Policy

This morning’s weak consumer spending and strong inflation data reinforce our sense that the US economy is heading toward recession.

Stocks will continue to struggle in the second quarter as President Trump tries to implement tariffs. Tax cuts will only temporarily dispel growth fears, if at all. Middle Eastern instability will add oil price surprises to an environment that is looking fairly stagflationary.

In this Second Quarter Strategy Outlook, we explore the major trends that are set to drive financial markets for the rest of 2025 and beyond.

The US economy has never entered a demand-driven recession without labour demand running below labour supply and without the job vacancy rate running below the unemployment rate. Right now though, US labour demand is still running 1.7 million workers above labour supply, and the job vacancy rate is running comfortably above the unemployment rate. This suggests that the labour market is still supply-constrained, and that a demand-driven recession is not imminent. We discuss the investment implications. Plus, more about our ‘trade of the century’: long cotton versus coffee.

An analysis of historical data shows that Ba-rated bonds outperform other corporate credit tiers in the long-run on a risk-adjusted basis. That said, today’s fragile macro environment warrants a more cautious allocation. 

European equities have surged on hopes of a low-inflation boom—but the rally has likely gone too far, too fast. With a pullback now likely, how should investors position themselves over the next 3–6 months?