Macro
Growing concerns about economic growth have increased the frequency with which economists discuss the possibility of a recession. Recessions are not typically triggered by a single catastrophic event; rather, they are often the culmination of a period during which the economy becomes increasingly fragile. This fragility makes the economy vulnerable to potential shocks that can significantly reinforce downward pressure on growth and lead to a recession.
Back in 2022, there was high anticipation of a recession that ultimately did not materialize. At that time, economists underestimated the strength of the US economy. The main reason for this gloomy outlook was the expected strong negative impact of high interest rates. Nevertheless, growth was robust but vulnerable. It was bolstered by a robust labor market with a high job opening rate, post-pandemic excess savings among US consumers, and the continuation of a robust fiscal stimulus. All of these stimulatory factors have now been depleted. The labor market has become more vulnerable, with the job opening rate returning to pre-pandemic levels, excess savings having been depleted, and an upcoming reduction in fiscal stimulus due to federal cuts implemented by the DOGE department. Furthermore, the private sector might also reduce spending as companies are likely to pull back on investments to navigate uncertainties related to tariffs and global trade.
Furthermore, consumer financial health is declining, as evidenced by rising delinquency rates on both credit cards and auto loans. More importantly, households are facing significant pressure on their budgets due to increasing mortgage costs. Although bond yields have decreased somewhat, mortgage rates remain above 6%. During the pandemic, many Americans were able to refinance their homes at historically low rates; however, a significant portion of existing mortgages are now coming up for refinancing at much higher rates. For example, in early 2022, only 4% of mortgages carried rates of 6% or more, but today, over 18% of mortgages are subject to rates at or above 6%. These high mortgage rates have led to an accumulation of new home inventories—the highest levels observed since August 2009, as fewer buyers enter the market.
In addition, layoffs have spiked in both the private and public sectors. In the public sector, agencies such as DODGE are reportedly preparing for mass layoffs of federal employees. Although the nominal economic impact of these layoffs may not be very significant – and is partially offset by generous severance packages – they could significantly affect the saving behaviors of approximately 10 million government workers. As uncertainty increases, consumers and employers may adjust their spending and investment strategies, further influencing the broader economic outlook.
U.S. economic data provided mixed signals, with February ISM Manufacturing falling into contraction, driven by declining new orders, weaker employment metrics, and increased pricing pressures linked to tariffs. Conversely, ISM Services data indicated sustained expansion, marked by growth in orders and employment. Employment figures showed modest job gains, with February nonfarm payrolls increasing by 151K – meeting market expectations – but unemployment ticked slightly upward, underscoring broader economic uncertainty. Federal employment decreased by 10K, consistent with analyst forecasts; however, significant DOGE-related layoffs are anticipated in the coming months.
In response to these developments, investors have become cautious, with market sentiment impacted by concerns of a potential recession.
Rates
Treasury markets reacted negatively as tariff concerns weighed heavily on investor sentiment. The yield curve experienced a bull steepening, with short-term yields declining faster than long-term yields, reflecting market expectations for potential rate cuts amid economic uncertainty related to tariffs.
The spread between the 10-year and 3-month U.S. Treasury yields turned negative again last week, indicating renewed concerns about economic growth. Such yield curve inversions typically signal investor apprehension that the Federal Reserve may maintain higher short-term interest rates longer than anticipated, potentially constraining future economic expansion. Recent market activity suggests investors are becoming increasingly cautious, anticipating a slowdown and reduced consumer spending power, despite persistently elevated long-term inflation expectations.
Markets currently price in approximately 75 basis points of Federal Reserve rate cuts over the next year, aligning with recent dovish signals from Fed commentary.
Bond market volatility has surged dramatically, reaching its highest level since the previous election. Investors have pivoted toward a notably dovish stance: at the start of the year, markets anticipated only 30 basis points of cuts—or roughly one rate cut—but expectations began shifting in mid-February. Now, investors are pricing in more than three Fed rate cuts for 2025. This shift suggests markets anticipate significantly more economic drag than previously acknowledged by the Fed.
Meanwhile, the U.S. dollar weakened considerably. Gold prices rallied, indicating heightened investor demand for safe-haven assets, while Bitcoin similarly gained amid ongoing market uncertainty. Conversely, oil prices continued their downward trajectory, marking the seventh consecutive week of declines.
Equities
US equities experienced significant declines this week, with major indices extending recent losses. The S&P 500 has broken through Jan. 13 support of 5,773 opening a gap to pre-election November 5 lows of 5,722 and pushing VIX volatility briefly above 26. The index is getting closer to test its key 200-day moving average at 5,725, which may accelerate the near-term selling. The Nasdaq briefly entered correction territory, impacted heavily by Big Tech declines, notably Tesla (-10.4%) and Nvidia (-9.8%). With richly priced index, softening of the leadership stocks, and growing concerns over consumer resistance, tariffs and overall geopolitical uncertainty there are not may dip buyers, therefore test of the level seems inevitable.
Mag-7 valuations are narrowing toward the S&P 500, reducing their gap. Cyclical sectors, including technology and energy, are experiencing downward momentum, while defensive sectors like healthcare are trending upward. On a Relative Rotation Graph, which tracks both performance and momentum, defensive industries have emerged as leaders. Meanwhile, technology and consumer discretionary remain the weakest-performing sectors, whereas real estate is currently the best performer.
Rising tariffs and geopolitical tensions have driven the U.S. Economic Policy Uncertainty Index to its highest level since the pandemic. While CEO and executive sentiment remains near a multiyear high, it has slipped since the election. This growing uncertainty is expected to weigh on corporate spending, leading analysts to revise earnings forecasts downward.
Over the next three years, AI-related capital expenditures (CAPEX) are projected to reach approximately $2 trillion. Major technology companies are significantly increasing their investments in AI infrastructure to support this growth. For instance, Microsoft plans to spend around $80 billion in fiscal year 2025 on AI-enabled data centers to train large language models and deploy AI and cloud-based applications. Similarly, Amazon has committed $100 billion this year to expand its data centers, partnering with companies like GE Vernova to enhance its infrastructure.
Nvidia’s graphics processing units (GPUs) are central to AI development, and investments in these GPUs have a substantial multiplier effect across the technology ecosystem. Wedbush analyst Dan Ives notes that for every dollar spent on Nvidia GPUs, an additional $8 to $10 is spent on related technologies, including software, infrastructure, and data centers. This multiplier effect underscores the extensive ecosystem required to support AI advancements, encompassing hardware and the software and infrastructure necessary for AI applications.
There where significant moves caused by earnings releases this week. Target (-7.4%) delivered slightly better Q4 results but cautious commentary; Best Buy (-11.7%) saw positive comps but disappointed on guidance. CrowdStrike dropped (-14.1%) due to lower recurring revenue forecasts and softer margin outlook. Abercrombie & Fitch (-16.5%) missed earnings significantly, guiding lower. Costco (-8.0%) missed slightly on margins, overshadowing robust non-food comps. Hewlett Packard Enterprise tumbled (-20.2%) on margin misses and weak outlook. Intel (-13.0%) gained attention from partnerships with Nvidia and Broadcom for its advanced manufacturing process, alongside Trump’s and TSMC’s (-1.9%) announcement of a $100 billion US chip manufacturing investment. Tesla’s losses (-10.3%) were attributed to weakening European and Chinese sales.