Morgan Stanley has revised its expectations for growth, pointing to a weaker outlook as rising costs take their toll.
Impact Of Tariffs And Labour Market Constraints
Tariffs and a labour market that remains tight are putting pressure on prices, pushing inflation higher. That inflationary pressure, according to their analysis, will be particularly pronounced in goods, leading to a quicker rebound in that category.
The new estimates show a GDP growth rate of 1.5% for 2025, scaled back from their prior expectation of 1.9%. The forecast for 2026 has also been adjusted downward, now standing at 1.2% instead of 1.3%. Alongside this, the firm maintains that rate cuts will not arrive as quickly as many anticipate. A single 25 basis point reduction is pencilled in for June 2025, followed by a further two cuts in 2026. Market pricing currently suggests a faster pace, meaning expectations will need to adjust.
Goldman Sachs has also shifted its stance, cutting its 2025 GDP growth forecast to 1.7% from 2.2%. The firm has raised the likelihood of a US recession to 20%, increasing from the previous estimate of 15%. A tempered outlook is becoming a common thread across institutions, reinforcing the idea that growth assumptions from earlier this year now look too optimistic.
For those assessing potential market moves, it will be necessary to weigh the impact of these shifts against current pricing. If central bank easing does arrive later than anticipated, interest rate-sensitive assets will need to adjust accordingly. Any misaligned expectations could lead to repositioning in interest rate futures, affecting short-term volatility.
Inflation Trends And Market Adjustments
Beyond monetary policy, inflation trends and their effect on various sectors will need close attention. If goods prices rise faster than most predict, adjustments in inflation-hedging strategies may follow. Given that both firms now anticipate slower growth, this also raises questions about equity markets, particularly sectors more exposed to economic cycles. Slower GDP expansion could dampen earnings forecasts, affecting valuations in the months ahead.
The assessments from Morgan Stanley and Goldman Sachs highlight a mix of pressures that will continue shaping near-term trends. With recession odds creeping higher and inflation remaining a challenge, positioning will need to reflect the risk of delayed policy action. Keeping an eye on shifting consensus figures will be key, especially as expectations realign with incoming economic data.
