As fears of stagflation rise, financial advisors and asset managers may need to reevaluate client portfolios for the second half of 2025.
A recent article from Business Insider, “Stagflation can be worse than recession. Investors are already bracing for it,” highlighted data from Bank of America:
71% of fund managers now expect stagflation in the global economy within the next year.
Why advisors should pay attention
Stagflation limits the Fed’s policy flexibility, and cutting rates is risky when inflation is already high. As a result, we could be in for a stagnant economy for longer periods, more market turbulence, and a weaker consumer environment — all of which affect client portfolios.
Note:
- PCE inflation now expected to be at 2.7% for 2025, up from 2.5%.
- GDP growth has been downgraded to 1.7%, from a prior 2.1%.
- Record reduction in US equity holdings in early March suggests fund managers are pulling back.
What’s the rationale for this outlook?
A mix of policy and market dynamics are cause for concern:
- Aggressive trade policies, particularly under a potential Trump administration, are expected to pressure growth (UBS raised stagflation risk from 15% to 20%).
- Sticky inflation and slowing growth in the second half of 2025 could lead to a "mini-stagflation," potentially triggering another equity sell-off.
Key takeaways for advisors:
- Reassess portfolio diversification: Overweighting growth stocks may be risky in this environment. Consider real assets, quality dividend payers, or inflation-protected securities.
- Stress-test portfolios for both inflationary and low-growth scenarios.
- Set realistic client expectations: Prepare clients for potential volatility and restricted monetary policy options.
- Monitor policy changes: Trade policy shifts or Fed pivots could create inflection points.
Bottom line:
Stagflation is no longer a far-fetched possibility. Proactivity in portfolio management is critical, and clear client communication is imperative.
Preparing clients ahead of time for more uncertainty and a complex macro environment may help to assuage fears.