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Recession on Hold – But Global Tensions Remain. For now, a recession has been averted—but the global economy remains under pressure. Three forces are steering today’s markets: inflation, growth, and geopolitical risk.

In recent months, uncertainty has dominated market sentiment. Yet fresh analysis suggests the worst-case scenario has been sidestepped.

Trade and Geopolitics

On the trade front, conditions have stabilized. While tariff levels remain historically elevated—at heights not seen since the 1930s—the feared escalation has not materialized. Legal disputes in the U.S., the prospect of sector-specific tariffs, and the unresolved agreement with China continue to inject uncertainty.

Still, we do not view current trade barriers as exceptionally growth-dampening or materially inflationary.

Geopolitically, the war in Ukraine remains a persistent overhang. It keeps commodity prices elevated and reinforces the political risk premium. A rapid easing of tensions appears unlikely.

Inflation

The global inflation landscape is diverging, with the U.S. and the Eurozone facing distinct risk profiles.

In the United States, headline inflation accelerated in August, climbing to 2.9% year-over-year, driven by higher energy costs. Core inflation remains at 3.1%—a clear sign of persistent, broad-based price pressures.

While moderate growth and subdued wage gains exert some downward force, structural drivers such as reshoring and elevated energy costs hinder a swift return to the 2% target. Inflation expectations remain well-anchored, but absent a sharper cooling of economic activity, a meaningful move toward 2% appears unlikely.

AI-driven productivity and weaker wage dynamics provide a disinflationary counterweight, though not enough to close the gap quickly.

In the Eurozone, the disinflationary trend is far more advanced. With inflation running near 2%, the ECB’s target corridor has been effectively reached. Consumer prices rose 2.1% year-over-year in August, while core inflation held steady at 2.3%.

A decline in service-sector prices signals further easing. The key risks lie in external shocks—particularly energy volatility and potential U.S. tariffs. For now, at 2%, the medium-term outlook is stable and broadly consistent with the ECB’s mandate.

Growth

After a weak start to the year, the economy is showing renewed strength. U.S. GDP growth was revised up to 3.8% for Q2, fueled by surprisingly resilient consumer spending and stronger corporate investment. Forecasts for the current quarter have also been raised steadily, now standing at 3.3%.

The clearest turning point, however, is the rapidly weakening labor market. Unemployment has risen to 4.3%- the highest since 2021 - while job creation has slowed sharply, with prior months revised down substantially. In response, the Federal Reserve resumed its rate-cutting cycle in September.

Given political pressure, upcoming changes in Fed composition, and relatively stable inflation expectations, we expect more rate cuts over the next 15 months than currently signaled.

Combined with fiscal stimulus measures passed this summer, these monetary tailwinds are likely to generate a growth boost at the start of next year.

In the Eurozone, growth remains subdued but resilient. Domestic consumption and rising real wages provide support, while trade weakness and geopolitical uncertainty weigh on prospects. The ECB projects only moderate growth, with external trade likely to remain the region’s Achilles’ heel.

Newly imposed U.S. tariffs, persistent geopolitical risk, and slower global activity are set to drag on exports. The ECB has nudged its GDP forecast for this year up to 1.2%, but lowered its 2026 projection to 1.0%, factoring in an average 13% U.S. tariff. Survey data also point to softer economic activity ahead.

Political risks—such as France’s fiscal position—could further dampen the investment climate. On the positive side, declining inflation gives the ECB scope to ease policy further should conditions deteriorate.

Core Convictions

At Ethenea, bonds, equities, and currencies remain the decisive pillars of portfolio strategy.

Bonds

Credit spreads for corporate bonds remain historically tight. Investment-grade spreads are at 0.79% in the Eurozone and 0.74% in the U.S. High-yield spreads are only about 180 basis points wider.

The last time levels remained below these thresholds for an extended period was before the 2008 financial crisis. We do not expect an imminent widening of spreads.

With recession risks receding, we are selectively adding high-yield exposure in the DEFENSIV strategy, while otherwise maintaining a focus on quality credits and sovereign bonds. French government bonds, in particular, appear attractive given the elevated risk premia.

Our rate outlook has so far been confirmed: both short- and long-term yields appear to have peaked and are gradually trending lower. The duration extension we considered opportunistic has been completed, and at present we see no need for additional duration management through overlays.

Equities

Europe remains stagnant, while U.S. markets continue to notch new all-time highs—driven by a narrow group of large-cap tech names. The broader participation we view as essential for a more sustainable rally has not materialized, despite some early signs. Even so, we expect the Tech/AI rally to continue.

Supported by fiscal and monetary tailwinds and the benefits of ongoing deregulation, we anticipate second-tier names catching up, broadening market participation. In our view, price gains in line with forecasted earnings growth remain realistic.

That said, fading momentum, seasonally challenging patterns, a degree of investor complacency, and a potential “buy the rumor, sell the news” reaction to the Fed’s recent rate cut could well trigger a temporary—and ultimately healthy—consolidation.

Strategically, however, we remain constructive on equities.

FX

We have adjusted our stance on the U.S. dollar for tactical reasons. While our long-term view remains that the dollar will weaken substantially, in the near term we see sufficient justification to raise USD exposure meaningfully.

The trade dispute has de-escalated significantly, U.S. fiscal stimulus is markedly stronger than Europe’s, and the Treasury’s ongoing replenishment of its General Account is draining dollar liquidity from markets.

In the event of an equity market consolidation, we also expect the greenback to show strength, thereby stabilizing the portfolio.

Conclusion

No recession—but no all-clear either. Markets continue to navigate a landscape shaped by inflation risks, geopolitical uncertainty, and shifting monetary policy. For us, this translates into: selective bond positioning, strategic equity optimism, and tactical dollar strength to stabilize portfolios.