Stock and GDP Outlook, for Week Ending 05/09/2025
Not a recession.
Stock prices and the mean expected NGDP growth rate rebounded sharply for the second straight week, as continuation of a general trend since Trump began backing off on his trade demands and attacks on Fed Chairman Powell. The S&P 500 is now just above the level it reached before Trump’s “Liberation Day” announcement on April 2nd.
Much was made about the slightly negative real GDP report for Q1, but in addition to this being an initial estimate subject to significant revision, the actual YoY figure was positive. Combined with core PCE inflation for the quarter, the NGDP growth rate was 4.82%, just under the latest 4.85% market forecast based upon forecasted S&P 500 earnings yields. These forecasts are available to paid subscribers.
The official YoY NGDP figure from the BEA was slightly lower.
While markets were conditionally predicting recession during the height of the tariff crisis, those conditions were mostly unmet, due to its brevity. They are not predicting recession now. That doesn’t mean there can’t be a slightly negative quarter of growth, but if it doesn’t come with a statsitically significant rise in unemployment, it isn’t a true recession as I see it.
That said, while it’s been rare, it is possible to have recessions even with relatively minor negative changes in stock prices. Consider the 1990 recession, which saw the S&P 500 fall only about 17%. That was caused by a combination of a negative oil shock associated with restricted supply after the invasion of Kuwait and a nominal shock caused by passive Fed tightening. The nominal shock was smaller than with most recessions, explaining the relatively mild stock price decline. Stock prices don’t put much weight on the current year. Similarly, after an initial 35% decline in the S&P 500 during the first couple of months of the pandemic panic, stock prices returned to all-time highs within 5 months after the Fed began its QE program.
As mentioned last week, and widely reported, port activity has been trending sharply downward lately, and international tourism in the US is also down sharply, indicating some rough times to come. But, nominal and real growth are only expected to slow at this point, rather then turn negative. Perhaps one should preserve some more allowance for uncertainty than usual, due to the unprecedented nature of this trade shock, but I can’t claim to consistently forecast better than markets. The Fed Funds Futures market paints a picture similar to that of the S&P 500 based market NGDP forecasts:
So, the downward trend in growth isn’t expected to change until late 2026, at the earliest.
Note: This post, as is the case with all my posts, should not be construed as offering investment advice. Such advice should be tailored to the individual investor by qualified professionals who, ideally, are fiduciaries.
Links to Data:
Studies on Immigration:
https://www.hoover.org/research/economic-effect-immigration
https://www.hoover.org/research/immigration-innovation-and-growth
https://www.epi.org/publication/u-s-benefits-from-immigration/
https://www.nationalacademies.org/news/2016/09/new-report-assesses-the-economic-and-fiscal-consequences-of-immigration
https://www.cbo.gov/publication/60165
https://www.dallasfed.org/research/economics/2024/0702
https://link.springer.com/article/10.1007/s41996-023-00135-x?utm_source=chatgpt.com
https://ideas.repec.org/p/cpm/docweb/2202.html?utm_source=chatgpt.com
Economic Data Sources:
https://fred.stlouisfed.org/series/SP500
https://www.wsj.com/market-data/stocks/peyields
https://www.barchart.com/futures/quotes/ES*0/futures-prices
https://ycharts.com/indicators/sp_500_earnings_per_share_forward_estimate#:~:text=Basic%20Info-,S&P%20500%20Earnings%20Per%20Share%20Forward%20Estimate%20is%20at%20a,28.27%25%20from%20one%20year%20ago.
https://www.cnbc.com/quotes/.VIX
https://fred.stlouisfed.org/series/DTWEXBGS
https://fred.stlouisfed.org/graph/?g=Ee9i
https://fred.stlouisfed.org/series/T10Y3M#0
https://fred.stlouisfed.org/series/DGS10
https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html
https://tradingeconomics.com/commodity/crb?user=nunote
https://www.cnbc.com/quotes/@CL.1
https://www.cmegroup.com/trading/en
https://www.spglobal.com/spdji/en/documents/additional-material/sp-500-eps-est.xlsx
https://www.cmegroup.com/markets/interest-rates/stirs/30-day-federal-fund.quotes.html