- The US economy contracted in 2025Q1, down -0.3% (annualized), the first time since 2022Q1.
- This was entirely caused by a sharp increase in imports. US companies tried to anticipate the “reciprocal tariffs” announced by President Trump by building up extra stocks.
- The Eurozone economy grew by +0.4% (QoQ) in 2025Q1, outperforming the US for the first time since 2022Q2.
- The chance of a recession in the US is currently estimated at 65%.
- The US economy faces many challenges; uncertainties over a potential tariff war, negative wealth effects, government layoffs (DOGE), a foreign boycott of US goods and significantly lower tourism.
- However, not everything is doom and gloom in the US. President Trump seems to be listening to the financial markets, US domestic economic growth remained strong in 2025Q1 and the FED has the option to cut interest rates in 2025.
- Looking at the S&P 500 (-1%) and the UST10 (-4bp), one would almost think that April was a boring month. In reality, it was a roller coaster ride, with the S&P 500 first falling from a peak of 6132 on February 19 to 4978 (-19%) on April 8, before rising again to 5687 (+14%) on May 2.
- With a -19% decline in the S&P 500, there is “officially” a bear market. Since 1946, the S&P 500 has declined an average of -23.9% in a bear market without a recession and has lasted an average of 7.3 months. In a bear market with a recession, the S&P 500 has declined an average of -34.8% and has lasted an average of 15.2 months.
- Unfortunately, President Trump's influence on both the economy and the financial markets will remain significant and unpredictable in the coming months.
Last month we predicted that the US economy would contract in 2025Q1, for the first time since 2022Q1. At -0.3% (annualized), the contraction was ultimately not too bad. Especially since this contraction was entirely caused by an unprecedentedly strong and probably temporary increase in imports. To anticipate the reciprocal tariffs announced by President Trump, companies in the US quickly bought large quantities of goods and services abroad in 2025Q1. At the same time, the Eurozone economy turned out to have grown by +0.4% (QoQ) in 2025Q1, outperforming the US for the first time since 2022Q2.
Due to the negative economic growth in the first quarter of 2025, the probability of a recession in the US in 2025 is currently estimated at 65%. The US economy has many challenges to overcome in the coming period. President Trump's aggressive and erratic policies are also leading to a lot of uncertainty in the US for both companies and households. The price declines on the financial markets are leading to significant negative "wealth effects". The Department of Government Efficiency (DOGE) led by Elon Musk is causing major layoffs among civil servants. There is a good chance that more countries, like China, will eventually increase their tariffs on American goods and services. In addition, the tariff war is now also leading to a boycott of American goods abroad and fewer tourists visiting the US. However, not everything is doom and gloom in the US, President Trump also seems to be guided by the financial markets. In addition, US domestic economic growth remained strong in 2025Q1 and the Fed has the scope to cut interest rates by 100bp in 2025 in an emergency.
Looking at the two charts below, the S&P 500 (-1%) and the UST10 (-4bp) would almost make you think that April was a boring month. In reality, however, it was a roller coaster ride in which the S&P 500, after a peak of 6132 on February 19, first fell to 4978 (-19%) on April 8, before rising again to 5687 (+14%) on May 2. President Trump had a major impact on this short and unprecedentedly volatile period, both with his announcement of the “reciprocal tariffs” and his attack on FED Governor Powell, as well as with the (temporary) withdrawal of his threats. Unfortunately, President Trump’s impact on the financial markets is expected to remain significant and unpredictable in the coming months.
With a -19% drop in the S&P 500, there is “officially” a bear market. According to Carson Investment, there have been 14 bear markets between 1946 and 2024. Seven times the bear market was accompanied by a recession and seven times there was a bear market without a recession. However, there are important differences. In a bear market without a recession, the S&P 500 fell by an average of -23.9% and lasted an average of 7.3 months. In a bear market with a recession, the S&P 500 fell by an average of -34.8% and lasted an average of 15.2 months. BCA was the most pessimistic research house at the beginning of this year, predicting both a recession for the US in 2025 and a price drop of -30% for the S&P 500. BCA also recently confirmed its year-end target of 4300 for the S&P 500. From the current level (5687), this means a further drop of 24%. All in all, enough reason to remain cautious for the time being. Although it is good to keep in mind that after every bear market a new bull market started reaching new highs.
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