US soft patch won’t “metastasise” into recession: ClearBridge

Yasmine Raso

Senior Journalist

14 July 2025

New analysis from ClearBridge Investments has determined the US economy will essentially avoid a recession, riding the wave of easing policy pressure and markets heading back into positive territory.

Jeffrey Schulze, Director and Head of Economic and Market Strategy at the Franklin Templeton specialist manager, said the economy may run through a “soft patch in the interim” but this won’t effectively “metastasise” into a recession.

According to Schulze, the three key reasons behind this adjusted outlook include:

• The introduction of the One Big Beautiful Bill Act (OBBB) and further forecasted rate cuts by the US Federal Reserve would “outweigh” the negative impacts of tariffs
• The ability of investors to “look past the noise” of a potential second-half economic slowdown, as evidenced by ClearBridge’s own US Recession Risk Indicators; and
• The buying opportunities for long-term investors that arise from “near-term pullbacks” in equity markets.

“In the coming quarters, tariff distortions should give way to tailwinds from positive policy forces, namely the tax cuts included in the OBBB,” Schulze said.

“The legislation is expected to generate a peak fiscal impulse of approximately 1% of GDP in 2026, on top of the extension of the 2017 Tax Cuts and Jobs Act tax cuts. Corporate tax filing season actually occurs in the fall (September 15 corporate deadline) and many of the OBBB corporate tax provisions are retroactive to January 1, meaning the corporate tax impacts are likely to begin appearing this quarter. These include expensing for factories and a larger R&D credit, both of which should help spur economic growth.”

“Individual tax cuts should begin to be felt by early fall as withholding tables are adjusted for no taxes on overtime or tips, while the bulk of the impact will occur in the first half of 2026 when individuals complete their tax returns. The health of the labour market is likely to remain a key focal point in coming quarters as investors assess the health of the US economy and the prospect for Fed rate cuts.

“We believe investors should look past the noise emanating from this typical summer swoon. A drop below 100,000 (growth in non-farm payrolls) would have been viewed as a negative as recently as a few months ago, but headwinds from DOGE-related layoffs, an aging population and reduced immigration flow all suggest that job creation below 100,000 may become the ‘new normal’.

“A slowing pace of job gains isn’t atypical as an economic cycle matures, but at the same time it also doesn’t mean that the cycle has ended.”

According to the latest 30 June figures of ClearBridge’s Recession Risk Dashboard, the yield curve and truck shipment indicators both improved in three months from 31 March.

“While many investors remain on the sidelines waiting for a pullback, history shows the S&P 500 has delivered returns of 6.4%, 10.5% and 16.4% in the three, six and 12 months after the previous 10 best 50-day rallies since 1950 (the current rally ranks tenth), suggesting further upside in the months to come if history is a guide,” Schulze said.

“Although the next several months may see a period of consolidation for US equities, the longer-term outlook looks more favourable. The timing distortions and “air pocket” from tariffs should give way to an improved fiscal impulse that should help power economic reacceleration into 2026. We believe these competing policy push-pull forces are on balance improving for equity investors and could be amplified by Fed rate cuts later in the year.

“As a result, should volatility may emerge in the coming months, we believe long-term investors will be best served by buying into any weakness.”