Tariffs Trigger Fears of US Recession and Inflation

MSCI models three macro scenarios, including stagflation risk, to assess how US tariffs could impact multi-asset-class portfolios in 2025.

April 30, 2025

Jordan B.

MSCI models the effects of three macro scenarios — stagflation, recession, and an inflationary recession — following the US tariff announcement on April 2.
In the worst-case scenario, US equities could drop nearly 35%, with diversified portfolios losing as much as 19%.
Rising inflation with declining growth could limit the Federal Reserve’s ability to cut rates, increasing the risk of simultaneous losses in both equities and bonds.

Key Takeaways

Following the April 2 announcement of new US tariffs, MSCI has modeled the potential economic and portfolio impacts under three forward-looking macroeconomic scenarios.

These include a mild recession, a period of stagflation, and a combined recession with rising inflation — the most severe outlook, according to MSCI.

Scenario breakdown

Stagflation: Growth flatlines at 0% and inflation climbs by 200 basis points. Rate hikes to fight inflation weigh on long-term economic activity. Equities and bonds both decline due to persistent inflation and limited central bank stimulus.
Recession: A 3% economic contraction is accompanied by easing inflation. The Federal Reserve cuts rates, supporting a quicker recovery. In this scenario, bonds rally and partially offset equity losses.
Recession + High Inflation: The worst-case scenario resembles 1970s-style stagflation, with a 3% drop in GDP and inflation rising 200 basis points. Equity losses reach 34%, while bonds also fall due to rising yields.

The chart shows growth and inflation under the three macro scenarios, along with a baseline. It shows that, in the 4th quarter of 2025, under recession and high inflation, GDP growth turns negative, to about -3%, and inflation spikes to roughly 4.5%.

Portfolio implications

A diversified portfolio of global equities, US bonds, and real estate could lose:

19% in the inflationary recession scenario
13% under stagflation
9% during a typical recession

Why It Matters

With elevated US equity valuations and rising trade tensions, investors are exposed to heightened downside risk — especially if growth stalls while inflation persists. The study highlights how macroeconomic volatility can simultaneously impact traditionally uncorrelated asset classes.

Potential Upside

A reversal back to earlier 2025 market highs could result in a 15% equity recovery, though that outcome depends on policy clarity and a normalization of growth and inflation expectations.

What’s Next

As macro conditions evolve, MSCI emphasizes the need for scenario-based portfolio stress testing — especially in environments where central banks have limited room to respond to dual shocks of inflation and stagnation.