant concerns over tariffs and the disruptive potential of AI. The latest ISM report underscores this shift, with anecdotal commentary revealing an intensified focus on cost pressures. On the labor front, the absence of robust job gains points to a prevailing “low hire, low fire” mentality. Crucially, this corporate caution regarding workforce expansion appears to be directly amplified by the rapid iteration and integration of AI technologies.
• Overall, the economy continues to demonstrate resilience and is likely to remain on solid footing barring a major external shock. However, uncertainty surrounding tariffs and AI disruption warrants a cautious stance. We recommend managing risk by maintaining a balanced portfolio that includes diversifying beyond technology into other overlooked large cap sectors poised for growth, while also adding international exposure to hedge against domestic volatility.

Iran Update: The conflict has now entered its sixth day, and there are still no clear signs of an off-ramp. Iranian officials on Wednesday rejected reports of backchannel talks with the United States and warned that their war efforts will intensify. The White House, however, continues to express confidence that it has degraded Iran’s capacity to strike and is moving closer to bringing the conflict to an end. We continue to presume this turmoil will affect commodity markets, with higher oil prices and aluminum prices now also moving up. 

Crypto Access: In a landmark move for digital assets, the Federal Reserve has granted its first master account to a cryptocurrency firm. Kraken Financial secured a limited-purpose master account, providing direct access to the Fedwire Funds Service. This integration allows for significantly faster transfers and serves as a pivotal signal that cryptocurrency is maturing into a mainstream fixture of the global financial system.

US Shale Constraints: US shale drillers are signaling they may struggle to meet additional supply needs in the wake of the recent Middle East turmoil. Their main concern is that the high cost of new projects could undermine competitiveness at a time when the industry is focused on repaying shareholders. New developments are also expected to take time before coming online, limiting the near-term response. Taken together, constrained US supply suggests a prolonged conflict in the Middle East could keep oil prices elevated.

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