Easing Trade Tensions Spur Optimism, Major Brokerages Revise Economic Outlooks
A temporary truce in the trade war between the United States and China has injected a wave of optimism into financial markets, prompting major brokerages to significantly scale back their forecasts for a U.S. recession and revise their expectations for Federal Reserve monetary policy. The agreement, which involves both nations reducing tariffs on each other’s imports, signals a potential de-escalation of global trade tensions that had previously threatened to stifle economic growth.
Goldman Sachs, one of the leading investment banks, took the bold step of reducing its U.S. recession forecast from a concerning 45% to a more palatable 35%. This adjustment marks the first significant downward revision by a major brokerage, reflecting a growing confidence in the U.S. economy’s resilience. Barclays went even further, dismissing recession risks altogether, while J.P. Morgan placed the probability of a recession below the 50% threshold. These revised outlooks underscore a notable shift in sentiment among financial institutions, driven by the easing of trade-related uncertainties.
The catalyst for this newfound optimism was the agreement reached on Monday between the U.S. and China to reduce tariffs on each other’s goods for a period of 90 days. Under the terms of the agreement, the U.S. will lower its tariffs on Chinese goods to 30% from a previously steep 145%, while China will cut its duties on U.S. imports to 10% from 125%. This reciprocal reduction in tariffs is expected to alleviate some of the pressure on businesses and consumers, fostering a more stable and predictable trade environment.
It’s worth noting that concerns about tariffs had previously weighed heavily on the minds of economists and investors alike. Last month, global brokerages had raised their odds of a U.S. and global recession, fearing that escalating tariff disputes would weaken business confidence and slow down economic growth. The imposition of tariffs can lead to higher costs for businesses, which may then be passed on to consumers in the form of higher prices. This can dampen demand and ultimately lead to slower economic growth. A recent CPI report indicated that inflation eased to a four-year low in April as the previous round of tariffs took effect, suggesting the impact of tariffs on prices is a tangible concern.
In addition to lowering its recession forecast, Goldman Sachs also hiked its 2025 U.S. GDP growth forecast by 0.5 percentage points to 1%. This upward revision reflects the brokerage’s belief that the easing of trade tensions will provide a boost to economic activity. With the growth outlook potentially improving, Goldman now expects a total of three rate cuts from the Federal Reserve in 2025 and 2026. Specifically, the brokerage anticipates one reduction in December 2025, instead of its previous projection of July, followed by two more cuts in March and June of the following year.
Interestingly, Goldman had earlier predicted three rate cuts for this year itself, indicating a significant shift in its expectations for the timing of monetary policy easing. The rationale for the revised outlook is that the need for rate cuts has shifted from providing insurance against a potential downturn to normalizing monetary policy as growth remains relatively firm, the unemployment rate rises by less than expected, and the urgency for policy support diminishes.
Barclays and J.P. Morgan have also aligned with Goldman Sachs in forecasting just one Federal Reserve rate cut in December 2025. Previously, Barclays had projected two rate cuts in July and September, while J.P. Morgan had anticipated a single reduction in September. The consensus among these major brokerages is that the Federal Reserve will likely adopt a more cautious approach to easing monetary policy in light of the improved economic outlook.
Furthermore, Goldman Sachs has raised its year-end target for the S&P 500 index .SPX to 6,100 points from 5,900, citing lower tariff and recession risks. The index closed at 5,844.19 points on Monday, suggesting that Goldman expects further gains in the stock market as investors become more confident in the economic outlook.
Citigroup, meanwhile, has pushed its expectations for a Fed rate cut to July from June. This subtle adjustment reflects the nuanced differences in opinion among financial institutions regarding the precise timing of monetary policy easing. While the overall sentiment is one of optimism, there is still some debate about the pace at which the Federal Reserve will begin to lower interest rates.
In summary, the temporary tariff truce between the U.S. and China has had a significant impact on the economic outlook, prompting major brokerages to revise their recession forecasts, adjust their expectations for Federal Reserve policy, and raise their targets for the stock market. While uncertainties remain, the easing of trade tensions has injected a much-needed dose of optimism into the financial markets, suggesting that the U.S. economy may be more resilient than previously feared. However, the long-term impact of the trade agreement will depend on whether the U.S. and China can reach a more comprehensive and lasting resolution to their trade disputes. The current agreement is only temporary, and a failure to reach a more permanent solution could once again raise concerns about the potential for a global economic slowdown.
