Home Insights Macro views Recession risks: Weighing policy uncertainty and market volatility

The U.S. economy faces headwinds from erratic tariff policies, weaker growth forecasts, and stretched market valuations—conditions that have significantly unnerved both markets and investors. However, while tariffs will undoubtably impact U.S. GDP, recession isn’t inevitable. Resilient consumer and corporate balance sheets, along with potential Fed support could stabilize conditions. While the odds of recession have risen, investors should not treat it as the base case—but neither should they dismiss the possibility outright.

The U.S. economy has faced significant challenges recently, leading to downward revisions in growth forecasts and a spike in recession-related web searches. Investors anticipated a growth-friendly administration, but policy announcements, particularly on tariffs, have been harsher and more erratic than expected. The government’s approach, immediately announcing tariffs and Federal job and spending cuts, has not included corresponding pro-growth policies, leaving markets and businesses grappling with disappointment, in addition to uncertainty.

While the economy may slow in the near-term, a recession is by no means assured, with multiple supports either already in play or emerging over the coming months:

  • While the proposed tariffs could knock 1.4% off GDP growth in 2025, on their own, tariffs aren’t currently enough to lead to recession. Furthermore, it’s unlikely that the fully implemented tariff policy will be as severe as threatened.
  • As policy visibility becomes clearer, the Fed will likely deliver a few rate cuts in the second half of 2025, while resilient household and corporate balance sheets should help the economy withstand ongoing headwinds.
  • Despite a disappointing start to the year, policy relief in the form of tax cuts and deregulation would also stabilize the economy, mitigating recession risks.

All told, while the odds of recession have risen, investors shouldn’t treat it as the base case—but neither should they dismiss the possibility outright.

Learn more about why we’re not convinced the U.S. will slip into policy-driven recession.

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