Beyond recession and inflation risks: Wall Street looking out for black swans

Freedom Broker has identified a potential “black swan” for the U.S. equity market. Unlike the risks most often discussed, such as recession or renewed inflation, this scenario centers on a possible loss of confidence in the uniqueness and long-term sustainability of the U.S. economic model itself. Previous black swans for the U.S. markets included the September 11 terrorist attack and the 2008 financial crisis. While such shocks are nearly impossible to predict, they can be hedged using investment strategies that are now accessible to a broad range of investors, MarketWatch writes.

A potential black swan for U.S. markets could emerge if investors begin to question “American exceptionalism,” according to a Freedom Broker strategy update for the third quarter of 2025 (seen by Oninvest). Trump's policies, combined with rising political risks, could lead investors to reassess the sustainability of the U.S. federal budget deficit and weaken confidence in the dollar.

Though this risk has long accompanied the U.S. economy, it remains difficult to assess precisely. Freedom notes a high probability of overestimating the risk and false signals. Still, the likelihood of such a scenario has increased slightly: on a one-year horizon, Freedom estimates the probability of this "black swan" at around 1%.

At the same time, Freedom analysts see little near-term risk of a U.S. recession. Based on current conditions, they estimate the probability of a downturn over the next year at 1.9%. That risk could rise to 10% in the event of a new, unidentified shock, Freedom warned.

Base-line scenario: The U.S. economy adapts to higher import duties in the third quarter of 2025. A recession is avoided, but inflation rises moderately and GDP growth slows to 1.8% annualized in the third quarter and 1.5% in the fourth. The labor market remains balanced, with unemployment at 4.4% and wage growth easing to 3.3-3.5%, down from 4.1% in 2024. Under this scenario, the Fed cuts rates once in 2025 and twice in 2026, supporting a recovery that accelerates in the second quarter of 2026. Freedom’s outlook is more conservative than the market view, which currently implies two Fed rate cuts in 2025.

Optimistic scenario: Trump's tariffs have a smaller inflationary impact, allowing the U.S. economy to grow steadily, by 1.9% in the third quarter and 2.2% in the fourth, without deterioration in the labor market. Wage growth slows gradually. In this case, the Fed begins a rate-cutting cycle in the fourth quarter of 2025, and GDP growth accelerates to 2.4% in 2026-2028.

Pessimistic scenario: Escalating trade conflicts push U.S. import duties to 18-20%, fueling inflation and slowing GDP growth to 0.7-0.9% in the third and fourth quarters. Unemployment rises, and wage growth falls behind increases in commodity prices (3.0% versus 3.9%), weighing on consumer demand. A recession is still not forecast, but the recovery would be slow and prolonged. It is this pessimistic scenario that could ultimately trigger a black swan event, Freedom suggested.

The black swan concept was introduced in 2007 by Nassim Nicholas Taleb to describe rare, unpredictable events that have outsized consequences and are often rationalized only in hindsight. In U.S. market history, black swans include September 11, the dot-com crash, and the 2008 financial crisis. Each caught investors off guard, caused severe market dislocations, and led to lasting structural changes in the economy.

The essence of the black swan theory lies not in predicting such events – which Taleb argues is largely impossible – but in preparing for them through diversification and hedging. Instead of traditional risk-management approaches, Taleb advocates a so-called barbell strategy, which involves being “both hyper-conservative AND hyper-aggressive at the same time.”

One version of this strategy allocates most of a portfolio to U.S. Treasuries, while investing the interest income in call options on the S&P 500, MarketWatch writes. Because only interest income is deployed, the investor avoids capital losses if the Treasuries are held to maturity. At the same time, depending on the options selected and market performance, the strategy allows participation in a meaningful share of equity upside.

Exchange-traded funds make such strategies accessible to retail investors. One example is the Amplify BlackSwan Growth & Treasury Core ETF, which allocates 90% of assets to Treasuries and 10% to S&P 500 call options. It has generated an average annualized return of 6.8%, versus 8.4% for the S&P 500. In effect, black swan insurance costs investors about 1.6 percentage points per year, a price MarketWatch considers reasonable given current market uncertainty.

MarketWatch also describes another barbell-style approach that combines equity exposure with systematic purchases of put options: the Swan Hedged Equity US Large Cap ETF. The long-term cost of this protection is similar, with an implied insurance premium of roughly 1.6 percentage points annually.