Economist asks: Did the stock market just send another false recession signal?

Published 02/05/2025, 14:20
© Reuters.

Investing.com -- The recent slide in U.S. equities may be more noise than signal when it comes to forecasting a recession, according to Capital Economics.

The firm argued in a note Friday that the market’s pullback earlier this year likely marks “another false signal about an economic downturn.”

Though the S&P 500 fell nearly 19% from its February 19 peak to its April 8 trough, narrowly missing the typical 20% threshold for a bear market, analysts at Capital Economics say the decline was driven largely by shifting investor sentiment, not earnings fundamentals. 

“The price action in the stock market… has stemmed mainly from fluctuations in the price investors are willing to pay for earnings,” the note said. “There hasn’t been much change in analysts’ expectations for earnings themselves, at least outside the energy sector.”

Drawing on historical context, Capital Economics notes that bear markets have only “predicted” recessions when accompanied by earnings downgrades that were later justified. 

“When a bear market in the S&P 500 only resulted from a drop in its FTM P/E ratio, there wasn’t a recession,” the report said, citing 1987 and 2022 as similar cases.

The firm also downplayed concerns over first-quarter GDP contraction, citing strong demand from private domestic purchasers, possibly due to “tariff ‘front-running’ by firms and households.” 

It added that ISM manufacturing data suggests tariffs are “weighing on the economy, but not crushing it.”

While risks remain from China’s growing AI competition to possible fallout from President Trump’s trade policies, Capital Economics concludes, “Our sense is that the recent slide in the stock market was another false signal of a recession.”

The real test, they say, will be whether earnings in the AI-driven big-tech sector hold up.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers
© 2007-2025 - Fusion Media Limited. All Rights Reserved.