Is the Market Overreacting to a US Recession? And What Does It Mean for Global Assets?

Markets have been on edge, with investors debating whether a US recession is around the corner. The S&P 500 has seen sharp swings, and fears of a slowdown are growing. But is the market overreacting? While sentiment has turned bearish, hard data suggests the US economy isn’t collapsing — at least, not yet.

Last week, the Fed announced in its latest policy meeting that it would keep interest rates unchanged, stating that despite significant declines in market sentiment, hard data shows the US economy remains strong and the risk of recession is not high.

Morgan Stanley has also pointed out that the panic around a US economic downturn might be exaggerated. While the market is pricing in a slowdown, the real economic weakness hasn’t fully materialized in the hard data — yet.

Clearly, both the Fed and Morgan Stanley are on the same page here. Morgan Stanley emphasizes that investors should focus on hard data rather than soft data.

By "hard data," they mean quantifiable and objective economic indicators like industrial production indexes, retail sales, and non-farm employment data. These numbers are telling us that the US economy isn't in a recession just yet.

On the other hand, "soft data," which includes subjective information like consumer confidence and market sentiment, can be influenced by many factors, including the current political climate and policy uncertainties.

For instance, the January retail sales numbers spooked many, but the February rebound suggests the fears were overblown. Morgan Stanley argues that a meaningful slowdown might not show up until another quarter passes, and they’re keeping a close eye on job data for clues.

Morgan Stanley also pointed out that four policy levers are currently shaping the market's view of the US economy: tariffs, fiscal policy, immigration, and deregulation. Tariffs and fiscal policy seem to be tilting more toward downside risks. The tariffs are coming faster and broader, and fiscal policy has turned contractionary due to spending cuts and layoffs. However, immigration is an underestimated factor that could play a crucial role in the labor market, and the market might be overestimating the speed and impact of deregulation on economic growth.

Given the current uncertainties surrounding the US economy, it’s time to consider global asset allocation to diversify risks. According to Huachuang Securities, the key to understanding the US asset adjustment this year lies in whether the risks in the US stock market will trigger an endogenous risk spiral and how sustainable the global asset rebalancing will be.

Risk Spiral refers to a situation where risks in the market gradually intensify, forming a self-reinforcing negative cycle. Essentially, it’s a "bad things leading to more bad things" scenario that increases downward pressure on the market. For example, if investors become pessimistic about the economic outlook and start selling assets, causing the market to fall, more investors may panic and sell, leading to even greater declines.

Huachuang Securities laid out three potential scenarios for US assets and global markets:

1. No Risk Spiral + No Rebalancing → US Outperforms

US equities remain the best-performing asset class, reaffirming "US exceptionalism."

2. Risk Spiral + No Rebalancing → Risk Aversion Rises

If inflation remains high and the Fed continues to hike rates, a US stock market selloff could benefit commodities.
If inflation is mild, US Treasuries could be the key beneficiary.

3. No Risk Spiral + Rebalancing Continues → Europe & Hong Kong Benefit

Global capital flows shift towards Europe and China, benefiting European and Hong Kong stocks, with potential spillover to A-shares.

Right now, the market seems to be pricing in a shift from Scenario 1 to Scenario 3. But the big question is whether we’ll see a full-blown risk-off scenario (Scenario 2) if US equities take a deeper dive.

One of the core risks for the US economy is the potential reversal of the wealth effect. The resilience of the US economy has been largely supported by the excess wealth generated from rising stock and housing prices. If stock prices crash—the Nasdaq falling another 8.9%-31% or the S&P 500 falling another 16%—and this excess wealth disappears, it could trigger a downward spiral in the US economy.

Additionally, the impact of Trump’s "reciprocal tariffs" on the global economy and the US fiscal deficit and debt ceiling issues remain key risks to watch.

On the global allocation front, the attractiveness of European and Chinese stocks is on the rise. If Europe’s fiscal stimulus and China’s tech industry continue to gain momentum, it could draw more global funds away from the US. This shift is already evident in the recent outflows from US stocks to other markets.

My Take

I think the market is right to be cautious, but the panic might be premature. The US economy is slowing, but it’s not collapsing—yet. The hard data still shows resilience, and while risks are mounting (tariffs, fiscal tightening, immigration), we’re not in a full-blown crisis. However, the uncertainties surrounding policies, especially immigration and tariffs, are real and could have a significant impact.

If US equities wobble further, non-US markets like Europe and Hong Kong could benefit. For investors, this is a time to stay nimble. If you’re heavily invested in US stocks, you might want to keep an eye on those policy developments and consider diversifying your portfolio.

In the short term, staying nimble is key. Watch hard data rather than sentiment-driven noise, and keep an eye on upcoming policy shifts. If US economic risks intensify, diversifying into European and Chinese markets might not just be a hedge — it could be an opportunity. #stockmarket #recession #globalmarket