Recession or recovery in 2025? What strategy to adopt for your stock portfolio?

In this fragile context, where the threat of an economic slowdown looms, investors need to anticipate possible scenarios and adjust their stock portfolios accordingly.

Numerous uncertainties and economic indicators to monitor

After a strong 2024 for US financial markets, with a 25% growth in the Nasdaq 100 and S&P 500 driven by the Magnificent 7 (+67%) and enthusiasm for Artificial Intelligence, could 2025 mark a reversal?

Indeed, since the start of the new year and President Trump’s inauguration, uncertainty has reared its head on several fronts, sparking fears of a significant economic slowdown. Inflation, economic growth, household consumption, employment, and monetary policy are under close scrutiny by investors, with signs of weakness appearing.

The trade war triggered by Trump, which imposes strict protectionism with significant tariffs on trading partners, does not encourage lower inflation. If this trade war intensifies, inflation could accelerate, eroding household purchasing power and making a financial market rebound more difficult. However, inflation might be offset by a slowdown in the US economy. 

US GDP growth forecasts have been downgraded by analysts; for example, Goldman Sachs revised its 2025 projections down from 2.2% to 1.7% for 2025. Consequently, consumers are cutting spending, manufacturing is slowing and business confidence is in decline. Interest rates remain high (4.50%), fuelling fears of an economic slowdown that could weigh on financial market performance.

The monetary policies of central banks, the Fed and ECB, will indeed play a decisive role. Monetary easing would increase liquidity in the financial system and alleviate current pressure on risk assets. However, no rate cuts are expected this first quarter, and the Fed faces a delicate balancing act. Cutting rates too soon risks reigniting inflation, while waiting too long could stifle the economy. A stagflation scenario (weak growth and inflation) remains a possibility.

For now, investors expect one or two rate cuts this year, but with so much uncertainty, the timing of these remains unclear. The central bank will likely adopt a cautious “wait-and-see” approach, guided by each new data release.

Finally, geopolitical uncertainties linked to the war in Ukraine and how it might be brought to an end add another layer of instability and concern for investors.

Amid this backdrop, US markets are undergoing a correction, sparking fears of a deeper downturn. The S&P 500 and Nasdaq 100 recently fell over 10% from their peaks. Tesla has lost 50% of its value in 3 months, and the concentration of the Magnificent 7 makes indices vulnerable and increases risks. That said, these indices remain in a medium- to long-term upward trend.

This uncertain environment could lead to a period of volatility, with equities and bonds may fluctuating with economic news or unexpected policy decisions. This presents opportunities for active traders, but long-term investors should focus on diversification, not only geographically, but also across asset classes, sectors and investment styles.

As always, avoid knee-jerk reactions to short-term swings.

 Also read: Should you sell or hold Tesla shares in 2025?

Possible scenarios for 2025

Scenario 1: A sharp economic slowdown takes hold

• Potential causes: monetary tightening caused by the trade war driving inflation, reduced consumption, financial crises.
• Market impact: equity down, bonds and gold on the rise.
• Adapted strategy: focus on defensive sectors (energy, healthcare, consumer staples, telecoms), banks, bonds and international diversification.

Scenario 2: An economic recovery gains momentum

• Key drivers: rate cuts, rebounding consumption, technological innovations.
• Market impact: equity rally, renewed interest in growth stocks.
• Adapted strategy: increase exposure to equities, cyclical sectors and tech stocks.

Scenario 3: Volatile and uncertain markets

• Possible causes: political instability, persistent inflation, sector-specific crises.
• Impact: sharp market swings in both directions.
• Adapted strategy: balanced approach with geographical diversification (US, Europe, emerging markets) and active risk management.

What strategy should you adopt for your portfolio?

Adjust asset allocation based on risk appetite

• Defensive vs aggressive portfolio
• Importance of sectoral and geographical diversification
• Holding cash during uncertain times

Assets to prioritise based on context

• Defensive stocks (healthcare, consumer staples).
• Quality, undervalued European “value” stocks
• Defence and armament sector stocks (BAE Systems, Rolls-Royce, QinetiQ, Rheinmetall…)
• Government and high-quality corporate bonds
• Safe-haven assets (gold, cash)

Mistakes to avoid during periods of uncertainty

• Panic selling or impulsive buying.
• Neglecting risk management and diversification.
• Blindly following trends without analysis.

Which stockbroker should you choose?

Below is our selection of the best brokers: