Wolfe Research has revised its 2025 U.S. economic growth forecast down from 2.2% to 1.6%. This adjustment stems from unexpected policy shifts originating from Washington, including anticipated tariff policies.

Key Insights from Wolfe Research’s Report

Economic Outlook

• Revised Growth Forecast: 1.6% (down from 2.2%)
• Recession Probability: 30-35% (higher than the historical average of 15%)
• Base Case: Despite heightened risks, Wolfe believes the economic cycle remains stable.

Market Pricing for Recession Risk

• S&P 500: Reflecting a 24% chance of recession
• Russell 2000: Indicating a 32% chance of recession
• Homebuilders: Projecting a 33% chance of recession

Note: Historically, risks are priced in significantly when these indicators reach above 40%.

Bond Market Implications

• U.S. Duration: The bond market shows minimal recession risk, suggesting yields may face downward pressure if conditions deteriorate but limited upward potential in stable scenarios.

Investment Implications

With recession fears rising but not dominating equity prices, investors should monitor critical economic indicators. The analysis of inflation trends, interest rates, and GDP growth will be essential for informed decision-making.

As the market sends mixed signals, investors might consider:

• Defensive Stocks: Companies with strong cash flow and stable demand.
• Fixed Income Assets: Increased interest in bonds may occur as uncertainty endures.
• Cyclical Recovery Opportunities: Pay attention to sectors like homebuilders that have already incorporated significant recession risks.