July 24, 2025

QuickTakes

Investors May Be Gaining Confidence

In the Resilience of the US Economy

The four-week moving average of weekly initial unemployment claims provides a real-time indicator of the labor market (chart). It has been improving recently as the four-week average of jobless claims has been falling. Employers may be less concerned about the possible adverse impact of Trump's tariffs on the economy and on their companies. They should also be gaining confidence in the economy's resilience as validated by the record highs in the S&P 500 and the Nasdaq.

We've been tracking the daily recession odds as reflected in Polymarket.com (chart). They've dropped significantly from around 60% in late April and early May to just 18% currently. There is an inverse correlation between the recession odds series and the S&P 500's forward price-to-earnings ratio. Investors are also gaining confidence in the economy's resilience and are willing to pay a relatively high valuation multiple for stocks. This is all consistent with our Roaring 2020s scenario, in which a recession remains a low-probability outcome for the rest of the decade.

Historically high valuation multiples should be sustainable as long as investors agree with us that the economy's resilience reduces the risk of a recession. This has been confirmed by numerous stress tests, which the economy passed without a recession. These include the post-lockdown pandemic, which led to supply-chain disruptions, and the ensuing inflation spike, resulting in the rapid tightening of monetary policy. Additionally, geopolitical shocks occurred when Russia invaded Ukraine and Israel fought a multi-front war against Iran. Most recently, Trump's Tariff Turmoil has also been a stress test that the economy has passed so far.

Today's S&P Global US Flash PMI report for July shows that "US business activity grew at a sharply increased rate in July." Economic growth accelerated as rising demand for services more than offset a dip in manufacturing (chart).

It is therefore no surprise that the stock market has also been resilient, with an unprecedented post-correction recovery to new highs since April 8 (chart).

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