Shenwan Hongyuan Securities: Does the significant pullback in US stocks indicate that an economic recession is approaching?

According to the Zhitong Finance APP, Shenwan Hongyuan Securities has released a research report stating that since the beginning of 2025, the weakening economy and the impact of reciprocal tariffs have led to a continuous pullback in the U.S. stock market. Will the decline in U.S. stocks create a "negative feedback" on the economy, and does a significant pullback in U.S. stocks indicate an impending economic recession?

Hot Topic: U.S. Economy: A Recession "Brought About" by Decline?

1. Historically, does a pullback in U.S. stocks indicate an economic recession? More importantly, what are the reasons for the decline?

Since the beginning of the year, U.S. stocks have experienced a significant pullback, nearing the brink of a "bear market." Since February 19, the S&P 500 and Nasdaq have pulled back by 17.4% and 22.3%, respectively; according to the SEC definition, a "bear market" refers to a market-wide index falling more than 20% and continuing for more than two months, and currently, U.S. stocks are close to this threshold. Structurally, recent cyclical stocks have significantly underperformed defensive stocks, aligning with the characteristics of "recession trading."

Historically, bear markets in U.S. stocks are likely to indicate economic recessions. Is this time different? Looking back at history, among the 14 bear markets since 1929, only the bear markets in 1961, 1966, and 1987 were influenced by panic sentiment and credit tightening; in contrast, the other 11 market declines were mutually reinforcing with economic weakness, and the U.S. economy subsequently experienced recessions.

2. From a qualitative perspective, how to understand the "wealth effect" of U.S. stocks? The core lies in the consumption willingness of high-income groups + dividend income.

The transmission mechanism of the "wealth effect" of U.S. stocks: household income and consumption propensity. 1) In terms of household income, dividend income is related to stock market performance but only accounts for 8% of household income, and short-term capital gains are not included in household income; 2) In terms of consumption propensity, historical patterns show that the U.S. household savings rate is negatively correlated with net worth/disposable income, meaning that stock market appreciation can enhance consumption willingness.

The "wealth effect" of the stock market may only affect the consumption capacity and propensity of high-income groups. U.S. household consumption is largely contributed by high-income groups, with the top 80-100% income percentile contributing 39% of consumption, and their consumption propensity is close to 50%. The proportion of dividend income for high-income groups is larger, and the top 1% income percentile has 45.6% of their assets in corporate equity.

3. From a quantitative perspective, how significant is the "wealth effect" of U.S. stocks, and will a stock market decline create a "negative feedback" on the economy?

Academics generally believe that the elasticity of the wealth effect of the U.S. stock market on consumption (MPC) ranges from 0.02 to 0.08. The elasticity of the stock market on consumption exhibits three main characteristics: higher elasticity in a loose monetary environment, higher elasticity among high-income populations, and higher long-term stock market volatility elasticity. Additionally, some studies suggest that the wealth effect of the U.S. housing market, due to the "collateral effect," is greater than that of the stock market.

To what extent will a decline in U.S. stocks lower the growth rate of the U.S. economy? 1) A 20% decline in U.S. stocks could drag down the U.S. economy by up to 1 percentage point; 2) Based on the Federal Reserve's financial conditions index (stock component) and the fit with stock market performance, the economic growth drag from the stock market decline since the end of 2024 may be between 0.4 and 0.5 percentage points.

This time, does the significant pullback in U.S. stocks indicate an economic recession? Attention should be paid to the following aspects: 1) The current decline in U.S. stocks is related to the panic caused by Trump's tariff policy, and it is crucial to understand how the tariff policy unfolds; 2) The continuous decline of the US stock market may lead to secondary shocks, with a focus on financial vulnerabilities; 3) The labor market is the foundation of the US economy, and the unemployment rate is the "touchstone" for determining whether a recession occurs.

Risk Warning

Escalation of geopolitical conflicts; US economic slowdown exceeds expectations; Federal Reserve turns "hawkish" beyond expectations