Wealth advisors tracking macroeconomic risks may want to recalibrate near-term recession expectations. Betting markets are lowering the probability of a U.S. downturn following positive developments in U.S.-China trade negotiations.
Data from prediction platforms such as Polymarket and Kalshi show that the odds of a U.S. recession have dropped to 40%, down sharply from 52% just days earlier. The shift comes after an agreement between Washington and Beijing to reduce tariffs for 90 days—a move that has alleviated one of the key overhangs weighing on market and economic sentiment.
The last time the Polymarket recession barometer dipped this low was on April 2, just before the Trump administration announced a new wave of reciprocal tariffs that re-escalated tensions and spooked investors. With the latest truce, market-based forecasts are adjusting to a more constructive macro backdrop.
Equity markets reflected the renewed optimism on Monday, as large-cap indices posted strong gains. Notably, the Russell 2000 Index—often considered a proxy for domestic economic momentum given its concentration in small-cap stocks—rose as much as 4%. Small-cap companies tend to be more vulnerable to cyclical downturns, so their rally suggests improved investor confidence in the economic outlook.
Commodity and bond markets also responded in kind. U.S. crude oil surged 4% from Friday’s close, pricing in stronger global demand expectations amid easing trade headwinds. At the same time, Treasury yields climbed as investors rotated out of risk-off positions in government debt and back into equities and credit markets. This broad-based risk-on shift points to a recalibration in expectations around economic growth and policy.
Rate cut expectations have also shifted. The CME FedWatch Tool now indicates that the market sees the first interest rate reduction from the Federal Reserve taking place in September—delayed from previous projections for July. This adjustment reflects the view that the Fed may now have more time to monitor economic data before acting.
Just last week, Fed officials highlighted elevated uncertainty in the economic outlook, while strategists warned that a recession scenario could force the central bank’s hand. The tariff rollback introduces a material shift in the calculus, potentially extending the current expansion and affording the Fed a longer runway before needing to intervene.
“This removes a major tail risk from the economic outlook,” said Torsten Slok, chief economist at Apollo Global Management, in an interview with Bloomberg TV. “The growth downside risks that everyone was focused on—the fear of a full decoupling in trade between the U.S. and China—are no longer as acute as they seemed just 24 hours ago.”
For advisors, the key takeaway is that trade policy remains a significant macro driver with direct implications for asset allocation and client portfolio positioning. The rapid shift in sentiment underscores the importance of staying nimble, especially in an environment where geopolitical developments can alter recession risk assessments and central bank policy trajectories in real time.
