Investing.com -- President Trump’s trade policies and the tech sector’s long-anticipated correction have triggered a significant market selloff, raising concerns about a potential U.S. recession.
The key question is whether the downturn will be severe enough to meet recession criteria or if the economy will instead face stagflation.
According to BCA Research, recession remains the more likely outcome.
“Trump’s disruptive policies have combined with the selloff in the overstretched tech sector to produce a major equity pullback – and potentially a bear market and recession,” said BCA strategists led by Matt Gertken.
But while long-term Treasury yields have declined, they have not yet fallen below the 4% level that would signal a clear recession warning. Still, widening credit spreads and higher market volatility signal growing investor concerns.
The administration’s tariff policies have played a pivotal role. The U.S. consumer had already depleted excess savings, and the labor market was cooling before tariffs were fully implemented.
BCA notes that global investors had underestimated Trump’s willingness to follow through with aggressive trade measures, and now that he has refused to rule out a recession, markets have adjusted accordingly.
The administration’s stance on Canada is also contributing to near-term uncertainty, as the White House is unlikely to make concessions in ongoing trade disputes.
Fiscal policy remains a key variable. U.S. Congress is expected to approve additional stimulus of around 1.2% of GDP over several years, with much of the tax relief frontloaded to help offset economic drag from tariffs.
“This is a small amount when divided over ten years, but it would be frontloaded to give consumers some fuel to shake off the tariff blowback in 2025-26. Spending cuts will be backloaded,” the strategists explained.
Europe and China are also responding with stimulus—1% of GDP from Europe and 3.8% of GDP from China this year—but these measures may not be enough to stabilize global growth.
Another major driver is oil. BCA argues that stagflation, rather than a return to economic expansion, would be the alternative to recession.
A key missing piece of the stagflation puzzle has been an oil shock, which the firm now expects later this year due to geopolitical supply disruptions.
“Oil prices are likely to have a higher floor than expected due to geopolitical oil supply disruptions later this year,” BCA’s team continued. If energy costs rise sharply, inflation could persist even as economic growth slows, creating a stagflationary backdrop.
BCA advises investors to “stay defensive as the tech selloff, growth scare, tariff implementation, and U.S. and global policy uncertainty come together.”
“The market is recognizing elevated recession odds,” the firm emphasized.
In the stock market, BCA favors energy stocks over cyclicals, namely technology.