MacroResearchBoard

U.S. Scenarios: Base Case, Benign Or Bearish? – May 12, 2025

A just-published report provided an update on our investment stance, noting that the recent easing in tensions over U.S. tariffs had reduced some economic downside risks, providing a lift to risk asset prices. However, the trade war is far from over and economic uncertainty will remain elevated.

The report provided a scenario analysis as a framework for developing and modifying strategy as U.S. policy evolves. At this point, we view the three most likely scenarios and their probabilities to be:

• Base Case: Bilateral negotiations resulting in 10% across-the-board U.S. tariffs. The U.S. economy slows but avoids recession; growth elsewhere slows only marginally. U.S. import growth weakens from 15% pre-tariff to near 0%. Scenario probability ≈ 50%.
• Benign: Multiple country deals, with emphasis shifting to a multi-year gradual ramp up in U.S. tariffs, giving U.S. importers and non-U.S. exporters time to adjust supply chains. The U.S. economy stays resilient, while the rest of the world gradually firms. U.S. import growth cools to a 5-10% clip. Scenario probability ≈ 20%.
• Bearish: The tariff war escalates as many bilateral country negotiations are dragged out and tit-for-tat tariffs are applied in select cases; negotiations between China and the U.S. are antagonistic and U.S. tariffs on China remain very high. U.S. imports decline 10%, U.S. corporate confidence deteriorates and capital spending is put on hold. The U.S. slides into a mild recession, with fallout for the rest of the world. Scenario probability ≈ 30%.

It is noteworthy that the probabilities have already shifted materially when President Trump was forced to pivot because of the mini-riot in the Treasury and equity markets, and may yet move meaningfully again in the next few weeks. Stay tuned.