History is unkind to those who mistake motion for progress. The violent equity drawdown in April, followed by an equally intense rebound in early May, has left investors torn between relief and suspicion. But market participants have been here before. From the Great Depression to the Global Financial Crisis, equity markets have a habit of luring investors back in with sharp recoveries, just before plunging to new lows. Still, not all rebounds are illusions. In 1982, 2009, and 2020, early rallies proved prescient, anticipating monetary or fiscal shifts that reignited growth.
Bear markets often follow a three-act structure. First comes the shock, a catalyst that breaks complacency. Then, a sharp rebound, as optimism returns prematurely. Finally, a more grinding phase where fundamentals reassert themselves. Investors who confuse the second for the third often pay dearly. In 2007, as cracks in subprime mortgages appeared, the market tumbled, only to rally and post a fresh high before collapsing into the financial crisis. Those who chased that rally waited six years just to break even. Such recoveries are not anomalies; they are defining features of bear markets. On average, early bear market bounces deliver gains of around 9%, while the full cycle typically spans 14 months and carries a median decline of 34%. But averages hide dispersion and the task now is to decide: are we facing a classic bear trap, or the start of something more durable?
The Shape of the Current Bear
To assess where we are, it's useful to classify bear markets into three types: structural, cyclical, and event-driven. Structural bears, like those following asset bubbles or banking crises, tend to be long and deep. Cyclical ones coincide with economic downturns and earnings erosion. Event-driven bears, triggered by geopolitical shocks, policy missteps, or pandemics, can recover quickly if the economic engine remains intact.
The recent turbulence began as an event-driven shock, triggered by sudden tariff hikes and U.S.-China decoupling fears. But what began as an external shock now risks evolving into a more fundamental slowdown. Headline growth remains positive, and financial conditions have eased, but warning signs are emerging.
Economic Data: A Mixed Picture
Employment data adds to the ambiguity. The unemployment rate remains near historical lows, yet jobless claims have been trending upward for months. Corporate layoff announcements are running well above last year’s levels, hinting at possible softness in the labor market that is not yet visible in official job reports. At the same time, consumer sentiment, is near multi-year lows, indicating that the psychological scars from tariff hikes and political volatility may be deeper than the spending data implies.
According to our Global Macro Roadmap, the current environment places the economy in a transitional phase: not in recession, but far from healthy. Historically, this “no man’s land” has delivered the weakest equity market performance, with the S&P 500 averaging only 3.9% returns over a six-month horizon. Manufacturing surveys underscore the caution. The ISM index has slipped back into contraction territory, and the S&P Global version has turned lower. The pattern is reminiscent of market peaks in 2011, 2015, and 2018, where optimism faded as industrial momentum waned.
This mix of data suggests that the recent equity rally may be less about renewed growth optimism and more about relief. The 90-day tariff truce between the U.S. and China has prompted markets to price out the most immediate downside risks. Average effective tariff rates have come down, and forward-looking trade expectations have improved. But this is not yet resolution, only reprieve. No binding agreement has been reached, and the damage to corporate confidence and investment planning may take quarters to unwind, while the economic impact of past tariff hikes will unfold with a lag through supply chains, input costs, and pricing behavior.
Against this backdrop, monetary policy remains constrained. U.S. inflation has cooled to 2.3%, but core services inflation remains sticky. Earlier this year, markets had priced in three rate cuts, now expectations have scaled back to one or two. The Fed’s tone has turned more cautious, facing a delicate balance between resilient hard data and weakening soft indicators.
A Rally Built on Shaky Ground
The current rally fits the profile of a classic bear market bounce. It has been sharp, sentiment-driven, and narrowly concentrated. Breadth is thin, with gains led by a few high-beta sectors. Technical flows and positioning unwinds, not fundamentals, have done most of the heavy lifting. With earnings forecasts remaining flat, there is limited room for further multiple expansion unless data meaningfully improves or policy turns more supportive,
For context: a modest 5% earnings decline would imply an S&P 500 fair value near 4’850, about 20% below current levels, assuming historical P/E norms. That’s not a forecast, but it illustrates how little cushion exists should macro conditions deteriorate. Still, this isn’t 2001 or 2008. There’s no credit crisis or bubble collapse underway. If inflation eases further and trade tensions de-escalate, markets could grind higher, but on sentiment, not substance.
The Risk of Stagnation
The danger now isn’t necessarily another collapse, but something more subtle: stagnation. A stalling economy paired with elevated valuations which creates a poor risk-reward profile: limited upside, heightened downside. Historically, this has led to volatile, sideways markets punctuated by sharp corrections. Confidence can erode gradually and investors often stay too long. Not out of conviction, but for fear of missing the next leg up.
To be clear, a more constructive outcome remains possible. A durable trade deal, falling inflation, and clearer Fed guidance could spark a sustainable rally. History reminds us that markets often recover before the data turns, but only when the path forward is credible. For now, investors must decide: is this one of those rare moments when hope leads history, or just another echo of it?
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