The S&P 500 has just broken below a major price channel dating back to October 2023.
To many investors, this is a mirror image of early 2022.
Back then, the S&P 500 also broke down from a major price channel that had been respected over the prior two years.
Donald Trump’s new tariff policies have been the most clear catalyst for this decline.
This sell-off has been limited to the US market, as indices like the DAX (German stock market) have actually printed record gains since the start of 2025.
Trump went as far as saying he wouldn’t rule out a recession in 2025, intensifying the sell-off.
Investors are rapidly readjusting their expectations for economic growth under a president who seems less concerned about short-term economic prosperity.
Recession Odds Rising
Goldman Sachs has increased their probability of a US recession occurring in the next 12 months to 20%.
Most other banks have made similar adjustments, with the average probability now sitting around 25%.
This might look like a small shift, but it has sparked real concerns across the market.
Google Trends data for the term “recession” has spiked to the highest level since 2022.
The combination of this steep stock market sell-off, banks readjusting their recession probabilities, and widespread public concern makes now an ideal time to reassess whether these fears are legitimate.
During a recession, the average S&P 500 drawdown is about 30%.
Given we’ve only witnessed a 9% correction so far, if we’re truly heading into a recession, it could mean an additional 20% decline from current levels.
What Happens In A Recession?
The most fundamental characteristic of a recession is rising unemployment.
When we look at initial jobless claims and overlay official US recessions, all of them occurred with an increase in initial jobless claims.
In fact, leading into every single recession, initial jobless claims had already begun to rise.
This is something we’ve been watching very closely over the last few months.
Currently, we’re not seeing a clear warning sign from the job market.
We also analyze corporate profit margins because they have a very close relationship with employment.
If profit margins are rising, businesses typically hire more people to expand operations.
If profit margins are shrinking, businesses are more likely to lay people off to cut costs.
Looking at corporate profit margins going back to the 1950s, in the year leading up to almost every recession of the last 70 years, corporate profit margins declined.
Today, corporate profit margins are at all-time highs, suggesting businesses aren’t positioning for major layoffs.
Of course, Trump’s tariff policy could lead to declining profit margins in 2025, potentially triggering a recession in 2026.
However, declining profit margins by themselves don’t necessarily lead to a lower stock market.
Between 1996 and 2000, the market went on a massive run despite declining margins, only falling during the 2001 recession.
In fact, the same thing happened in 2006.
To us, widespread recession concerns seem premature, just as they were in August 2024, September 2022, and June 2022.
All of these moments featured widespread recession fears that never materialized.
These periods of recession concern all occurred following significant market sell-offs and marked significant market bottoms.
That remains our base case on the stock market today.
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Our Technical Strategy
As traders, we must remain open-minded to all scenarios…
We can’t afford to be stuck on just one vision.
For instance, we’ve seen the S&P 500 have much more significant drawdowns without a recession occurring, like in 2019 and 2022 when it declined by over 20%.
So, here’s a sneak peek at how we’re positioning at Bravos Research.
The S&P 500 has just reached oversold conditions according to the RSI.
This momentum indicator does a great job identifying when price has reached extreme conditions.
An oversold RSI reading has marked significant bottoms on the S&P 500 in the past.
This suggests a big rally with the market recovering back to all-time highs is a very likely scenario.
But there’s another possible outcome, something similar to January 2022.
Back then, stocks only saw a brief bounce before continuing to decline another 20%.
That’s the risk we need to watch for today!
Now, there is something similar about these January 2022 and today.
In both cases, the S&P 500 broke below key moving averages before hitting oversold conditions.
In fact, even 2018 and 2020 saw the same setup:
A steep sell-off, slicing through moving averages, reaching oversold RSI.
Both times, stocks only bounced briefly before moving lower.
So, on this next bounce, we want to see the S&P 500 make a strong recovery back above all key moving averages.
We’ll also be watching our leading market indicators that provided warnings in each previous case.
If we get the same warning sign today, we’ll be adopting a much more defensive position at Bravos Research.
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