JPMorgan Warns of Market Fog as Trade Tensions Cloud 2025

JPMorgan’s strategy team, led by Fabio Bassi, warns that the second half of 2025 will present markets with a difficult balancing act as opposing economic forces play out. On one side, the U.S. faces growing headwinds from trade policy shifts and a fading of prior “exceptionalism” narratives that had supported optimism, increasing the likelihood investors will begin pricing in recessionary risks. On the other, core economic fundamentals still appear resilient: credit imbalances are limited and the direct inflationary impact of tariffs so far looks contained.

Mixed market signals: low volatility vs. high uncertainty

The strategists point to a notable disconnect in current market signals. Implied volatility gauges such as the VIX have retreated sharply, which typically suggests calmer markets and lower perceived downside risk. Yet measures of economic policy uncertainty and geopolitical risk remain elevated. JPMorgan interprets this divergence not as simple complacency but as evidence of market resilience in the face of ongoing uncertainty. Investors are still willing to take risk, supported by favorable corporate fundamentals and pockets of positive sentiment, even while policy and trade risks persist.

Near-term bullish stance on risk assets

In the short term, JPMorgan retains a constructive view on risk assets. A number of influences support this stance: continued technological momentum—especially related to artificial intelligence trends—remains an important growth theme for earnings and investment; higher interest-rate levels can be consistent with stronger returns in certain sectors; and capital markets still display liquidity. Collectively, these factors help explain why risk assets have held up despite mixed macro signals.

Currency and commodity outlook

JPMorgan’s strategists are cautious on the U.S. dollar, expressing a bearish bias. The combination of a less dominant U.S. growth narrative, changing trade dynamics, and a potential shift in monetary policy expectations could weigh on the dollar in the coming months. Conversely, the team is cautious about gold’s near-term prospects. While gold often benefits from geopolitical or inflation-driven uncertainty, the current setup—lower implied volatility, contained inflation effects from tariffs, and expectations for varied central-bank responses—dampens the immediate bullish case for gold.

Recession remains the principal downside risk

The central risk highlighted by the strategy team is a recession scenario triggered by escalating trade frictions. If trade wars intensify and materially erode consumer spending and business investment, the Federal Reserve could be forced into a rapid and aggressive easing cycle to support the economy. Such a turn would compress risk premiums and likely produce sharp shifts across asset classes—undermining the current resilience that has supported valuations.

What investors should watch

• Trade policy developments: Any persistent or escalating tariffs and sanctions that affect consumer prices or corporate margins could shift the outlook rapidly.
• Economic policy uncertainty indicators: Sustained elevation in uncertainty metrics could eventually translate into market stress if it begins to impair real economic activity.
• Inflation readings and Fed communication: Signs that inflation is reaccelerating or, alternatively, that the Fed is preparing to ease sooner than expected, will be key drivers for rates, the dollar, and asset allocation.
• Corporate fundamentals and earnings: Durable earnings growth and contained credit imbalances remain the backbone of short-term market resilience.

Practical implications for portfolios

Given this mixed backdrop, JPMorgan’s strategy suggests a balanced approach: maintain exposure to risk assets that can benefit from technological strength and still-positive fundamentals, while keeping defensive levers available in case policy-driven economic stress materializes. Hedging strategies, diversification across sectors and geographies, and monitoring liquidity profiles can help manage the asymmetric risks between resilient markets today and the possibility of sharper corrections under a recessionary shock.

Conclusion

JPMorgan’s outlook for the remainder of 2025 is one of guarded optimism tempered by vigilance. Markets have shown notable resilience—reflected in lower volatility—even as policy uncertainty persists. Investors should prepare for a variety of outcomes: a continuation of the current risk-on environment supported by AI and solid fundamentals, or a more adverse path where trade-related shocks lead to weakened demand and force substantial Fed easing. Active risk management and close attention to policy and inflation signals will be essential as the second half of 2025 unfolds.