Risks beyond recession and inflation: what could be the new «black swan» on Wall Street

Freedom Broker has identified a potential «black swan» - an unexpected but highly significant event - for the U.S. equity market. It was not a recession or a new round of inflation, but a loss of faith in the uniqueness and sustainability of the U.S. model. The main «black swans» in the past were, for example, the September 11 terrorist attacks and the 2008 crisis. While such shocks are extremely difficult to predict, they can be hedged against with investment strategies available to a wide audience, according to MarketWatch.

A possible «black swan» for the US market could be the loss of investors' faith in «American exceptionalism», according to the Strategic Outlook for the third quarter of 2025, which was prepared by Freedom Broker (available from Oninvest). The policy of President Donald Trump and the corresponding growth of political  risks may cause investors to doubt the reasonableness of the US federal budget deficit and weaken the dollar.

Although this is a classic risk that has always accompanied the U.S. economy, it is difficult to predict: there is a high probability of overestimation and false signals, when the risk seems higher than it really is. Nevertheless, now the probability of its realization has slightly increased: on the horizon of one year such a «black swan» may appear in the U.S. with a probability of 1%, Freedom Broker suggested.

Freedom analysts practically do not believe that the US may slip into recession in the near future. According to their assessment, within the framework of already observed processes, its probability is only 1.9% on an annual horizon. This risk may increase to 10% in case of a new, as yet unknown shock, the bank warned;

- Baseline scenario: The US economy adjusts to higher duties in the third quarter - with no recession but a moderate rise in inflation and a temporary slowdown in GDP growth to 1.8% annualized, and to 1.5% in the fourth quarter. The labor market remains balanced with unemployment at 4.4% and wage growth slowing to 3.3-3.5% from 4.1% in 2024. The Fed will cut the rate once in 2025 and twice in 2026, supporting the U.S. economic recovery, which will accelerate in the second quarter of 2026. Freedom is more cautious than the broad market here - futures prices include two US Fed rate cuts this year.

- Optimistic scenario: The duties have a smaller inflationary effect, allowing the United States economy to grow steadily - by 1.9% in the third quarter and 2.2% in the fourth quarter - without a deterioration in the labor market. The growth of wages is smoothly slowing down. With favorable dynamics, the Fed begins a cycle of rate cuts in the fourth quarter of 2025, and GDP growth accelerates to 2.4% in 2026-2028.

- Pessimistic scenario: escalating trade conflicts lead to an increase in US duties to 18-20%, inflation and a slowdown in GDP growth to 0.7-0.9% in the third and fourth quarters of 2025. Unemployment rises and wage growth lags behind increases in commodity prices (3% vs. 3.9%), dampening consumption. Despite the pressures, a recession is not forecast, but the recovery will be sluggish and protracted.

It is the pessimistic scenario that could lead to a «black swan,» Freedom suggested.

The «black swans» theory, proposed in 2007 by writer Nassim Taleb, refers to rare, unpredictable events that have a profound impact on society or markets - and are often attempted to be explained after the fact. The Classical «black swans» in U.S. stock market history are the Sept. 11 terrorist attacks, the dot-com crash and the 2008 financial crisis. Each took investors by surprise, shocked markets, and set the stage for major shifts in the economy.

The essence of the «black swans» theory is not so much in predicting such events (it is practically impossible), but in preparing for them: through asset diversification and risk hedging. In contrast to traditional approaches to risk management, Taleb recommended the so-called Barbell Strategy (Barbell Strategy). It is about «being both hyperconservative and hyperaggressive, rather than moderately aggressive or moderately conservative.»

One variation of such a strategy involves putting the bulk of the portfolio in U.S. Treasuries and investing the interest income from them in call options on the S&P 500 index, writes MarketWatch. Since only interest income is invested, there is no loss if the trijeris are held to maturity. That said, depending on the options chosen and the behavior of the S&P 500 Index, such an investor will be able to participate in a significant portion of the market's rise.

Exchange-traded funds (ETFs) offer a wide audience tools to implement such strategies. One of them is the Amplify BlackSwan Growth & Treasury Core fund. It places 90% of its funds in Treasury bonds and 10% in call options on the S&P 500. This strategy yields an average annualized return of 6.8% - versus 8.4% for the S&P 500. Thus, the «insurance» against the black swan costs investors 1.6 percentage points annually - a reasonable price given the current nervousness in the markets, notes MarketWatch.

The exchange publication describes another variant of the «barbell» strategy: invest in an index fund, and use part of the capital to buy put options. An example is Swan Hedged Equity US Large Cap. The «insurance premium» is the same - 1.6 p.p. per year.

This article was AI-translated and verified by a human editor