Staff Reporter
Forecasting a U.S. recession is more complex than it seems. Recently, Wall Street has faced numerous catalysts. After a nearly two-and-a-half-year rise in the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite—driven by advancements in artificial intelligence—investors in 2025 have been captivated by erratic swings in Treasury bond yields and a renewed excitement over stock splits.
However, it’s worth questioning whether Wall Street is overlooking the broader picture: the state of the U.S. economy.
While the economy and the stock market aren’t always closely linked, corporate earnings often reflect domestic economic conditions. One notable recession forecasting tool, which has been accurate for 59 years—only misfiring once in back-testing since 1959—suggests that the outlook for the U.S. economy and stock market may be less optimistic than it appears.
A Reliable Recession Indicator
No forecasting tool can definitively predict the future of the U.S. economy or Wall Street. Yet, certain metrics and events have historically correlated with movements in the Dow, S&P 500, and Nasdaq Composite. For example, significant declines in M2 money supply have typically preceded economic downturns and challenging times for investors.
Right now, Wall Street’s primary concern may not be Trump’s tariffs, but rather what the Federal Reserve Bank of New York’s recession probability tool indicates.
This tool analyzes the yield spread between the 10-year Treasury bond and the three-month Treasury bill to assess the likelihood of a recession within the next year. In a healthy economy, the yield curve slopes upward, meaning longer-term bonds yield more than short-term bills. An inverted yield curve—where short-term yields exceed long-term ones—often signals investor anxiety about the economic outlook.
The New York Fed updates its recession probability forecast monthly. As of May 2025, it indicates a 30.45% chance of a U.S. recession by April 2026. While this is down from a high of over 70% in 2023—the peak in four decades—historically, any probability above 32% since 1966 has eventually been followed by a recession.
Historical Context
It’s essential to understand that recessions often don’t occur until the yield curve has un-inverted and started to rise sharply. This pattern is evident in comparisons of the 10-year and three-month Treasury spreads.
Having just experienced the steepest inversion of this yield curve in 40 years, it’s reasonable that it may take time for the curve to normalize. This potential un-inversion, along with the historical accuracy of the New York Fed’s tool, suggests a U.S. recession could be on the horizon.
Notably, the initial reading of U.S. GDP for the first quarter showed a 0.3% contraction. Although this is better than the Federal Reserve Bank of Atlanta’s GDPNow model predicted, it aligns with the New York Fed’s recession indicator.
According to Bank of America Global Research, around two-thirds of S&P 500 drawdowns from peak to trough between 1927 and March 2023 occurred during recessions, not before.
Cyclical Nature of the Economy
While a recession forecast may not be what investors wish to hear, it’s important to remember that economic and stock market cycles are not linear—they swing both ways.
Recessions are a normal part of the economic cycle, and while they often bring about higher unemployment and slower wage growth, they tend to be brief. Since World War II, the U.S. economy has experienced a dozen official recessions, averaging just 10 months in duration, with none lasting longer than 18 months.
Conversely, periods of economic growth typically last around five years. This imbalance explains the long-term growth of the U.S. economy.
This divergence between optimism and pessimism is reflected on Wall Street. In 2023, analysts at Bespoke Investment Group shared data on social media platform X, comparing the lengths of S&P 500 bull and bear markets since the Great Depression began in 1929. They found that the average bear market lasted about 286 days, while the average bull market extended to 1,011 days.
If the current bull market continues, it could surpass the length of many previous bull markets recorded since 1929.
