Recession risk falls as global stimulus kicks in

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Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves. 

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Eric Morin, director of global macro and strategy in the multi-asset and currency management group at CIBC Asset Management 

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We’ve kept the probability of a recession relatively contained at 35% — unchanged since Liberation Day in April. So we have not flip-flopped like a lot of forecasters. Looking ahead, with the passage of time, our bias is that that probability of recession will likely decline over the course of the next few quarters, given a globally large monetary and fiscal stimulus pipeline, given contained and diminishing effects of tariffs, and also due to growing global tailwinds from inelastic demand for investment in tech, mining and military equipment globally. 

So for those reasons, we think that, with the passage of time, the probability of a recession may decline over the course of the next 12 months. So those are the factors that could push the probability of a recession lower. 

What could push the probability of a recession higher? Well, we have two primary concerns looking at the next 12 months, and both of them are coming from the U.S. 

The first one is that the U.S. labour market may slow down more than expected because of a confluence of demand and supply factors. So on the supply side, in the U.S., there are restrictive immigration policies that include deportation. There is also an acceleration of aging. And both of them are compatible with a much slower natural growth of employment. 

So perhaps, in 2026, the natural rate of increase of employment will be below 30,000 per month. This would be well below the 150,000 that we saw a year or two years ago. So there’s a downward trend there that is driven by supply factors, and that will result mechanically in a slowdown, and this is something that could increase the probability of a recession down the road. 

The other aspect is the demand aspect for workers. There could be negative spillovers from AI because AI is net-net positive for the market, and net-net positive for the economy because it brings investment. But AI also could have a side effect, which could be to reduce demand for low value-added service employment. So the U.S. labour market may be slowing more than expected in 2026, and that could increase the probability of a recession. The good news there is that if this were to happen, we would expect the Fed to cut more than [what’s priced into the market], and that would provide a cushion. So, we see limited upside on the risks of a recession. 

The other aspect that could increase the risk of a recession is a resurgence of inflation in the second half of 2026. So for the next few months, inflation will remain distorted by the impact of tariffs, which is seen as a one-off effect on inflation. And the concern is really on the second half of the year, where we could have a resurgence of service inflation and wages because of [a] growing labour shortage in 2026 due to deportation policies. 

So we have this on our radar. So service inflation and wage could be accelerating in the second half of 2026, and that is a concern because this would be a leading indicator of a rise of inflation, and that could force the Fed to stop its loosening cycle, or it could force the Fed, in the worst-case scenario, to hike its policy rate again in the second half of 2026. And that would, without surprise, increase the probability of a recession in the next 12 months. 

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We still recommend a small tactical equity overweight. This is not a new view, but we kept the view that we implemented last summer. And prior to that, we were neutral. After the tariff announcement, we were not negative, we were neutral, and now we remain positive, tactically. 

Why is that the case? Well, it’s important to look at history for guidance. And equity markets, historically, have outperformed during non-recessionary Fed rate cutting cycles. So when the Fed cuts and there is no recession – which is our baseline – historically, that was associated with outperformance of equity markets in the U.S. and in most countries. 

So in the next 12 months, as of today, Oct. 29, we do expect the Fed to cut its policy rate by 125 basis points for the next 12 months. And this is something that should provide a tailwind to stock markets in the U.S. and globally as well, because cuts by the Fed would allow other central banks, especially in emerging markets, to provide further policy accommodation, meaning providing more cuts. So that is, we believe, something that would be positive for equities globally. 

Also in the U.S., there has been under the Big Beautiful Bill, there is accelerated tax depreciation for capital expenditures, and we do expect that this would sustain additional share buybacks in the U.S. And so this is a tailwind also for the U.S sector. 

Tech remains another compelling story. We are in the middle of a strong global tech cycle. Typically, those strong tech cycles, they last two, three years, and often they coincide with the global business cycle and/or reinforce it. So the global tech cycle is something that should, of course, benefit U.S. stocks. But also there are other tech heavy markets globally, such as Japan, Taiwan, Korea, or even China, at some extent, that could benefit from that global tech cycle. 

And there’s also ongoing benefit from corporate reforms in Japan and Korea that should make equities in the U.S., and in most countries, outperform tactically. And this is why we have a small tactical equity overweight. The reason why it’s a small tactical equity overweight is because we remain mindful of the recession risk that I’ve mentioned earlier. 

What could cause us to increase the position is if we were to be surprised with a global broadening of tech investment. So far, tech investment has remained quite strong in the U.S. We do expect that there will be [a] broadening of tech investment globally, for data center, for example, for generating tech equipment for power grids, because the more you have tech, AI and data center, the more you need power grids. So there’s a lot of spillovers that we expect to take place globally, and the timing is uncertain. Where we could be surprised is that the timing of that broadening of tech investment globally could take place sooner than later, and that is something that could force us to increase further that position or that recommendation. 

There is also strong investment globally in natural resources, because the world order is changing, and a lot of countries want to secure their supply and sourcing of natural resources, and that creates strong and elastic investment for natural resources. And this is something that could benefit a lot of equity markets globally, including Canada. 

The changing world order also brings implications for infrastructure demand and military equipment, and this is something that could bring spillovers to the global economy, but also to the equity markets across the globe. 

What could cause us to decrease the overweight recommendation or bring it to neutral? Well, we do have in terms of factors to watch is the probability of a recession. So if we were to see evidence that the probability of a recession would increase, then there is a possibility that we may have to bring that recommendation to neutral. And again, as I’ve mentioned earlier, the factors that could increase the probability of a recession are a slowdown, or an acceleration of the slowdown of the labour market in the U.S., and/or stubborn inflation in the U.S. for the second half of 2026. 

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Another thematic that could surprise us to the upside is emerging markets. Emerging markets should benefit from a spillover of global stimulus and strong investment demand in natural resources, etc. So emerging markets could also be a place where we could be surprised positively. In terms of stimulus, what’s important is that if the Fed were to cut as expected, this would allow central banks in emerging markets to cut further. And that would be positive for stocks in emerging markets, but also for local debt because, you know, bonds would benefit from the cuts of the central bank, and also the starting yields are higher than in developed markets. 

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Our outlook for Canadian equity remains constructive, given relatively attractive valuations and dividend yield. But also because of supportive earning tailwinds, and also because of the opportunity for sector diversification compared to the narrow U.S. market, which is heavily exposed to technology. 

So in other words, what I’m saying is that Canada offers investors the opportunity to diversify some U.S. tech exposure with attractive names in the cyclical and material/natural resources sector. 

Also, the broad Canadian equity market should be supported by domestic, and global monetary and fiscal stimulus. So this is another positive aspect for the Canadian stock market. Also, the Bank of Canada will be cutting a little bit more. Growth should accelerate. We do expect some sort of a deal – not a perfect deal with the U.S. – but still a deal, reduction of uncertainty.  

And also something that will support equity market before the real economy is the strong infrastructure agenda that the federal government has for developing infrastructure and natural resources in Canada. This is something that could bring tailwind to the material and natural resources sector. So this is something that is definitely positive. 

Overall, we are constructive on cyclical sectors. So the cyclical names in the TSX could outperform, and also the material/natural resources names are other segments that could benefit from our global macro outlook.

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