U.S. markets recorded their worst week since the 2020 pandemic collapse amid rising fears that recently imposed tariffs will drag the economy into a downturn.
Key Takeaways:
- JPMorgan (JPM) is the first major Wall Street firm to forecast a U.S. recession tied to Trump's new tariffs, expecting GDP to shrink in the second half of 2025.
- The firm projects a stagflationary scenario, with core inflation rising to 4.4% and the unemployment rate climbing to 5.3%.
- Rising prices and slowing growth may complicate the Fed’s ability to cut rates aggressively.
- Equity markets responded sharply, with the Nasdaq entering a bear market and the S&P 500 nearing a 20% drawdown from recent highs.
The S&P 500 and SPY both lost nearly 6%, the Dow Jones Industrial Average dropped over 5%, and the Nasdaq Composite plummeted almost 6%, officially entering a bear market.
The trigger: mounting evidence that the economic impact of President Trump's reciprocal tariffs could push the U.S. into recession by late 2025. JPMorgan now expects the economy to contract for two consecutive quarters — a technical recession — with GDP shrinking by 1% in the third quarter and by 0.5% in the fourth. Full-year growth is projected to fall 0.3%.
This marks the first recession call from a major Wall Street institution since the new tariffs were enacted. The firm’s latest note points to a deteriorating macroeconomic picture driven by rising import costs and declining consumer resilience.
Tariffs Accelerate Stagflation Threat, Fed Policy in Crosshairs
The new tariff regime — featuring blanket 10% duties and targeted levies on strategic trade partners — is widely expected to fuel inflation and depress economic activity. JPMorgan’s base case sees core PCE, the Federal Reserve’s preferred inflation metric, rising to 4.4% by year-end 2025. That’s well above the 2.8% reading recorded in February and more than double the Fed's long-term target.
Complicating matters, the report warns that consumers may struggle more with rising prices this time than during the post-pandemic inflation surge. Nominal income growth is slowing, and heightened uncertainty is discouraging spending from savings. As a result, inflation is expected to persist even as demand weakens.
The outlook suggests a stagflationary environment — rising prices coupled with slowing growth — that could tie the Fed’s hands. While markets have priced in multiple rate cuts this year, the persistence of inflation might force the central bank to proceed cautiously. JPMorgan anticipates modest easing, starting with a 25-basis point cut in June and continuing gradually until rates reach 3% by January 2026.
Economic Signals Flash Red as Job Market Softens
Alongside declining output, labor market strain is becoming more evident. The unemployment rate, last measured at 4.2% in March, is projected to rise to 5.3% by the end of 2025. Slower wage growth is expected to follow, potentially tempering inflation pressures — but only after significant labor market damage.
The firm’s analysis underscores the risk that current policy decisions could inadvertently tip the economy into a stagflation cycle. In such a scenario, policymakers face the unenviable task of managing rising prices while supporting a weakening job market.
The market rout reflects these anxieties. Investors are increasingly skeptical of “buy the dip” strategies as fundamentals deteriorate. With the major indexes shedding 6% to 10% in a matter of days, sentiment has shifted sharply from cautious optimism to fear of prolonged economic weakness.
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