Investing.com -- Wolfe Research has updated its assessment of the U.S. economic outlook, reflecting heightened concerns about a potential recession.
The investment research firm has revised its 2025 growth estimates for the U.S. economy from 2.2% down to 1.6%, attributing the change to unexpected policy developments out of Washington, including earlier-than-anticipated tariff policy.
“Following our revision, we were asked whether this may ultimately end the cycle. Our base case is that the cycle will not end, as the economy remains on firm enough footing,” said Stephanie Roth, chief economist at Wolfe Research.
That being said, the firm sees “elevated recession odds of around 30-35%, roughly double the 15% unconditional probability of recession (likelihood of recession at any given time) but still far from the central case.”
In its analysis of market pricing, Wolfe notes that the S&P 500 has not fully priced in the firm’s recession expectations, while the Russell 2000 and homebuilders’ stocks have done so.
The firm’s probit models, which compare six-month price returns against the likelihood of a recession in the following 12 months, indicate that the S&P 500 is pricing in a 24% chance of a recession, the Russell 2000 a 32% chance, and homebuilders a 33% chance.
“Historically, recession is largely in the price when these types of models are at 40% or greater,” Roth highlighted.
The economist also points out that U.S. duration, a term referring to the sensitivity of bonds to interest rate changes, has factored in relatively little recession risk.
This suggests an asymmetric return profile, meaning that bond yields have more room to decrease if the economy deteriorates but are expected to increase less if the economy remains stable.
In contrast, credit spreads, which measure the difference in yield between corporate bonds and safer government bonds, are still relatively tight, meaning that they are pricing in very low odds of a recession.