Global Markets Health Check: Relief or Risk?

Archive edition · Market data and company circumstances reflect 3 May 2025, when this newsletter was sent.

Where Do Global Markets Go From Here?

Global markets have endured a challenging period over the last year, shaken by trade disputes, policy uncertainty, and concerns about economic slowdown. From sharp equity sell-offs to rising volatility and defensive asset outperformance, investors have navigated a turbulent environment defined by shifting narratives.

However, the question on everyone’s mind now is whether we’ve turned a corner. Are we finally beyond the worst of the market distress, or are we merely experiencing a temporary lull before fresh risks emerge?

Recent developments — including a tentative easing of trade policy tensions, partial market rebounds, and a recalibration of growth expectations — have sparked cautious optimism. Yet, beneath the surface, there remain significant risks that could quickly derail this fragile recovery, particularly if recessionary dynamics begin to take hold.

In this newsletter, we unpack both sides of this debate. First, we'll examine the factors fueling hopes that the markets may have established a floor. Then, we'll explore the reasons why the situation could deteriorate rapidly and what signs investors should watch for in the weeks ahead.

Why Markets Might Be Finding Their Footing?

While economic data continues to paint a mixed picture, several indicators suggest that the worst market pressures may have peaked. Mentioned below are the key reasons why markets might be stabilizing and what could fuel a sustained recovery.

1.1.1 Trade Tensions Are Easing — Slightly, but Meaningfully

The most prominent headwind for risk assets over the past year has been the escalation of trade disputes, particularly between the United States and China. Tariffs, retaliatory measures, and policy uncertainty contributed heavily to market volatility and risk-off sentiment.

In recent weeks, however, we’ve witnessed the first signs of de-escalation. A temporary 90-day halt on new tariffs, along with selective product exemptions and a renewed willingness for dialogue, has introduced a degree of stability into what was a highly unpredictable situation.

Although these are modest shifts, they mark a significant departure from the peak of trade-related tensions.

Historically, markets have responded positively when clear causes of market distress begin to moderate.

This pattern may be playing out again, with equity indices bouncing off their early April lows and implied volatility easing from panic levels.

1.1.2 Moving Away from Recession Fears

Another factor underpinning the recovery in asset prices is the market’s gradual alignment with a non-recessionary economic outlook. While risks remain elevated, recent market pricing appears to reflect a baseline scenario of continued, albeit slower, growth rather than an outright contraction.

Additionally, with the probability of a U.S. recession over the next year estimated at around 45%, markets appear to be pricing in a middle path rather than a deep economic slump — a sign of measured, if fragile, confidence.

1.1.3 As Policy Shocks Peak, History Points to Market Stability

Looking back at previous market corrections, history suggests that markets often find a floor shortly after the primary cause of stress reaches its peak. Whether driven by interest rate hikes, oil price shocks, or geopolitical crises, once markets perceive a limit to the downside risk, a bottoming process usually follows.

Trade policy uncertainty may have peaked.

In the current case, the peak in trade policy uncertainty seems to have passed, removing one of the largest sources of immediate market risk. Even if economic data weakens further, the ability to quantify and contextualize potential damage allows markets to begin stabilizing and gradually discounting future recovery prospects.

1.1.4 Positioning and Valuations Are Less Stretched

One overlooked element of the recent rebound is the improved risk-reward setup in financial markets. Following a 19% drawdown from prior highs, valuations in several key equity markets have moved closer to their historical averages.

While not yet screaming bargains, the combination of lower prices, cautious positioning, and reduced speculative excesses provides a firmer foundation for stability. Defensive sectors have outperformed, risk aversion spiked, and cash levels increased — all of which historically precede more resilient market phases.

1.1.5 Policy Flexibility Remains a Backstop

Finally, policymakers retain room to maneuver if downside risks escalate. Central banks, while cautious about stoking inflation, have signaled readiness to adjust monetary settings if necessary. Similarly, fiscal authorities in several economies are exploring contingency measures to support demand should conditions deteriorate.

This latent policy flexibility serves as a critical safety net, reducing the likelihood of a self-reinforcing downturn. Markets tend to stabilize when investors are confident that authorities can and will act if required — a dynamic that seems to be slowly returning.

Why Things Could Take a Turn for the Worse?

Despite these constructive signals, it would be premature to declare victory over market instability. Beneath the surface, several risks remain capable of reigniting volatility and derailing the nascent recovery. Here’s what could go wrong.

1.2.1 The Tariff Reprieve Is Modest and Fragile

While recent trade developments have been positive, they fall well short of the comprehensive reversals seen in previous market recoveries. Past episodes of policy-driven corrections typically saw aggressive pivots.

In contrast, the current tariff pause is limited in scope and vulnerable to reversal. Talks remain precarious, and geopolitical tensions continue to simmer. A single adverse headline could reignite market fears, particularly if negotiations stall or new disputes emerge in other areas like technology or energy.

1.2.2 Rising Unemployment Could Amplify Market Risks

One of the most powerful — and underappreciated — variables influencing market behavior is the labor market. When job losses and asset price declines coincide, risk aversion rises sharply as households and investors simultaneously face income insecurity and portfolio losses.

So far, employment data has held up reasonably well, but signs of softening are emerging. Should unemployment rates begin to rise meaningfully, consumption could weaken, corporate earnings would face pressure, and defensive behavior could intensify — all of which would strain equity valuations and credit markets.

Historically, markets struggle to maintain stability when labor markets turn decisively weaker, making this a critical data point to monitor in the months ahead.

1.2.3 Is a 19% Dip Enough to Mark the Bottom?

Another reason for caution is the relatively modest size of the recent market correction. At 19% peak-to-trough, the decline is significant but mild compared to past recessionary bear markets, which have typically featured drops of 25-35% or more.

S&P 500 peak-to-trough drawdowns of more than 15% since 1950.

Moreover, previous corrections of this scale often occurred after economic weakness was already evident. In this case, the market bottomed before clear signs of economic contraction emerged — a historically unusual pattern that raises questions about the durability of the recovery.

If economic data deteriorates meaningfully from here, the risk is that markets will need to adjust further to fully price in weaker growth and earnings expectations.

1.2.4 Fragile Market Psychology & Volatility Risks Persist

Investor sentiment remains fragile, and while implied volatility has receded from its peaks, it remains elevated by historical standards.

Sharp reversals in market psychology can occur swiftly, especially if negative news surprises investors already positioned for a recovery.

The asymmetry of risks — where the downside in the event of negative surprises may exceed the upside potential of positive ones — warrants ongoing caution. Investors should be prepared for volatility spikes and maintain hedging strategies where appropriate.

A Delicate Balance

Global markets find themselves at a critical juncture. The easing of trade tensions, improved sentiment alignment, and historical patterns of market behavior suggest that we may have seen the worst of the recent market turmoil. However, significant risks remain, particularly if economic conditions deteriorate and policy responses prove insufficient.

For investors, this is a time for balance. Selectively adding risk exposure where valuations and fundamentals support it makes sense, but equally important is maintaining downside protection and liquidity to navigate potential setbacks.

Ultimately, whether markets can sustain their recovery will depend on the interplay between economic data, policy decisions, and investor psychology in the months ahead. For now, cautious optimism is justified — but it must be paired with vigilance.

Archive note

This article preserves the analysis in our weekly newsletter sent 3 May 2025. Market prices, forecasts and company circumstances reflect the time of publication and may have changed.

This material is general information, not personal financial advice or a recommendation to trade. Investing and trading involve risk, including loss of capital.