“Recession-proof.”
Professional economists might balk at the phrase, but it’s how the stock and bond markets see the economy in the second half of 2025.
DataTrek Research wrote on Tuesday that markets are flashing signs of extreme confidence in the trajectory of the US economy. Nicholas Colas, cofounder of the firm, pointed to two signals being sent in the stock and bond markets in particular:
In the stock market, valuations look similar to levels seen during the internet boom in the 1990s, Colas said, with the S&P 500 achieving a series of record highs in recent weeks.
The benchmark index now looks like it’s 8% more expensive than it was during the dot-com bubble, based on the forward price-to-earnings multiple among S&P 500 companies, DataTrek said. Given earnings estimates for 2026, the index looks on track to be 23% more expensive than it was during the dot-com bubble next year.
There’s no way to explain those valuations without using a price-to-earnings ratio that implies “Peak confidence” or “Super Peak” confidence among investors, Colas said.
“Whether one likes or not, US large cap valuations imply at least a ‘highly recession resistant US economy,’ if not a ‘recession-proof’ one,” he said.
In the bond market, a similar story is unfolding in the 10-year US Treasury yield.
When recession odds decrease, investors tend to expect two things, Colas said:
- They don’t expect a decrease in inflation. Recessions are inherently disinflationary, and tend to reduce the overall inflation rate by an average of 4.4 percentage points, Colas said.
- They expect long-term interest rates to rise. That’s because investors don’t expect the Fed to lower interest rates to boost growth, leading to a higher 10-year yield.
The 10-year US Treasury yield hovered around 4.4% on Tuesday, higher than levels seen 10 years ago.
Meanwhile, the 10-year breakeven inflation rate hovered around 2.44% on Tuesday. That’s also higher than the average through 2010-2019, when inflation expectations hovered around 2%.
“The idea that markets are cutting future recession odds does a good job of explaining why nominal yields may remain high,” Colas said. “It is optimism about the US economy’s recession resistance, not pessimism regarding the Fed’s inflation fighting credentials, driving this phenomenon.”
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The research firm said it was first introduced to the idea of a “recession-proof” US economy from a previous conversation with a financial journalist. The thesis is based on five things that show increased resilience in the US economy, Colas said:
- The US economy avoided a recession during the 2010s. It was the first-ever decade in modern history where the economy didn’t have a downturn.
- The economy avoided a recession that decade despite a handful of catalysts, like the Greek Debt Crisis and when the Fed raised interest rates in 2018.
- Since 2018, there have been more job openings than unemployed workers. The labor shortage could buffer the job market during shocks that, in the past, would have caused a recession.
- After the Great Financial Crisis, the US erected guardrails to keep the banking and financial sectors stable.
- Since the late 2010s, stock valuations have climbed higher, a possible sign equity investors”were beginning to catch on” to the idea that the economy is more resistant to downturns that in past eras.
The US slipped into a recession at the start of the COVID-19 pandemic, and later entered a brief technical recession in 2022, when GDP contracted for two quarters in a row. But an official recession, which is declared by the National Bureau of Economic Research, hasn’t arrived since the Fed began raising interest rates.
Most forecasters on Wall Street expect the economy to cool off, but steer clear of an official downturn this year. According to a Bank of America survey conducted in July, 65% of global fund managers said they believed the most likely outcome for the world economy was a soft landing, while 21% said they believed the most likely outcome was a “no-landing,” a situation where inflation comes down and the economy continues to expand.
