US stock market is pricing in a recession based on these early signs

The US stock market is flashing warning signs. The S&P 500 has dropped by 2% since the Federal Reserve started cutting rates in September 2024, and that’s not normal. Typically, the S&P 500 climbs by 1% in the six months after a rate cut.

But when the economy is in a recession, history shows the index falls by 6% in half a year and 10% within a year. The biggest drop recorded during past downturns has been 15% within eight months, according to data from CNBC.

If the Fed successfully dodges a recession, the market usually bounces back. In cases where a recession is avoided, the S&P 500 rises 10% in six months and 15% over a year. But the way things are moving, investors aren’t betting on that outcome. The Fed is cutting rates, but markets aren’t reacting the way they should if the economy were healthy.

Executives are abandoning the ‘soft landing’ narrative

Company leaders have stopped talking about a soft landing—the idea that the economy can slow without crashing. During the last quarter of 2024, that phrase came up in 61 earnings calls. Since the start of 2025, it has been mentioned only seven times. That’s a sharp drop. Businesses aren’t optimistic anymore.

A survey conducted on March 4-5 by Chief Executive magazine asked 220 CEOs about their outlook for the next year. The results were the worst since November 2012. The National Federation of Independent Business reported that small-business optimism dropped in February, while policy uncertainty spiked to its second-highest level in records going back to 1985.

Corporations aren’t openly criticizing Donald Trump’s policies, but their focus is shifting. Mentions of tariffs in earnings calls have skyrocketed. So far this quarter, executives in the S&P 1500 have brought up tariffs 683 times. A year ago, in the same period, it was only 49 times.

Many businesses say they’re stuck in limbo. A chemical manufacturer told the Federal Reserve Bank of Dallas, “Tariff threats and uncertainty are extremely disruptive.” Executives don’t know which goods will be taxed next or how high the new rates will be. That makes planning difficult. Investment slows, hiring freezes, and expansion takes a backseat.

Consumers are cutting spending across all income levels

The warning signs don’t stop at corporations. Consumers are changing their habits. A report from the University of Michigan shows that consumer sentiment has dropped to its lowest point since November 2022. The decline is happening across every demographic—age, income, education, and political affiliation.

Spending habits are shifting. People are buying fewer non-essential items when stopping for gas. Walmart shoppers are choosing smaller pack sizes at the end of the month because their money isn’t stretching far enough. Liquor sales are seeing changes too—there’s an increase in purchases of 50ml “nip” bottles and half-sized 375ml bottles, while full-sized bottles are selling less. Jack Daniel’s CEO Lawson Whiting explained the trend simply: “It’s a consumer that is pinched.”

Luxury spending is dropping. American Eagle Outfitters CEO Jay Schottenstein said customers are cautious because they don’t know what’s coming. Delta Air Lines CEO Ed Bastian reported that last-minute flight bookings have declined. Companies are cutting travel expenses, and price-sensitive travelers are delaying trips.

There’s also a shift in immigrant communities. Small businesses in Hispanic neighborhoods are seeing fewer customers. Colgate-Palmolive’s head of investor relations, John Faucher, confirmed this in a recent earnings call: “There obviously is an impact on Hispanic demand. We’ve seen lower traffic from Hispanic consumers.”

Workers are losing confidence in job security

Employment numbers still look strong, but layoffs are creeping up. The unemployment rate stood at 4.1% in February, with 151,000 new jobs added. But beneath the surface, things are shifting.

Challenger, Gray & Christmas reported 172,017 job cuts in February, the highest since July 2020. That number is nearly three times higher than in 2024. While government layoffs played a role, private-sector job cuts more than doubled.

Workers are nervous. A report from Glassdoor found that only 44.4% of employees expect their employer to be in a better position in six months—the lowest optimism level since 2016. A New York Fed survey in January showed that 34% of workers thought unemployment would rise. By February, that number had jumped to 39.4%, the highest since September 2023.

Unemployment claims are still low, but the cracks are forming. Claims filed in Washington, D.C., Virginia, and Maryland are up 49% compared to a year ago. These numbers don’t include federal workers, meaning they likely come from businesses that depend on government spending—businesses now feeling the effects of Trump’s budget cuts.

The White House is holding its position

Despite the signs, Treasury Secretary Scott Bessent is downplaying fears. When asked if he could guarantee the US won’t enter a recession, he responded, “I can’t guarantee anything.”

Economists see trouble ahead. Trump’s tariffs remain a major risk, and businesses are waiting to see the impact before making big moves. There’s also concern about how companies will adjust once the new tariff policies are fully in place.

Bessent insists that the fundamentals of the economy remain strong. “There’s no reason we need to have a recession,” he said. He pointed to credit card data and banking activity as signs of stability.

The Trump administration is focused on spending cuts, tax reductions, and deregulation as their strategy to keep the economy moving. Bessent described it as a necessary adjustment: “There may be a pause as we transition from relying on government spending, but we’re going to get this spending under control. We’re going to bring manufacturing back home, and we’re going to make the country more affordable for working Americans.”

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