Stock Markets Defy the Recession Spectre: An Analytical Look

Despite a 30% probability of a U.S. recession sounding like a warning sign, global stock markets are maintaining their vibrancy, raising questions about whether investors are overlooking potential risks. Paolo Schiavone, a macro strategist at Goldman Sachs, suggests that the market may not be looking far enough ahead, which is why it's disregarding recession risks.

Schiavone posits that investors may be focusing more on strong liquidity and structural growth themes like artificial intelligence and fiscal credit expansion, rather than concentrating on the potential slowdown in the labor market. On Wall Street, despite worries about the impact of full-blown tariffs, strong corporate earnings and bets on lower interest rates have propelled stocks near record highs. Investors have also flocked back to tech giants and AI trades, even as data suggests economic growth may be slowing.

Liquidity Influx and the Impact of Short-Term Investors

Swap traders are now pricing in more than 100 basis points of Federal Reserve rate cuts by mid-2026. With massive issuance of short-term Treasuries pumping liquidity into money markets, cash is abundant. Meanwhile, after the S&P 500 Index rebounded from a tariff-driven sell-off in April, “fast money” investors have poured into the market.

Schiavone says these trend-following investors, or CTA funds, now control most of the “hot” equity flows. This makes the market exhibit signs of short-sightedness, because “their singular playbook (‘let winners keep winning’) leaves little room for fundamental bears,” he says.

Why It's Hard to Bet Against the Upward Trend

The Goldman Sachs trader indicates that due to the prevalence of short-term strategies and suppressed volatility, few are willing to bet against an upward trend that remains intact, suggesting that the path of least resistance is still upward.

Optimistic Outlook from HSBC

Meanwhile, HSBC on Tuesday raised its year-end target for the S&P 500 by more than 800 points to 6400, citing the elation brought on by artificial intelligence and the easing of U.S. policy uncertainty.

“The AI trade is driving tech/AI stocks (which are about half of the S&P 500) higher, and a reduction in policy uncertainty (like tariffs) is driving the ‘rest’ of the market higher,” HSBC analysts wrote in a note.

Important Note

This article provides an analysis of the current situation in the financial markets and does not provide investment advice. Investors should conduct their own research and consult with a financial advisor before making any investment decisions.