Deficit Spending Helped Juice U.S. Equities. Will it Continue?

Federal deficit spending was a likely catalyst for U.S. equity markets.

We think federal deficit spending has played a significant role in supporting U.S. equities over the past 15 years. Prior to the Global Financial Crisis (GFC), federal deficits typically averaged around 2.3% of GDP. However, following the GFC and then later in response to the COVID-19 pandemic, deficits increased dramatically, coinciding with and preceding relatively extended periods of strong equity market performance. With current fiscal constraints, however, there is uncertainty about whether this level of support can continue and what implications that might have for future equity performance.

Increased Deficit Spending Helped Juice S&P 500 Performance

Source: Federal Reserve Bank of St. Louis “FRED”. Past performance is no guarantee of future results. An index is unmanaged and unavailable for direct investment.

Germany set to abandon a decade of austerity in favor of fiscal excess.

In Europe, fiscal policy has followed a similar trajectory in some respects. For many years, Western-democracies maintained deficit levels near 2% of GDP in line with neoliberal economic norms. However, the eurozone crisis prompted tighter fiscal rules, most notably in Germany, where a constitutional amendment in 2009 introduced the so-called "debt brake," requiring fiscal surpluses. This rule was temporarily relaxed during the pandemic, allowing for moderate deficits.

More recently, geopolitical developments and security concerns have driven significant shifts in European fiscal policy. Germany recently amended its constitution to remove the debt brake and permit higher spending - a structural change that is expected to increase government expenditures to 5-6% of GDP split between defense and infrastructure. This marks a notable departure from previous fiscal restraint and could be a tailwind for European equities.

Is this the start of European fiscal excess?

Source: Finaeon, Eurostat, Haver Analytics, Deutsche Bank. As of March 2025. 

 Past performance does not guarantee future results. Investing in securities involves risk, including the possibility of the loss of principal.

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