Market Minute: S&P 500 Correction, Recession Risks, and the Fed's Balancing Act
The S&P 500 is currently still in correction, despite trading higher from last week’s lows. Sentiment remains bearish, driven by soft economic data pointing to slower growth and higher inflation. While this correction has raised concerns, it has not yet triggered a clear recession warning for the U.S. economy. However, recession risks appear to be rising, with higher tariffs and fiscal drag cited as key catalysts. Some market observers argue that the recent sharp stock market decline could foreshadow a deep economic contraction, while bullish investors suggest a de-escalation of the trade war and a shift toward pro-growth policies could help the S&P 500 recover from its current correction and reach new highs.
The Fed’s recent Federal Open Market Committee (FOMC) meeting reflected a cautious tone. While leaving interest rates unchanged, the committee acknowledged increased economic uncertainty and reduced the pace of quantitative tightening (QT). Treasury securities roll-off will now be 5 billion per month, down from 25 billion. The Fed’s Summary of Economic Projections (SEP) also revised GDP growth for 2025 downward to 1.7%, while raising inflation forecasts. Despite these adjustments, the Fed signaled that it remains aligned with market expectations for two to three rate cuts this year.
The slowdown in QT is seen as positive for equities, as it adds liquidity to the market by shoring up bank reserves. This stance has been interpreted as dovish, providing some relief to markets. However, the broader economic outlook remains challenging, with stagflation posing a complex policy dilemma. If the combination of slowing economic growth and inflation presents risks for corporate earnings, it could continue to weigh on stock prices.
While recent data does not indicate an imminent recession, the market is pricing in a slowdown in earnings amid weakening global growth expectations. The Fed’s cautious stance and reduced QT provide some support, but the broader economic outlook remains uncertain. Clarity on trade policies and further economic data will be critical in determining whether the current correction deepens or the market recovers.
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Charles Schwab and all third parties mentioned are separate and unaffiliated, and are not responsible for one another's policies, services or opinions.
