The start of Fed easing cycles often carries risk, but today’s political backdrop is unlike anything in modern history. Public trust is low while financial markets continue to notch fresh highs.
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair,” — Charles Dickens, A Tale of Two Cities.
The Fed Eases into an Era of Contradictions
Dickens’s novel unfolds against the French Revolution, contrasting London and Paris and the paradox of intellectual ferment and great wealth for the few alongside deep poverty for the many. Likewise, at the height of the British Empire there were striking gaps between prosperity and deprivation. Looking at the present—and the always pivotal U.S. economy—one might think we live in the worst of times: the University of Michigan’s consumer sentiment sits near record lows and the first-year approval ratings of President Donald Trump are historically weak.
John J. Hardy, Chief Macro Strategist at Saxo, points to equities: for investors—at least for giants and AI-linked firms—these are the best of times. The broad stock market hit record levels in Q3, and more importantly, record valuations. Records span both earnings and—more surprisingly—sales. S&P 500 companies fetched a stunning valuation of over 3.3× sales in Q3. At the 2007 market peak, the price-to-sales ratio was just over 1.5.
Globally, Chinese markets are booming as China backs a domestic tech revolution aimed at independence from, and even competition with, the West.
Meanwhile, large European companies have outperformed the U.S. market in dollar terms, and emerging markets have also outpaced the U.S.—at least in USD terms. The divergences are clear, and the future looks more uncertain than ever. Will global markets keep rising on the added thrust from the Fed’s new easing stance announced at the September FOMC—and a weaker dollar? Or are we facing a growth slowdown as tariff effects compound, the prior cycle’s high rates bite, or AI capex cools?
Recession Risk in the U.S.: Rising—or Just a Tariff Effect?
We still see rising recession risk in the U.S., but if it doesn’t arrive in Q4 it could reflect a temporary demand pop tied to reduced uncertainty around trade policy. Companies also have incentives to invest under the “Great Beautiful Act,” which allows 100% expensing in the year of purchase for property and equipment. Some firms may now accelerate supply-chain diversification. On the other hand, as discussed below with equities, AI investment may prove far more consequential than other capex and is a key growth driver in the U.S. this year.
A hard-to-measure medium-term factor—given weak official statistics and unclear data on gray-market work—is the impact of the Trump administration’s anti-immigration policy on the economy. We do not incorporate Fed easing into our growth forecasts, which may be unfair given the rising wealth effect in a highly financialized U.S. economy. Even so, for the broader economy, the Fed’s policy shift will likely transmit with long lags, probably not until next year.
Chart: EURUSD vs. the yield spread between 10-year U.S. Treasuries and German Bunds. In recent years, EURUSD has largely tracked the long-end rate differential between the two blocs. This year saw a notable divergence—initially when Germany announced a large fiscal expansion, lifting German and European yields relative to global peers (fiscal expansion typically supports a currency). The subsequent euro appreciation versus the dollar is harder to pin on European developments and more likely reflects concern that Trump’s trade barriers and U.S. Treasury policy mean capital returning to the U.S. may not coincide with strong returns.
Iran–Israel Conflict: Will Tensions Ease or Escalate?
This outlook is written as hostilities between Israel and Iran have resumed, with Israel seeking to block Iran’s nuclear ambitions. The impact on oil markets has been dramatic, stoking fears of a new inflation wave. But geopolitical shocks are notoriously hard to forecast. Central banks can look through energy price spikes if overall sentiment and growth prospects deteriorate—keeping policy accommodative even if energy-driven headline inflation rises.
Recession Risk in the U.S.
Recession risks likely rise in the second half of the year, partly as momentum fades after a strong start and as weakness shows in key indicators. Real policy rates remain restrictive, pressuring the economy, and the housing market is flashing signs of stress. Our base case is a mild recession in H2, before inflation re-accelerates early next year ahead of the U.S. midterms.
Further downside to this year’s growth outlook comes from tariffs, which act like a tax. Higher prices for a given good don’t conjure extra money to buy it; consumers buy less of it—or less of something else—reducing real growth. The administration’s anti-immigration stance could also bite: ICE actions and pressure on the undocumented may push some workers into the gray economy and prompt others to leave the country. While hard data are scarce, the likely effects include softer consumption and labor supply in sectors most reliant on undocumented labor—agriculture, construction, and hospitality.
A wild card for the U.S. and global economy is whether AI-driven disruption triggers the first genuine downturn in high-skill labor, with roles displaced by efficient AI tools. Hard data on AI’s impact may arrive soon.
Expected Market Outcomes
- USD to remain weak.
- Precious metals to remain strong.
Trump 2.0 policy is anti-globalist—what economist Russell Napier calls “national capitalism,” and others dub “reverse mercantilism”—as the U.S. seeks to upend the post-WWII order it built. That order fostered global growth and low prices for U.S. consumers; a strong dollar was its lynchpin as mercantilist economies deliberately weakened their currencies to build export-led models. The result: U.S. industrial decline and vulnerability to supply-chain shocks—now a national security issue. Despite Trump’s transactional style and new trade barriers, the U.S. dollar remains the world’s key currency, though less dominant than before.
Other major economies will invest less into the U.S. economy, U.S. equities, and Treasuries, and instead rebalance savings and consumption at home. Europe already shows signs of this, driven by uncertainty about U.S. commitment to the transatlantic alliance and Trump’s stance on trade terms. Germany’s strong fiscal expansion has materially supported the euro; EURUSD could reach 1.25 by year-end. Japan is dragging its feet on talks with the Trump administration, perhaps due to domestic politics. But a very weak yen is a warning sign for U.S.–Japan trade relations, likely requiring adjustments that could drive a significant JPY strengthening.
Precious Metals Power Commodities in H1—More Gains Ahead
Q4 2025 analysis by Ole Hansen, Head of Commodity Strategy at Saxo Bank:
Commodities have performed very well in H1, with the Bloomberg Commodities Index up ~9% at the time of writing—far outpacing other USD-denominated assets like bonds and equities. The S&P 500 and Nasdaq lag far behind. While commodities typically rise with strong growth, today’s rally is driven mainly by geopolitical risk and growing investment demand for tangible stores of value, especially precious metals.
Gold is at multi-month highs, with silver and platinum joining the surge—fueled by concerns over sovereign debt, tariff-induced supply-chain frictions, labor-market cooling, and a weaker dollar. These factors could push the Fed into a more dovish stance than expected. Added risk of higher inflation and continued central-bank gold buying point to further upside; $4,000/oz for gold within the next year is possible.
A strong September rally in silver lifted prices to a 14-year high above $47. After a period of underperformance versus gold—driven by central banks’ preference for gold—the latest move brought the gold/silver ratio back toward its 10-year average near 81. To retest the 2011 record of $50, silver will likely need gold’s tailwind. If gold reaches $4,000, silver could gain enough momentum to challenge that level in the months ahead.
