Andrew Cates

Kevin Gaynor

Recent company earnings calls and sell-side analyst reports suggest heightened uncertainty and an unusual degree of hesitation among market participants regarding the future macroeconomic and geopolitical environment. In contrast, financial markets—as embodied by aggregate asset prices—must continuously express a view, even in the face of profound ambiguity.

Currently, the market appears to have revised its expectations in three key ways. First, growth expectations have declined markedly: our cross-asset growth factor implies that US GDP growth priced into markets recently fell from above 2% to effectively zero. We note in pasting that the Atlanta Fed’s latest Nowcast for GDP growth in Q1 is still negative. Second, inflation expectations have nudged higher. Third, there has been a modest upward revision in the expected cost of capital.

250331AK1.jpg

This should not, however, be interpreted as evidence of a stable medium-term equilibrium. Rather, it reflects the pricing of a wide distribution of potential outcomes—an environment where tail risks are significant and where asset prices signal only a mildly bearish outlook to policymakers. When probability is spread across a highly dispersed set of outcomes, the modal market signal may appear muted even in the presence of profound underlying uncertainty.

**Strategic Games Under the Trump Administration: A Shift from Cooperation to Conflict**

A key source of this uncertainty stems from the US administration’s departure from established norms of international cooperation. The Trump administration has, with unprecedented speed, initiated multiple strategic confrontations with both allies and rivals. The distinguishing feature of these interactions is a move from cooperative to non-cooperative strategic games.

In game-theoretic terms, cooperative games permit binding agreements and shared strategies that serve common objectives—such as trade integration, global regulatory convergence, or collective security arrangements. Non-cooperative games, by contrast, are characterized by self-interested behaviour, the absence of enforceable agreements, and a greater likelihood of defection or confrontation.

When these games are played repeatedly over time—as is the case with international economic and diplomatic relations—past actions inform future strategies and payoffs. Common strategies in such repeated games include _Tit-for-Tat or Grim Trigger_, which condition future cooperation on previous behaviour. The underlying assumption is that players act to maximize their own payoffs, irrespective of the broader costs or benefits to others.

The concept of _Nash Equilibrium_—where no player can unilaterally improve their outcome given others’ strategies—provides a useful lens through which to assess the current landscape. What appears to have changed dramatically is the Trump administration’s perception of the payoffs associated with cooperation versus confrontation. The administration’s defection from existing equilibria—especially in trade and security arrangements—suggests a re-evaluation of strategic priorities and costs.

While the US has legitimate grievances—such as low relative tariffs, underfunded NATO commitments by allies, and high levels of economic migration—the novelty lies in the use of trade threats and unilateral actions to extract concessions. In strategic terms, this constitutes a sudden shift in the structure of the game itself, challenging the assumptions of stability and mutual gain that previously underpinned the international system.

**Pricing an Undefined Game: Implications for Market Participants**

For financial markets, the challenge is twofold: first, to understand the structure and rules of the new strategic game; and second, to infer the likely path to a new equilibrium. Both are inherently difficult tasks in the current context.

Critically, the payoffs associated with key policy moves remain opaque. For example, it is unclear how the White House evaluates the outcomes of trade tariffs, whether it possesses a coherent utility function in game-theoretic terms, and how it might respond if its initial strategies are challenged or exposed as bluffs.

The temporal dimension adds further complexity. Is this policy regime a transient strategy ahead of midterm elections, or does it represent a more enduring transformation of US policy? If the administration is surprised by negative economic consequences arising from its actions, will it pivot—or double down?

In this environment, market participants—including firms and governments—must treat policy threats as credible regardless of their actual likelihood. This rational response is already observable: firms are re-evaluating supply chain configurations, redirecting investment toward domestic markets, and adapting to the risk of prolonged strategic uncertainty. These are early-stage, low-cost adjustments, but they signal a meaningful shift in expectations.

Foreign governments are responding similarly. The rapid recalibration of policy stances in countries such as Canada and Germany suggests that the global response to perceived US policy shifts is already underway. In strategic terms, the cost of ignoring these signals may be higher than the cost of premature adaptation.

**Toward a New Equilibrium—or Systemic Disruption?**

One plausible scenario is that the US administration intends its threats to function as negotiating tools rather than as preambles to concrete action. However, such a strategy assumes that counterparties will not retaliate. This is unlikely. Major competitors may respond with targeted actions—such as restrictions on US financial and technology service exports or the cancellation of defence contracts. In such cases, US credibility is jeopardized, potentially necessitating escalatory responses.

These dynamics could rapidly unravel the existing trade regime, injecting significant volatility and downside risk into both macroeconomic and corporate performance. While a new equilibrium may eventually emerge, it is likely to be less favourable than the status quo ante, and the transition period could involve substantial dislocation and earnings disruption. The faster this strategic shift is executed, the more severe the potential surprises.

Conversely, if the administration achieves geopolitical leverage without triggering a full-scale trade war—and if this is accompanied by regulatory reform, falling domestic energy prices, fiscal consolidation, a modest depreciation of the US dollar, and extensions to tax cuts—then US risk assets could present compelling value.

**Concluding Remarks**

Future analysis will explore potential payoff structures and policy permutations in greater depth. For now, we turn to market pricing in statistical terms: what is implied about the mean, variance, skewness, and tail risk of key economic variables such as volume growth, input costs, and capital expenditures? The table below summarizes our interpretation of the probability distributions currently embedded in asset prices.

Strategic Uncertainty and Market Pricing: A Game Theoretic Perspective on Recent US Policy Shifts

Our global data offering is unparalleled in terms of coverage, quality, and organization. We offer 290+ databases from 2500 government and private sources, a wealth of key survey and forecast data covering the world’s economies, and a robust offering of archive databases that drive machine learning for big data applications.

Optimized for precision analytics, our data is seamlessly integrated with Microsoft Office and all leading statistical packages through our DLX® software and platform independent HaverView™ website. We further offer direct database feeds, client server or cloud-based delivery, and RESTful API.


Kevin Gaynor

Publications by Kevin Gaynor

Strategic Uncertainty and Market Pricing: A Game Theoretic Perspective on Recent US Policy Shifts