China and the U.S. appear ready to hit pause on tit-for-tat tariffs to pursue a potential trade agreement, inspiring Wall Street veteran investor Ed Yardeni to dial back recession odds.

What Happened: Signs emerge that Washington, D.C. and Beijing may finally be willing to ease trade tensions that have rocked global markets and dented economic confidence.

In a note shared Monday, Yardeni said he's reducing his subjective probability of a U.S. recession to 35%. That’s down from 45% at the end of March.

Yardeni’s new estimate matches the level seen in early March and reflects growing optimism that ongoing tariff disputes will de-escalate.

"We are now lowering our odds of a recession back down to 35% because we believe that China and the US both may be ready to suspend their tariffs on each other while they negotiate a trade deal," the Yardeni Research President said.

"In other words, both sides may be starting to blink."

Markets have been rebounding sharply amid latest trade developments. Yardeni sees this as a reflection of confidence in a resolution and perhaps an early end to what he dubbed Trump's “Reign of Tariffs.”

Yet, he isn't blind to risks.

"There could still be supply disruptions resulting from the still unresolved trade war with China," he said, noting that regional and national business surveys have indicated softening economic activity and rising prices through March and April.

CFTC-regulated prediction market Kalshi shows recession odds — defined as two consecutive quarters of negative gross domestic product — have fallen from 69% a week ago to 55% as of early May. When Donald Trump was sworn in as the 47th U.S. president, odds were just 19%.

Why It Matters: Despite the softening probability, Yardeni still considers the current economic environment fragile, citing heavy consumer exposure to financial markets.

"We had been concerned recently about the negative wealth effect on consumption because of the drop in stock prices," Yardeni said, but recent gains in equity markets have alleviated that concern.

The S&P 500 — as tracked by the SPDR S&P 500 ETF Trust ( SPY ) — rallied sharply in April. Yardeni is weighing whether to revise his year-end target higher again.

He initially forecasted 7,000 for 2025 but lowered that to 6,400 on March 5 and then to 6,000 by March 31.

"We are inclined to do so given the power of the V-shaped rally in the S&P 500," Yardeni said. "However, we aren't ready to do so" due to ongoing earnings pressure and valuation concerns.

On April 8, the price-to-earnings multiple for the index bottomed at 18.1 but rose to 20.5 by the end of April.

The biggest drag on earnings may still be tariffs, which Yardeni emphasized are "first and foremost taxes on domestic importers."

Currently, the U.S. has imposed a 10% tariff on most imports, plus a 25% tariff on autos, aluminum and steel. Chinese goods have a staggering 145% levy.

What’s Next: With corporate tax receipts totaling $502.19 billion over the past 12 months, Yardeni estimates tariffs could raise over $300 billion in duties in the coming year — a significant potential hit to corporate profits unless companies pass costs on to consumers.

"Trump needs to put the trade issue behind him to reduce the odds of a recession, which would harm the Republicans' chances of holding onto their slim majorities in both houses of Congress," Yardeni said.

Court challenges to Trump's authority to impose tariffs under a national emergency declaration are also gaining traction. If the courts or political pressure force Trump to delay or drop the tariffs, Yardeni predicts it could trigger "a V-shaped stock-market bottom."

In his words: "We're counting on that; the alternative is just plain ugly."

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