USA, probability of recession lower than estimates produced by traditional models

The recent decline in the US stock market appears more like a healthy correction than the start of a bear market driven by recession fears.

by Alberto Conca, manager of the Zest Quantamental Equity fund

The volatility seen in equity markets over recent weeks has largely been driven by the forceful and unpredictable communication of US President Donald Trump. His contradictory statements have fuelled uncertainty among investors, raising concerns about a possible recession and making it difficult to outline a clear and stable economic trajectory. However, the recent pullback in the US stock market looks more like a healthy correction than the start of a bear market driven by recession fears.

A key element supporting this view is the profound transformation of the US economy after the Covid-19 pandemic, which has made it significantly less sensitive to interest-rate trends than in the past. The broad fiscal stimulus and widespread refinancing of mortgages at historically low rates have strengthened the resilience of consumers and businesses, enabling them to better withstand any rate increases. Another indicator supporting the low probability of recession is the recovery in the manufacturing PMI: the global index has moved above the critical 50-point threshold, which separates expansion from contraction, and the number of countries where the manufacturing PMI stands above 50 is increasing. The recovery in the manufacturing sector is being supported by the accommodative stance of global central banks, most of which have adopted monetary easing policies. More than 80% of central banks in fact cut interest rates at their latest meeting, an additional positive signal for the manufacturing cycle.

At the same time, the services sector continues to show strength, with labour demand still robust. The US labour market remains resilient, despite recent job cuts, largely due to government layoffs carried out by the Trump administration. The only weaker segment is real estate, with job losses concentrated mainly in industries linked to Real Estate, especially property agencies and lending institutions that provide financing to businesses and consumers. Higher rates have in fact weighed on the property market over the past two years; however, it remains relatively solid, supported by still-high underlying demand.

Another factor that could help reduce uncertainty in financial markets is the performance of the US Breakeven index at 5 and 10 years, which reflects expectations for average annual inflation in the years ahead. After peaking at the start of the year, these indicators have started to decline again, easing the risk of a new inflationary spike. Three main factors explain this trend: wage growth is moving back into a non-inflationary range (around 4% per year), the property market (particularly the rental segment) is showing signs of stabilisation, and oil prices – a key variable for inflation – are falling. Historically, inflation does not accelerate without an increase in the price of oil, and the current trend confirms this picture. Given the economy's reduced sensitivity to interest rates, the recovery in the manufacturing sector, the strength of services and the resilience of the labour market, the probability of a recession in the United States appears lower than traditional models suggest.

The analysis carried out by the independent firm Ned Davis, based on historical data from 1928 to 2024, shows the average performance of the equal-weighted S&P 500, taking into account annual returns, the first year of each presidential cycle and the fifth year of each decade. If this trend were to repeat in 2025, the correction seen since the beginning of March could fall within the index's normal seasonal pattern, which historically moves sideways or slightly lower between March and April before resuming its rise. The analysis suggests that the S&P 500 could end the year up around 10%. This view is also supported by the upward revision of earnings per share (EPS) estimates for S&P 500 companies over the past six months, with a significant acceleration in annualised EPS growth over the past five years. In addition, the index's ROE (Return on Equity) stands at historically high levels. Given the composition of the index, earnings growth of between 10% and 12% can be estimated, a factor that could support the market's recovery in the months ahead.