July 10, 2025

QuickTakes

The Roaring 2020s:

Six Years of Resilience, So Far

The economy won't let us down. Despite numerous crises, real GDP has remained recession-resistant since the Covid lockdown during the first half of 2020. That's almost six recession-free years notwithstanding the pandemic, the Russian invasion of Ukraine, the tightening of monetary policy, the war in the Middle East, and Trump's Tariff Turmoil. Despite the five crises, it really has been the Roaring 2020s so far. Real GDP is at a record high and so is the stock market.

There doesn't seem to be much roaring (a.k.a., exuberance) in measures of consumer and business confidence. But there is plenty of it visible in the quarterly Buffett Ratio, which is equal to the total value of US corporate equities at market value divided by nominal GDP (chart). A useful weekly proxy for the Buffett Ratio is the S&P 500 stock price index divided by the S&P 500 forward revenues per share. It rose to 3.03 during the July 9 week matching the record high just before the latest correction started on February 19.

So is the stock market irrationally exuberant and set for another fall, i.e., a correction or even a bear market? That depends on whether the next (inevitable) crisis will raise recession fears again or actually cause one. Corrections happen when recession fears depress the valuation multiple, which then rebounds when no recession occurs (chart). We have previously referred to these events as "panic attacks." Bear markets occur when recession fears accurately anticipate an economic downturn. In this scenario, both the valuation multiple and earnings fall.

We reckon that the Buffett Ratio, as well as other stock market valuation measures have rebounded to where they were before the latest correction because investors have more confidence in the resilience of the economy. The longer that the economy is expected to grow, the higher is likely to be the Buffett Ratio and the P/E multiple. That's consistent with our Roaring 2020s scenario. That's also consistent with the outperformance of the Magnificent-7, the Roaring 2020s' market leaders.

Today's unemployment claims report confirmed the resilience of the labor market as initial jobless claims fell back down to 227,000, though that might have been affected by the July 4 holiday (chart). On the other hand, continuing claims rose to a new cycle high suggesting that the duration of unemployment is increasing.

The July 9 readings of the Atlanta Fed's GDPNow tracking model showed real GDP up 2.6% (saar) during Q2 (chart).

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