Worst-case scenarios mostly off the table with | Australian Markets

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 elevated by the investment supervisor following “worse-than-expected” tariff bulletins made final month.

According to commentary on the second quarter of 2025, Jeff Schulze, Director and Head of Economic and Market Strategy at ClearBridge Investments, stated there was a 35 per cent probability of a recession over the subsequent 12 months simply primarily based on the supervisor’s recession risk dashboard, which was then elevated by a additional 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 stated 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 determined to take away the 15 per cent increase in recession probability in the wake of the Trump administration asserting 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 prime of the ClearBridge Recession Risk Dashboard’s ~35% likelihood of a recession over the subsequent 12 months,” Schulze stated.

“The discount in recessionary odds is more likely to be a major driver for equity markets in the near-term, with cyclicals and small caps building upon the relative power proven over the final two weeks. However, we imagine
a lot of the good news has already been priced into equities.

“As a consequence, a period of digestion might play out in the coming months as financial growth slows from a nonetheless significant increase in efficient U.S. tariff charges and the risk of increased inflation conserving the Federal Reserve on the sidelines by means of the summer season.

“Historically, buyers have been rewarded for staying the course during durations 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.”