By Teresa Rivas

The upheaval in markets has been painful, but isn't necessarily a harbinger of economic fallout to come. Yet that doesn't mean it's safe to go back in the water.

On a closing basis, the S&P 500 technically avoided a bear market, with a peak-to-trough decline of only about 19% on April 8 -- that's less than the typical 20% threshold, but it did surpass that mark on an intraday basis. And of course anyone who lived through the selloff would be forgiven for feeling as if they had survived a bear.

Semantics aside, over the last four decades the S&P 500 only correctly predicted a recession when it was pricing in a fall in earnings expectations that later materialized. When it was just a matter of a falling forward 12-month price-to-earnings ratio, no recession emerged, as happened most recently in 2022, and perhaps most famously in 1987.

Last month's swoon appears to be more of the latter, argues Capital Economics' Chief Markets Economist John Higgins. While the picture may change given the rapid pace of policy, at the moment it appears the market will avoid the most draconian tariff levels -- and therefore the worst economic impact.

Although there will still be some tariffs in place, those may be largely manageable. In addition, he writes the economy could also benefit from a fiscal package.

"That's provided one can be agreed fairly soon, given the risk of a debt ceiling crisis this summer," Higgins writes.

Other economic data has held up so far. Friday's job report showed 177,000 jobs were created last month, far more than the 135,000 expected.

Moreover, he notes that it isn't clear whether tech -- the previous rally driver -- will have to see much in the way of earnings estimate cuts. Many electronics have been exempted from the trade war. On the other hand, that doesn't mitigate the competitive threat from China in areas such as artificial intelligence following the unveiling of DeepSeek's capabilities.

"Overall, our sense is that the recent slide in the stock market was another false signal of a recession," he concludes, particularly if any potential downward revisions in tech don't spread to the broader market.

Greg Boutle, head of U.S. equity and derivatives strategy at BNP Paribas, largely agrees. He writes that non-recessionary market crashes can be large and volatile, but brief, and thinks that is going on in the market this year.

Still, as the above data highlights, the economy and the stock market are two different things. Boutle warns against interpreting that as an all-clear signal. His base case is for ongoing P/E compression and earnings downgrades that "could see equities retest year-to-date lows."

In fact, he warns a next leg lower could be more of a grind, with less explosive downside moves.

"In the U.S., we think the rally off the lows has been a short-term positioning squeeze," he concludes. "For those looking at S&P 500 upside, we would keep trades very short in maturity and tactical. For investors who want to position for a more sustained upside rally, optionality in Europe could be more attractive."

Perhaps like this week's Barron's stock pick, Dutch brewer Heineken. Cheers to stability.

Write to Teresa Rivas at teresa.rivas@barrons.com

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May 02, 2025 15:36 ET (19:36 GMT)

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