A recent report by JP Morgan estimated the probability of a recession at 40%, up from 30% at the start of the year, warning that US policy was “moving away from growth”.
Meanwhile, Mark Zandi, chief economist at Moody’s Analytics, raised recession risks from 15% to 35% due to tariffs. As 2025 begins, uncertainties are mounting, leading to risk aversion in financial markets.
In this fragile context, where the threat of an economic slowdown looms, investors must anticipate possible scenarios and adjust their stock portfolios accordingly.
Numerous uncertainties and economic indicators to monitor
After a strong 2024 for US financial markets, with a 25% growth in the Nasdaq 100 and S&P 500 driven by the Magnificent 7 (+67%) and enthusiasm for Artificial Intelligence, could 2025 mark a reversal?
Indeed, since the start of the new year and President Trump’s inauguration, several uncertainties have emerged, sparking fears of a significant economic slowdown. Inflation, economic growth, household consumption, employment, and monetary policy are under close scrutiny by investors, with signs of weakness appearing.
The trade war triggered by Trump, which imposes strict protectionism with significant tariffs on trading partners, does not favour lower inflation. If this trade war intensifies, inflation could accelerate, eroding household purchasing power and making a financial market rebound harder. However, inflation might be offset by a slowdown in the US economy.
US GDP growth forecasts have been downgraded by analysts; for example, Goldman Sachs revised its projections from 2.2% to 1.7% for 2025. Consequently, consumers are cutting spending, manufacturing is slowing, and business confidence is declining. Interest rates remain high (4.50%), fuelling fears of an economic slowdown that could weigh on financial market performance.
The monetary policies of central banks, the Fed and ECB, play a decisive role. Monetary easing would increase liquidity in the financial system and alleviate pressure on risk assets. However, no rate cuts are expected this quarter, and the Fed faces a delicate balancing act. Cutting rates too soon risks reigniting inflation, while waiting too long could stifle the economy. A stagflation scenario (weak growth and inflation) remains possible.
For now, investors expect one or two rate cuts this year, but with so much uncertainty, timing remains unclear. The central bank will likely adopt a cautious “wait-and-see” approach, guided by each new data release.
Finally, geopolitical uncertainties linked to the war in Ukraine and how it might end add another layer of instability and concern for investors.
Amid this backdrop, US markets are undergoing a correction, sparking fears of a deeper downturn. The S&P 500 and Nasdaq 100 recently fell over 10% from their peaks. Tesla has lost 50% of its value in 3 months, and the concentration of the Magnificent 7 makes indices vulnerable and increases risks. That said, these indices remain in a medium- to long-term upward trend.
This uncertain environment could lead to a period of volatility. Equities and bonds may fluctuate with economic news or unexpected policy decisions. This presents opportunities for active traders, but long-term investors should focus on diversification—not just across regions, but also asset classes, sectors, and investment styles.
As always, avoid impulsive reactions to short-term swings.
Also read: Should you sell or hold Tesla shares in 2025?
Possible scenarios for 2025
Scenario 1: A sharp economic slowdown takes hold
- Potential causes: monetary tightening due to the trade war driving inflation, reduced consumption, financial crises.
- Market impact: equity declines, rising bonds and gold.
- Adapted strategy: focus on defensive sectors (energy, healthcare, consumer staples, telecoms), banks, bonds, and international diversification.
Scenario 2: An economic recovery gains momentum
- Key drivers: rate cuts, rebounding consumption, technological innovations.
- Market impact: equity rally, renewed interest in growth stocks.
- Adapted strategy: increase exposure to equities, cyclical sectors, and tech stocks.
Scenario 3: Volatile and uncertain markets
- Possible causes: political instability, persistent inflation, sector-specific crises.
- Impact: sharp market swings between gains and losses.
- Adapted strategy: balanced approach with geographical diversification (US, Europe, emerging markets) and active risk management.
What strategy should you adopt for your portfolio?
Adjust asset allocation based on risk appetite
- Defensive vs aggressive portfolio
- Importance of sectoral and geographical diversification
- Holding cash during uncertain times
Assets to prioritise based on context
- Defensive stocks (healthcare, consumer staples).
- Quality, undervalued European “value” stocks
- Defence and aerospace sector stocks (BAE Systems, Rolls-Royce, QinetiQ, Rheinmetall…)
- Government and high-quality corporate bonds
- Safe-haven assets (gold, cash)
Mistakes to avoid during uncertain periods
- Panic selling or impulsive buying.
- Neglecting risk management and diversification.
- Blindly following trends without analysis.
Conclusion
In 2025, markets may swing between recovery and recession, requiring a flexible investment approach. If recovery prevails, growth stocks and high-potential sectors could shine. In a slowdown, defensive assets like gold, bonds, or safe-haven stocks may offer better protection.
Regardless of the economic path, portfolio diversification and rigorous risk management remain key. Monitoring macroeconomic indicators, adjusting positions based on central bank decisions, and staying alert to geopolitical tensions will help navigate uncertainty.
Finally, a disciplined, rational approach is essential: avoid impulsive reactions to volatility and rely on proven strategies to make stronger investment decisions in 2025.
