(Note: This article mainly examines the situation from the perspectives of corporate earnings expectations, investor sentiment, valuation expectations, technical analysis, and historical data. The data is sourced from publicly available materials. The views are for discussion purposes only and should not be taken as direct investment advice.)
Recently, Trump's new tariff policy has disrupted the market and even raised expectations of an economic recession. To determine whether the economy is heading towards a recession, it is necessary to continue monitoring the negative impacts brought about by Trump's trade policies and policy uncertainties:
Are the Q2 GDP growth rate, consumer confidence index, manufacturing and services indices, leading economic indicators (LEI), and non-farm employment data declining?
Are inflation data (CPI) and the unemployment rate rising?
The precursors of an economic recession will also be reflected in whether the U.S. stock market continues to fall and whether short-term U.S. Treasury yields exceed long-term Treasury rates.
It is worth noting that Warren Buffett's holding of $300.87 billion in short-term U.S. Treasury bonds $10-YR T-NOTE - main 2506(ZNmain)$ through $Berkshire Hathaway(BRK.A)$ $Berkshire Hathaway(BRK.B)$ , which accounts for 4.89% of the total amount of short-term U.S. Treasury bonds, exceeds the Federal Reserve's holdings of short-term Treasury bonds.
Buffett's investment strategy reflects his concern about economic uncertainty.
Has the U.S. stock market already begun pricing in a recession? What impact will this have on the market? Where might the $S&P 500(.SPX)$ fall to next?
The following are some relevant observations based on corporate earnings expectations, technical analysis, and historical valuations of the S&P 500.
I. Factset’s Q1 Earnings Data Still Look Solid
According to the latest data from Factset as of April 17th, the majority of the published Q1 earnings reports remain strong. However, what deserves more attention is the corporate guidance. Since tariffs took effect in April, their impact on businesses and the market will only start to be reflected from Q2 onwards.
Earnings Report Card: Among the S&P 500 Index component companies that have announced their results so far (12% of the S&P 500 companies have reported thus far), 71% of the companies have seen their EPS (Earnings Per Share) growth exceed expectations, and 61% of the companies have reported revenue growth that surpassed expectations.
The average EPS growth in the reported results is 7.2% year-over-year. If 7.2% is the actual growth rate, this would mark the seventh consecutive quarter of year-over-year profit growth for the S&P companies.
II. From a Technical Analysis Perspective, It May Still Be a “Corrective Rebound”
The $S&P 500(.SPX)$ experienced a daily “death cross” last week, where the 50-day moving average intersected below the 200-day moving average.
Currently, the S&P 500 Index is under pressure below the 21-day and 30-day moving averages, and it has not yet managed to close above 5,403. This inability to avoid a bullish reversal on the daily chart may indicate that the current rebound is of a corrective nature.
According to the analysis by Elliotwaveclub, the $S&P 500(.SPX)$ is currently still in a bearish triangle pattern. Its technical analysis suggests that the S&P is expected to pull back further before breaking below the 4,600–4,400 range—a daily closing price below 5,277 is anticipated. In the short term, it is expected to slightly break above the high of 5,485 before initiating the next wave of decline.
From a technical standpoint, the potential upside could reach 5,685–5,750. However, this is overly optimistic, as the area around 5,500 points represents a strong resistance level.
Overall, this rebound is likely to be a corrective one, and the initiation of the next major downward movement is only a matter of time.
Tiger International analyst @Tiger_James Ooi also pointed out in his weekly report the decline magnitudes of some historical recession cycles.
At present, there is still time and room for further decline, both in terms of months and the extent of the drop.
Read more>>US Market Insights (21–25 Apr): S&P 500 Is Not in a Bear Market—Just Yet
III. From a Valuation Perspective, the Downside Correction Space Is Significant If a Recession Occurs
Currently, Wall Street's EPS (Earnings Per Share) forecast for the $S&P 500(.SPX)$ in 2025 is $267.94 (a downward revision from $275.24 at the beginning of the year), which still represents a 9% increase from the 2024 base of $244.44.
Factset indicates that the forward price-to-earnings (P/E) ratio for the $S&P 500(.SPX)$ Index is 19 times. This P/E ratio is below the 5-year average (19.9 times) but above the 10-year average (18.3 times).
Assuming a mild recession, and referring to the valuations during the 2020 pandemic and 2022, which were also recessionary periods, the potential drawdowns for the S&P 500 could be as follows:
2022 low (15.4 times): 4,080 points, a potential drawdown of 32% from the current level.
March 2020 low (15.98 times): 4,233 points, a potential drawdown of 27% from the current level.
10-year average (18.3 times): 4,893 points, a potential drawdown of 9% from the current level (5,375.86).
IV. Summary:
Overall, the severity of the U.S. economic recession expectations should not be ignored.
The International Monetary Fund (IMF) estimates that the probability of the United States entering a recession in 2025 is 40%, a significant increase from its forecast in October of last year.
Barclays Bank believes that the United States faces a "high risk of recession" in 2025. Its core logic includes the economic growth rate approaching the threshold of recession, a persistently weak labor market, and policy risks exacerbating economic fragility.
Barclays forecasts that the U.S. GDP growth rate in 2025 will be only 0.7%, close to the edge of a technical recession.
Under the expectation of a recession, the U.S. stock market may face the risk of further decline. From multiple perspectives, including corporate earnings expectations, investor sentiment, technical analysis, and historical valuations of the S&P 500, the downside potential for U.S. stocks still exists.
Going forward, whether U.S. economic data signals improve, whether the $Cboe Volatility Index(VIX)$ volatility index declines, and whether the M7 big tech stocks will lead the market rebound first remain key to a market reversal.
Strategically, secondary market investors should not blindly go long but should follow the trend and employ some hedging strategies, such as short selling and allocating defensive assets, to cope with potential market fluctuations.
$SPDR S&P 500 ETF Trust(SPY)$ $E-mini S&P 500 - main 2506(ESmain)$ $Micro E-mini S&P 500 - main 2506(MESmain)$ $Vanguard S&P 500 ETF(VOO)$ $ProShares Ultra S&P500(SSO)$
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