US Recession in 2025? The Market Might Not Care
With fears of a US recession in 2025 building, traders and investors once again find themselves at a familiar crossroads, caught between anxiety and anticipation. Trading and investing have always been strange professions: one moment, you’re engulfed in chaos and noise; the next, silence.
In those quiet stretches, when markets stall and headlines fade, many turn to research, reading, or even crossword puzzles-searching for clarity while waiting for the next big move.
One of the more popular websites that has recently become a favorite of many traders during down times is www.polymarket.com, a site where people can bet on many political, economic, and sporting events.
Anyway, one of the notable bets on the website was “Will there be a recession in the US in 2025?”. The market was at 40% odds with around 5MM USD bets overall.
Some traders turned to me and asked, “What would you do here, Mr. Stoykov?”
My answer surprised them: I said they were asking the wrong question—or at least an incomplete one.
The real question they wanted answered was: “If there is a recession in 2025, will stocks go down significantly?”
Do US Recession Always Mean Market Decline?
To explore this, let’s look at a 50-year chart of the S&P 500 and US recessions, sourced from macrotrends.net.
As you can see, correlation between US recessions and S&P500 going down is strong but not 100%. During the recession of 1990, the S&P 500 went down more than 10% from its high. During the 2000 recession, the S&P 500 declined, but it continued to fall even as the economy began to grow in 2001.
So, yes, just because the US economy enters recession it does not mean the S&P500 will necessarily go down a lot. Yes, that has been the case in 2008 and during 2020 but has not always been the case. Moreover, S&P500 can go down even if the economy is not in a recession like in 2001.
So, it is technically possible that even if the US enters a recession in 2025 S&P500 might not go down? Yes, that is certainly possible as it has happened before, the last time in 1990.
So, what are the tell-tell signs that a substantial market decline is imminent?
What Really Spooks the Market
In our opinion, that would be a combination of, mainly, two factors. The first factor and probably the most important one is optimism! The markets tend to behave opposite to what most people expect them to. Below is a 25-year chart comparing the S&P 500 with the University of Michigan Current Conditions Index, sourced from tradingeconomics.com.
Pictured in blue – S&P500, pictured in green – University of Michigan Current Conditions Index
Historically, large equity sell-offs tend to happen only after a sustained period of optimism—when most investors believe the good times will keep rolling. That’s not the environment we’re in today. The University of Michigan Current Conditions Index is hovering near all-time lows around 60, signaling widespread pessimism. In such a sentiment climate, a major market decline—even if a US recession occurs in 2025—is statistically less likely.
The second major factor that can trigger a significant downturn is a crisis of confidence in the banking sector. This kind of mistrust leads to credit contraction, which played a central role in nearly paralyzing the US economy during the 2008 financial crisis. There are many ways to assess this risk, but our preferred metric is short interest in the largest US bank stocks—a real-time pulse on investor sentiment toward financial institutions.
Here’s a snapshot of short interest as of April 30, 2025, sourced from finviz.com
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JPM: 1.01%
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WFC: 1.23%
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BAC: 1.28%
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C: 1.98%
These figures are extremely low, suggesting that investors are not betting against the big banks. In other words, credit contraction risk is low, and the financial system looks healthy.
Why a 2025 Slowdown Doesn’t Have to Spell Doom
In conclusion, while a US recession in 2025 is certainly possible, the probability of a major market crash appears low. Most investors have already taken a defensive stance, leverage is contained, and the banking sector remains strong.
So, even if the economy slows, the stock market might not follow suit.
Keep calm and carry on—2025 is not the end of the world.