MW Why are stocks climbing when a recession looks more likely? Here's one possible reason.

By Joy Wiltermuth

Treasury Secretary Scott Bessent said Tuesday that President Donald Trump was making more progress toward trade deals and a new tax bill, helping take some of the edge off Wall Street as a chaotic April draws to a close.

Optimism around potential deals, tax cuts and deregulation helped the S&P 500 index SPX on Monday cement its longest string of gains this year.

Yet Trump's extra tariffs unveiled on April 2, followed by a partial pause on April 8, rattled global trade partners and added to an already sour mood among U.S. households and businesses. It also unleashed carnage in stocks and raised fears that the U.S. economy could tip into a recession - even if some trade deals were being struck during Trump's 90-day pause.

"We moved to an expectation of a recession as a baseline on April 9," said Luke Tilley, chief economist and head of asset allocation and quantitative services at Wilmington Trust Investment Advisors. His firm's biggest concerns have been that even if the newly imposed tariffs were removed, or dramatically reduced, baseline tariffs on U.S. imports would still be extremely high versus recent decades.

With that backdrop, the Wilmington Trust team puts the odds of a recession at about 60% over the next 12 months, and expects a short and mild downturn, while others have put the likelihood of a recession much higher.

Read: Another juicy S&P 500 target goes by the wayside as this 6,700 call is thrown into trash

So, why have stocks been rising? Aside from talk of Trump looking to pivot to more "pro-growth policies," there's a view that some of the damage in stocks in a mild-recession scenario has been realized already.

Tilley pointed out that the S&P 500 fell by as much as about 20% on a median basis during recessions in roughly the past 80 years. On a monthly basis, the peak-to-trough declines were less dramatic.

The S&P 500 ended 18.9% lower on April 8 from its Feb. 19 record finish, based on a closing low of 4,982.77, according to Dow Jones Market Data. When including April 7, it fell 21.3% on an intraday basis.

Yet perhaps more important, stocks have been able to turn around pretty quickly - with a median trough-to-peak recovery pegged at around 11 months, according to Tilley.

"I think a lot of people are looking at this," Tilley said, adding that even with the risks of a recession rising, more people appear to be willing to look through shorter-term volatility in stocks.

Nixon-esq first 100 days

The S&P 500 on Tuesday was down 7.8% over Trump's first 100 days in office, on pace for the worst such stretch since the start of Richard Nixon's second term in 1973, according to Dow Jones Market Data.

See: Trump's first 100 days in office are worst for stock market in half a century

While that could mean the worst damage for stocks might be done, Tilley also said it's hard to see American consumers handling even baseline tariff increases very well.

Treasury Secretary Bessent in March warned investors of a need to "detox" from pandemic stimulus after two straight years of 20%-plus gains in the stock market.

Still, the big equity drawdown of 2025 stems largely from uncertainty created by policies from the Oval Office. And another way to look at the possible direction of the stock market would be through estimates around price-to-earnings multiples.

The ratio reached 22x for the S&P 500 at the end of last year, based partially on expectations for "pro-growth" Trump policies. But they dipped below 20x after China's DeepSeek raised concerns about potentially cheaper ways to harness artificial intelligence and then on Trump's tariffs.

"It's hard to justify markets going back to a 22x multiple in the near termgiven the current backdrop of weakening economic and earningstrends and heightened uncertainty," said Keith Lerner, chief market strategist at Truist Advisory Services, in a Tuesday client note.

The Dow DJIA was up about 370 points Tuesday, or 0.9%, while the S&P 500 was 0.7% higher and the Nasdaq Composite COMP was up 0.6%, according to FactSet.

-Joy Wiltermuth

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April 29, 2025 14:58 ET (18:58 GMT)

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