Macro Scenarios in Focus: Stagflation Remains Downside Scenario
The Iran-Israel conflict and brief oil-price concerns brought stagflation risks back in focus for investors. Beyond these geopolitical tensions, potentially widening U.S. fiscal deficits due to a new tax-and-spending package and delayed implementation of tariffs along with future supply-chain shifts could push inflation higher. The downgraded U.S. growth forecast and raised inflation expectations from the Organization for Economic Cooperation and Development underscore that macroeconomic downside risks persist.1
We assessed three scenarios for hypothetical multi-asset-class portfolios: stagflation, recession and a stable outlook.2 Our analysis shows that the impact could range from a 12% loss under stagflation — where bonds lose their diversification benefit, making the outcome more severe than in a recession — to a 3% gain under the stable-growth and moderate-inflation outlook.
No place to hide when stagflation hits
In our stagflation scenario, we assume stagnating growth and a spike in inflation, along with a 20% increase in oil prices.3 U.S. equities could drop 20% while Treasurys could fall 6%, resulting in a 12% loss for a hypothetical multi-asset-class portfolio.4 In our recession scenario, where the economy contracts and inflation drops, falling yields lift bond prices by 3%, partly offsetting the 20% equity loss and reducing the portfolio’s loss to 9%. In our stable-outlook scenario, with resilient growth and falling inflation, that same portfolio could gain 3%, mainly driven by a 5% rebound in U.S. equities.
GDP and inflation paths were generated with the MSCI Macro-Finance Analyzer using the MSCI baseline scenario, as of March 31, 2025.
Portfolio impact as of June 20, 2025. Source: S&P Global Market Intelligence, MSCI
The authors thank Will Baker for his contributions to this quick take.
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1 Alvaro S. Pereira, “OECD Economic Outlook: Tackling uncertainty, reviving growth,” OECD, June 3, 2025.
2 These scenarios are not forecasts but hypothetical scenarios. We used the MSCI Macro-Finance Model to translate macroeconomic assumptions to U.S. market impact. You can find the scenarios here: stagflation, recession and stable outlook.
3 We assumed a persistent 20% increase in oil prices for our stagflation scenario. For a discussion of various ranges for oil prices, see: “Goldman Sachs warns of oil price surge on Strait of Hormuz risks,” Reuters, June 23, 2025.
4 The results are generated by using model correlations to propagate shocks to the portfolios, using MSCI's BarraOne®. MSCI clients can download the correlated BarraOne and RiskMetrics® RiskManager® stress tests. Treasury inflation-protected securities (TIPS) are represented by the iBoxx TIPS Inflation-Linked Index provided by S&P Dow Jones Indices. U.S. Treasurys, equities and corporate bonds are represented by MSCI indexes. Private equity is represented by model portfolios. U.S. real estate is represented by the MSCI/PREA U.S. AFOE Quarterly Property Fund Index. The composite portfolio is 50% global equities (35% public and 15% private), 10% Treasurys, 10% Treasury inflation-protected securities, 10% U.S. investment-grade bonds, 10% U.S. high-yield bonds and 10% U.S. real estate.
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