Why the Recession Call Matters for Stocks

Despite ongoing trade tensions and recent market volatility, the article argues that the US economy remains resilient, with key indicators suggesting continued growth and a low probability of recession in 2025. The author highlights better-than-expected earnings, moderating inflation, and healthy employment data as supportive factors, emphasizing that non-recessionary bear markets tend to be shallower and shorter, making the call for no recession a key pillar of their constructive stance on US stocks.

Analysis

The U.S. economy is demonstrating notable resilience despite persistent trade uncertainties and recent market volatility, leading to a maintained forecast that avoids a recession in 2025. Key economic indicators support this outlook: earnings season has surpassed expectations, inflation metrics are moderating, and crucial components of the 'Recession Dashboard' show minimal signs of distress. Specifically, the Atlanta Fed's GDPNow tracker indicates an approximate 2.4% annualized growth rate, recovering from a Q1 technical downturn attributed to pre-tariff trade distortions. Furthermore, PMI surveys remain slightly above the 50 expansionary threshold, and employment data continues to be robust. While policy news, such as President Trump's tax cut bill passing the House and threats of 50% tariffs on the EU, contributes to 'Headline Hell,' the base case remains a 'Muddle Through' scenario where trade resolutions with major partners are anticipated by the second half of 2025. Historically, as per NDR Research, non-recessionary bear markets, which the S&P 500 (experiencing a -19% peak-to-trough decline recently) has narrowly avoided, are shallower (-25% average decline over 212 days) compared to recessionary bears (-35% average decline over 353 days). Crucially, corporate earnings, a primary driver of stock prices, have fallen by a mean of over -16% in nine of the last twelve U.S. recessions, underscoring why the current call for no recession and continued earnings resilience forms a key pillar of a generally constructive stance on U.S. stocks.

Key Decisions for Investors

• Investors might consider maintaining a constructive stance on U.S. equities, particularly broad market exposures like the S&P 500, given the expectation of continued economic resilience and avoidance of a recession.
• It is prudent to closely monitor leading economic indicators, corporate earnings releases, and developments in U.S. trade negotiations, especially with the EU, as these will be critical in validating the 'Muddle Through' economic scenario.
• Prepare for ongoing market volatility driven by trade policy headlines, but recognize that such volatility, if not accompanied by a recession, has historically resulted in shorter and less severe market downturns.
• Evaluate the potential impacts of U.S. tax policy developments, such as the progression of the tax cut bill through the Senate, on market sentiment and specific sector performance.