The Storm Clouds Are Gathering: Morgan Stanley Warns of US Economic Weakness Ahead

The U.S. economy is walking a tightrope, and the safety net is fraying. Analysts at Morgan Stanley, led by Kerry Craig, are sounding the alarm: “More weakness to come” looms over 2025, driven by trade wars, policy missteps, and a Federal Reserve caught between a rock and a hard place. This isn’t just about tariffs—it’s a perfect storm threatening growth, inflation, and your portfolio.

The Red Flags Raising Alarm Bells

Kerry Craig’s warnings are stark. Despite a brief equity rebound fueled by hopes of resolving trade tensions, the U.S. economy faces mounting headwinds. The key culprit? Tariffs and immigration policies.

• GDP Growth Slump: The U.S. economy contracted by 0.3% in Q1 2025, and Morgan Stanley forecasts growth to slow further to 2.1% in 2025, dropping to 1.6% in 2026. That’s well below its potential, with tariffs and labor shortages squeezing corporate profits and consumer spending.
• Inflation’s Sneaky Return: New tariffs on Chinese imports—set to expand to other trade partners—are pushing up input costs. By late 2025, this could spark a temporary inflation spike, forcing the Fed to delay rate cuts.
• Labor Market Stress: Immigration restrictions are shrinking the workforce, hiking wage pressures, and complicating the Fed’s balancing act.

Investors Are Panicked—And Right to Be

Morgan Stanley’s Q2 Wealth Management Pulse Survey reveals a sea change in investor sentiment:
- 51% are now bearish, up 9 percentage points from Q1.
- 41% cite inflation as their top fear, surpassing tariffs (35%) and market volatility (24%).
- Only 48% believe the economy is healthy enough for Fed rate cuts, down from 59% in Q1.

This isn’t just pessimism—it’s data-driven. Chris Larkin, Morgan Stanley’s head of trading, warns: “Timing the market is a fool’s errand right now. The twists and turns in trade policy are too unpredictable.”

Where to Find Safety in the Storm

Kerry Craig and the Morgan Stanley team aren’t just ringing the alarm—they’re offering a roadmap. Here’s what to do:

1. Diversify Globally, But Stay Selective in the U.S.
2. Stick with high-quality U.S. companies (think healthcare, utilities, and financials) that can weather the slowdown.

3. Expand into Europe, where defense and infrastructure stocks are benefiting from geopolitical realignments.

4. Embrace Fixed Income—But Be Picky

5. Avoid Treasuries; instead, target floating-rate instruments and private credit (projected to hit $2.8 trillion by 2028).

6. Avoid Emerging Markets and Commodities

7. China’s deflationary spiral and manufacturing overcapacity are dragging down global trade. Stay cautious on Asia’s equity markets.

8. Say Goodbye to “Buy the Dip”
   Lisa Shalett, Morgan Stanley’s investment chief, slams passive strategies. The “Magnificent 7” tech giants—once growth engines—are now burdened by tariffs and overseas profit risks (52% of their revenue comes from abroad). Shift to healthcare (AI-driven cost cuts) and industrials (infrastructure spending).

The Bottom Line: Prepare for a Rocky Road

The writing is on the wall. The U.S. economy is in for a bumpy ride in 2025, with growth slowing, inflation lurking, and policy misfires adding fuel to the fire. But this isn’t a recession—yet.

Investors who act now can shield their portfolios. Follow Craig’s advice: diversify, focus on quality, and avoid the siren song of passive investing. As the old Wall Street adage goes: “Hope is not a strategy.”

In a world of uncertainty, these steps—backed by Morgan Stanley’s data—could be the difference between riding out the storm and getting swept under. Stay vigilant, stay diversified, and stay ahead of the curve.

Conclusion: With the U.S. economy slowing to 1.6% growth in 2026 and inflation risks rising, investors must adapt. By prioritizing high-quality U.S. equities, global diversification, and fixed income opportunities, portfolios can navigate this choppy landscape. The data is clear: complacency is the enemy here. Act decisively—or risk getting caught in the undertow.