Stocks Roar Ahead, Brushing Off Recession Warnings

The U.S. stock market has staged a remarkable rally in late April and early May 2025, with the S&P 500 hitting its longest winning streak in two decades. This surge—driven by strong tech earnings and fading trade tensions—has left investors puzzled: How can equities climb so high while recession risks loom?

The answer lies in a stark divergence between corporate performance and economic fundamentals. While the S&P 500 rose nearly 1.5% on May 2—the ninth consecutive gain—the U.S. economy contracted by 0.3% in Q1, marking its first quarterly decline since 2022. Unemployment claims hit a two-year high, and core inflation remains stubbornly elevated at 3.5%. Yet markets are betting that earnings momentum and trade diplomacy will outweigh these risks.

The Rally’s Engines: Tech and Trade

The tech sector has been the market’s unsung hero. Both companies reported eye-popping Q1 earnings: Meta’s revenue rose 16% year-over-year, while Microsoft’s cloud business surged 27%. These AI-driven gains have fueled a rotation into growth stocks, even as broader economic data weakens.

Trade optimism has also played a role. After months of escalating tariffs under the Trump administration, U.S.-China negotiations showed glimmers of progress in late April. Beijing’s conditional openness to talks—if Washington eases car tariffs—has calmed investor nerves. “The market is pricing in a resolution to trade wars, not a recession,” said one Wall Street strategist.

The Elephant in the Room: Recession Risks

Yet the economic data is increasingly ominous. The Q1 contraction was driven by a surge in imports as businesses stockpiled goods ahead of tariffs. But the true toll of those tariffs—rising prices, empty store shelves, and delayed shipments—has yet to hit.

The labor market is also showing cracks. While April’s nonfarm payrolls beat expectations at 177,000, the ADP report revealed a sharp slowdown to 62,000 private-sector jobs—a sign of corporate caution. The Fed’s dilemma is clear: inflation remains above target, but the economy is fragile. The central bank has held rates steady at 4.25%-4.50% since April, with markets now pricing in a July rate cut.

Sector-Specific Winners and Losers

The market’s resilience isn’t universal. Healthcare stocks have fallen 2.7% year-to-date amid regulatory pressures, while energy and consumer discretionary sectors lagged behind tech’s gains. Investors are clearly favoring companies with pricing power and secular growth, such as AI leaders, over those exposed to consumer spending or trade disputes.

The Bottom Line: A Fractured Landscape

The market’s optimism hinges on two assumptions: 1) trade wars will be contained, and 2) corporate earnings will keep rising despite slowing GDP. History suggests both are risky bets. The last time the S&P 500 hit a record high while GDP contracted (Q4 2022), it soon reversed course.

Investors should also note the Fed’s caution. Chair Powell has warned that “the path ahead remains uncertain,” and the central bank’s latest forecasts predict inflation will stay above 2% until 2026. With the S&P 500 still 10% below its February all-time high, complacency could prove costly.

Conclusion: Proceed with Caution

The stock market’s resilience is undeniable, but it’s built on shaky foundations. Tech earnings and trade optimism are countering the headwinds of a contracting economy and rising jobless claims. While a near-term recession may not be inevitable, the risks are mounting.

Investors should focus on companies with durable earnings and avoid sectors tied to consumer spending or trade volatility. As the old adage goes: “Don’t fight the Fed”—but in this case, the Fed itself is unsure of the path ahead. With the S&P 500 facing resistance at 5,783 and technical indicators suggesting a potential correction, the rally may be running out of room.

The coming months will test whether this bull market can survive a weakening economy—or if the recession warnings will finally catch up.