Tariff Shock to Weigh on U.S. Growth: JPMorgan (JPM) Sees 1.3% GDP, 40% Recession Risk

JPMorgan (JPM) analysts warn that ramped-up U.S. tariffs are set to unleash a “stagflationary impulse,” pushing economic growth down to 1.3% in 2025 from earlier forecasts of 2%, while rekindling inflationary pressures. The bank now sees a 40% chance of recession in the back half of next year as higher import levies bite into corporate margins and consumer purchasing power. They project U.S. GDP growth of just 1.3% this year, trimmed from 2%, attributing the downgrade to negative shocks from trade barriers. The combination of sluggish output and persistent price gains echoes the 1970s malaise, raising the specter of stagflation and elevating recession risks well above historical averages. Market Overview:

• Recession probability at 40% in H2 2025;
• GDP growth trimmed to 1.3% from 2%;
• Tariffs cited as primary drag on activity.

Key Points:

• Stagflationary impulse raises inflation fears;
• Term premium on U.S. Treasuries likely to widen by 40–50 bps;
• Fed cuts expected later, with 100 bps by spring 2026.

Looking Ahead:

• Bearish on the dollar amid slower U.S. growth;
• Tech and AI sectors to underpin equity strength;
• Foreign demand for Treasuries to wane as debt swells.

Bull Case:

• Despite downgraded GDP growth and elevated recession risks, JPMorgan remains constructive on U.S. equities, expecting strong fundamentals in the Tech and AI sectors to drive markets toward new highs.
• Tariffs and stagflation concerns are largely priced into the market, and any signs of stabilization or policy relief could trigger a rebound in sentiment and asset prices.
• Tech and AI sectors continue to demonstrate robust earnings growth and innovation, providing a resilient core for equity market performance even amid broader economic headwinds.
• While Treasury yields are expected to remain elevated, clarity on Fed rate cuts by spring 2026 could support a rally in risk assets as investors anticipate easier policy ahead.
• Dollar weakness could benefit U.S. exporters and multinational corporations, offsetting some of the drag from higher import costs.
• The market’s focus on AI and tech leadership suggests that select sectors will continue to attract investment and outperform, even as the broader economy slows.

Bear Case:

• JPMorgan analysts warn that ramped-up U.S. tariffs will push economic growth down to just 1.3% in 2025 and rekindle inflationary pressures, raising the specter of stagflation and a 40% chance of recession in the second half of the year.
• Higher import levies are expected to bite into corporate margins and consumer purchasing power, further dampening economic activity and increasing the risk of a prolonged slowdown.
• Term premiums on U.S. Treasuries are likely to widen by 40–50 basis points as foreign, Fed, and bank demand for government debt wanes, increasing borrowing costs for businesses and households.
• Fed rate cuts are expected to come later than previously anticipated, with only 100 basis points of easing projected by spring 2026, leaving markets exposed to tighter financial conditions for longer.
• JPMorgan is bearish on the dollar amid slower U.S. growth, which could amplify inflationary pressures by raising the cost of imports and further straining consumer budgets.
• While tech and AI sectors are expected to underpin equity strength, any major policy or geopolitical shocks could quickly undermine market confidence and trigger a broader sell-off.

JPMorgan’s strategists forecast two-year Treasury yields (TLT) around 3.5% and 10-year yields near 4.35% by year-end, even as term premiums climb. They foresee foreign, Fed and bank demand ebbing in a larger debt market, increasing borrowing costs over time. Despite policy uncertainty, the bank remains constructive on U.S. equities, expecting Tech and AI fundamentals to drive markets toward new highs—provided no major policy or geopolitical shocks intervene.

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