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5/9/2025
In addition to the severity of the recession, inflation will be an important factor during this phase.
Donald Trump's tariffs are causing increased nervousness, and not just among investors in international financial markets. The main concern is the expected negative impact on U.S. growth. The long-running U.S. economic expansion could be interrupted if Trump's tariff plans were to overshadow the solid growth trends seen so far. In our view, real gross-domestic-product (GDP) growth in the U.S. is likely to fall to around 1% in 2025 and 2026 as new tariffs raise costs and slow domestic production and consumption. We see the probability of a U.S. recession[1] at slightly above 50%, but if one occurs, it is likely to be moderate, with inflation rather than deflation.
So what does this mean for stock-market performance? As our chart of the week shows, recessions with higher inflation rates have historically had less of an impact on earnings per share (EPS) in the S&P 500 than deflationary recessions. The average decline in S&P 500 EPS during recessions is 20% from the peak to the trough of four-quarter EPS, with results since 1960 ranging from 4% to 45%. While deeper-than-average recessions tend to result in sharper declines in S&P EPS, the inflation environment also plays an important role.
David Bianco, DWS Americas CIO, points out that “in recessions with inflation above 4%, the impact on S&P EPS is less than the real GDP contraction would suggest. This is not only because high inflation tends to boost nominal sales growth, but more importantly, unlike severe disinflation or deflation, high inflation recessions may help to
Sources: Haver Analytics, S&P Global, DWS Investment GmbH as of 5/1/25
*Consumer price index
We expect S&P 500 companies to absorb one-third of the tariffs ultimately implemented by the Trump administration, which should weigh on S&P after-tax earnings by 3.5%, or about USD 10 per share. Our revised S&P EPS forecasts for 2025 and 2026 of USD 260 and USD 285, respectively, assuming slower growth and weak production, but no deep U.S. recession or sharp decline in U.S. asset values. We also include a USD 5 currency gain in S&P EPS as we expect a weaker U.S. dollar going forward.
Recessions in the U.S. are announced by the National Bureau of Economic Research (NBER) which defines a recession as a “significant decline in economic activity that is spread across the economy, lasting more than a few months.” It therefore takes into account various data points and may only announce a recession with hindsight.
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