Recession fears for 2025 are fading fast, with market models and economist forecasts signaling a slim chance of economic contraction. But with optimism running high, could markets be misreading the risks?

According to the New York Fed's recession model, there is a 29% probability that the U.S. will enter a recession by the end of 2025. This is a dramatic decline compared to the elevated probabilities seen during the Federal Reserve's aggressive monetary tightening in 2022 and 2023.

In June 2023, the New York Fed’s model — which calculates recession probabilities based on the yield spread between 10-year Treasury bonds and three-month bills — estimated a 70% chance of a recession within a year, marking the highest level since 1982.

Notably, recession odds have tumbled since early November 2024. Kalshi betting markets showed a sharp drop from over 50% to just 23% following Donald Trump‘s election victory.

Recession odds have been tumbling because investors expect a strong boost to economic growth under Trump’s incoming administration. Expectations are centered around fresh tax cuts for individuals and corporations, as well as pro-business policies that could fuel spending and investment.

Growth Data Defies Expectations

The U.S. economy has displayed remarkable resilience in the face of high interest rates and persistent inflation. GDP growth in 2024 significantly outpaced other advanced economies, fueled by robust consumer spending.

The third quarter of 2024 saw an annualized GDP growth of 3.1%, revised up from 2.8%. This marked the strongest quarterly performance of the year. Personal spending increased at its fastest pace since the first quarter of 2023, growing 3.7%.

Meanwhile, the Atlanta Fed's GDPNow model estimates a 2.7% growth rate for the fourth quarter. That figure has been revised higher as of Jan. 7.

Oxford Economics also puts the probability of a recession at its lowest level in over two years. That’s due to a surge in leading indicators that suggest strong momentum heading into 2025.

Too Much Optimism?

However, there are signs that the optimism may be overblown.

Capital Economics stated that Trump's anticipated tariffs and immigration restrictions could weigh on GDP growth. The firm expects these measures, if enacted by mid-2025, to push annualized GDP growth down to 1.5% while temporarily driving inflation back up to 3%.

Michael Gayed highlighted that tariffs could also lead to layoffs as companies struggle to balance rising costs. "If tariffs become a bigger thing in the new year, it's reasonable to think that companies could consider layoffs to balance out some of the additional costs, if they don't pass them entirely on to the consumer," he said.

The expert sounded the alarm over renewed inflation risks as periods of Fed easing after extended tightening cycles have triggered inflationary surges.

"The U.S. economy experienced a huge second wave of inflation back in the late 1970s after the Fed brought interest rates way down," said Gayed.

Inflation had dropped from 11% to 4% before surging back to 14%. With major central banks globally expected to continue rate cuts in the coming quarters, a similar scenario cannot be ruled out.

Market Risks: Correction Ahead?

While stocks have climbed in tandem with economic strength, some experts are urging caution.

Veteran Wall Street investor Ed Yardeni said Trump's initial flurry of executive orders—expected to include new tariffs and immigration actions—could unsettle markets.

Yardeni highlighted a possible 10% correction in the stock market, though he remained optimistic about the broader outlook.

"We can't rule out a 10% stock market correction, but we would view that as a buying opportunity rather than as a reason to panic out of the market since we don't expect a recession or a bear market. We are still targeting 7000 on the S&P 500 by the end of next year," he said.

Goldman Sachs has also flagged a potential market correction risk, citing heightened uncertainty driven by reaccelerating inflation and policy shifts expected under Donald Trump’s administration, including tariffs and fiscal stimulus measures.

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Goldman Sachs Flags Market Correction Risk As Inflation, Trump Policies Stir Uncertainty

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