Ken Rogoff, former chief economist at the International Monetary Fund and current Harvard professor, is warning that equity markets may be underestimating the likelihood of a U.S. recession by the end of the summer.
Rogoff attributes the rising risk largely to President Donald Trump’s tariff policies, which he believes have created unnecessary economic uncertainty and are steering the country toward a downturn.
In an interview this week, Rogoff described a mild recession as the most probable outcome for the U.S. economy in the months ahead, contingent on whether Trump moderates or escalates his ongoing trade disputes. "If he sticks with his tariffs, with his chaos policy, 100% we will get a recession," Rogoff said. “The question is how far he retreats.”
Despite these downside risks, Rogoff noted that equity markets are behaving as if a positive resolution is already in the works. Investors appear to be assuming that the more aggressive tariff threats will be withdrawn or softened in the near term.
“The market seems to be discounting the most extreme outcomes,” Rogoff said, referencing exemptions that have already been granted for certain sectors, including technology and autos. "But if that optimism proves misplaced, equity valuations could fall sharply."
Rogoff pointed to the disconnect between market pricing and macroeconomic fundamentals. While the S&P 500 had recovered from its early April sell-off after Trump paused some of the announced tariffs, it still closed nearly 9% below its February 19 all-time high.
“If even a 30% chance of recession is real,” Rogoff said, “stocks still look overvalued. Surely they would fall much more if we actually enter a recession.”
He also observed that a 90-day pause on Trump’s planned reciprocal tariffs—measures beyond the already-imposed 10% levies on many imported goods—is set to expire in July. “We’ll have more clarity by the end of the summer,” Rogoff said. “If the full scope of tariffs is implemented, it’s difficult to envision a scenario where we avoid a recession.”
For advisors and investment professionals, Rogoff’s cautionary stance highlights the importance of preparing portfolios for a range of macroeconomic outcomes. The consensus market view currently assumes a relatively benign resolution to the trade standoff, but Rogoff suggests that assumption may be overly optimistic. “If investors believed Trump would stick to his current tariff trajectory, the market would be significantly lower,” he said.
One of Rogoff’s key recommendations is for investors to rethink their domestic bias and consider broader geographic diversification. The longstanding U.S. exceptionalism trade—the thesis that U.S. equities will consistently outperform global markets—may be losing credibility in a world where the economic fallout from tariffs disproportionately impacts U.S. businesses.
“There’s an unusually strong case for international diversification at the moment,” Rogoff argued. “There may be downside in Europe and other markets, but likely less than in the U.S., where valuations are still well above global averages.”
This call for international diversification is underpinned by structural concerns about the dollar’s global role. In his recent book, Our Dollar, Your Problem, Rogoff contends that the dominance of the U.S. dollar in global trade and financial systems has been eroding since 2015. He argues that the weakening of the dollar’s global standing is accelerating due to inconsistent domestic policy and an increasingly unilateral approach to international economic relations.
Wealth managers and RIAs may find particular relevance in Rogoff’s assessment, especially those overseeing globally diversified portfolios or advising clients on macro-sensitive allocations. With the U.S. equity market still priced for a soft-landing scenario, any deviation toward a more adversarial or prolonged trade war could amplify downside risks for domestic-focused portfolios.
Rogoff’s observations also align with a broader narrative that has emerged among macro strategists: the fragility of U.S. economic outperformance. For years, U.S. assets have commanded a valuation premium thanks to superior growth, innovation, and monetary policy credibility.
That premium may now be under pressure. “It’s not just that other markets might be cheaper,” Rogoff noted. “It’s that the assumptions justifying U.S. valuations are increasingly being challenged by policy volatility.”
Advisors concerned about short- to medium-term risk should pay attention to July’s tariff deadline, which could serve as a key catalyst for broader market repricing.
If the administration opts to renew or expand import duties, it could trigger a reassessment of earnings estimates and GDP forecasts. Conversely, a retreat from tariff escalation might provide temporary relief—but Rogoff cautions that any such reprieve may not fully reverse the damage already done to business confidence and capital expenditures.
“Trade wars are hard to calibrate,” he said. “They have lingering effects even after the immediate policy threat subsides.”
While Rogoff stops short of forecasting a deep recession, he maintains that even a modest contraction could result in equity price adjustments of 15% to 25%, given current valuations. “Markets seem fairly complacent about this possibility,” he said. “A correction could come quickly if recession odds increase.”
For RIAs, this reinforces the importance of stress testing portfolios and considering strategies that perform well in stagflationary or risk-off environments. Hedged equity, international exposure, and uncorrelated alternatives may warrant closer evaluation as trade and monetary policy uncertainty persists.
Rogoff’s remarks also echo themes emerging from recent IMF and World Bank assessments, which have highlighted elevated global risks tied to protectionism and capital flow disruptions. As a former IMF chief economist, Rogoff has long been critical of policy unpredictability and its impact on investor confidence. His analysis adds a layer of macro insight for advisors weighing tactical shifts in equity exposure or fixed income duration.
Another implication for wealth advisors lies in client communication. Rogoff’s baseline recession call, coupled with his critique of market pricing, presents an opportunity to proactively manage client expectations around volatility and potential drawdowns.
Rather than reacting to headlines, advisors can contextualize Rogoff’s warning as part of a broader conversation on portfolio resilience, downside protection, and the benefits of global diversification.
In the context of behavioral finance, market optimism in the face of rising risks could also signal confirmation bias among investors—underestimating negative outcomes that challenge the current bull thesis.
Advisors who can objectively assess these risks may be better positioned to guide client portfolios through a potentially turbulent second half of the year.
As always, asset allocation decisions should be driven by long-term objectives, not short-term noise. However, Rogoff’s assessment offers a valuable contrarian perspective at a time when market sentiment appears largely disconnected from policy realities.
Whether or not a recession materializes by summer’s end, the divergence between economic risks and equity valuations is growing harder to ignore.
