Worst-case scenarios mostly off the table with trade truces: Analyst

The United States’ negotiation of “trade truces” with China and the United Kingdom earlier this week has seen ClearBridge Investments revise its exaggerated recessionary outlook for the US, which was first increased by the investment manager following “worse-than-expected” tariff announcements made last month.

According to commentary on the second quarter of 2025, Jeff Schulze, Director and Head of Economic and Market Strategy at ClearBridge Investments, said there was a 35 per cent probability of a recession over the next 12 months just based on the manager’s recession risk dashboard, which was then increased by a further 15 per cent to 50 per cent probability “due to the worse-than-expected tariff announcement and our perception of risks skewing negative for the economy and markets”.

“Our assessment of the economy begins with the dashboard but incorporates many tools as well as our own judgement and experience, along with that of our colleagues at ClearBridge,” Schulze said in the commentary.

“In speaking with our colleagues over the past few days, three words best encapsulate the recurring themes across those conversations: scepticism, unknowns and diversification.”

However, ClearBridge has now decided to remove the 15 per cent increase in recession probability in the wake of the Trump administration announcing its “trade truces”.

“These catalysts have combined to reduce uncertainty and take many of the worst-case scenarios for the economy and equity markets off the table. As a result, we believe the risk-reward trade-off is coming back into better balance, prompting us to remove the subjective “extra” 15% probability we had added on top of the ClearBridge Recession Risk Dashboard’s ~35% chance of a recession over the next 12 months,” Schulze said.

“The reduction in recessionary odds is likely to be a primary driver for equity markets in the near-term, with cyclicals and small caps building upon the relative strength shown over the last two weeks. However, we believe
much of the good news has already been priced into equities.

“As a result, a period of digestion may play out in the coming months as economic growth slows from a still meaningful increase in effective U.S. tariff rates and the risk of higher inflation keeping the Federal Reserve on the sidelines through the summer.

“Historically, investors have been rewarded for staying the course during periods of heightened uncertainty.

“While the recent rally may temper returns vs. historic norms as uncertainty wanes, we believe the direction of travel for U.S. equities over the coming year is higher as greater clarity on both the trade policy and fiscal front continues to emerge.”