Why Investors Who Fear a Recession and the End of ‘American Exceptionalism’ May Be Overreacting

Amid signs of a softening economy, U.S. stock-market volatility has surged in 2025, leaving many investors worried about the imminent risk of recession and a perceived shift away from ‘American exceptionalism’. However, industry experts argue that these fears may be exaggerated.

Yardeni Research recently shared a note expressing continued confidence in the resilience of the American economy. They anticipate that the emergence of pro-business policies will bolster long-term investor confidence, easing short-term uncertainties associated with what some refer to as “Trump 2.0.”

Understanding Recent Economic Indicators

Concerns over tariffs have contributed to a negative outlook regarding the U.S. GDP growth forecast for the first quarter. According to the Federal Reserve Bank of Atlanta’s GDPNow model, released on February 28, 2025, estimates indicate a troublesome 1.5% contraction in real U.S. gross domestic product for the first quarter, a stark decline from the 2.3% growth anticipated on February 19.

Yardeni pointed out that this drastic shift may be attributed to a surge in imported goods experienced in January as businesses aimed to circumvent forthcoming tariff increases. As various trade policies take shape, the import surge seems likely to reverse, stabilizing the economic outlook going forward.

Contrasting Bearish Narratives with Bullish Perspectives

Despite prevailing bearish narratives surrounding the stock market, Yardeni maintains a bullish stance. They currently assign both a potential recession and fiscal crisis only a 20% probability in their economic scenario analysis. They add, “We still apply an 80% subjective probability to outcomes that are bullish for U.S. stocks.” This optimism emphasizes that, while a drop in stock prices and real estate valuations could discourage consumer spending, such a scenario is perceived as unlikely in the near term.

As of late February, the S&P 500 index has experienced a minor downturn, having retreated by approximately 1.4% in February, while the Cboe Volatility Index (VIX), an investor anxiety gauge, soared by about 31% in 2025. The recent economic backdrop has resulted in increased apprehension, with analysts such as Neil Shearing, chief economist at Capital Economics, noting a decline in consumer confidence, retail sales, and industrial production.

The Global Economic Landscape

Shearing elucidates that while the U.S. economy appears to have started the year on a tough note, fears surrounding a global economic slowdown may be overblown. He cites the significant rise in imports driven by tariff concerns, suggesting a potential rebound in consumer spending once weather-related factors and other short-term pressures ease.

According to Capital Economics, the projected growth rate for the U.S. economy in 2025 is between 1.5% and 2%, which, while subdued by American standards, remains “well above the rates of growth experienced in Europe.” Ultimately, their expectation is that the U.S. macroeconomic outperformance against developed markets will remain a defining characteristic, even as challenges persist.

Comparing U.S. Stocks with Global Equities

This year, the performance of U.S. stocks has markedly lagged behind international equities. For instance, the iShares Europe ETF increased by over 11% by the end of February, while the iShares MSCI ACWI ex US ETF was up by just over 6% for the same period. Nicholas Colas, co-founder of DataTrek Research, pointed out that the rally in international stocks is more of a corrective measure than a new trend, serving to balance out the quarter’s earlier losses.

Colas adds that ‘American exceptionalism’ is a broader concept that must consider market performance over longer time frames instead of shorter quarterly snapshots. While current fiscal policy uncertainties contribute to volatility in the markets, many continue to hold a bullish outlook on U.S. large-cap equities.

Conclusion

As fears mount over the potential for recession and a loss of American economic dominance, industry leaders are evaluating the evidence. While the immediate data suggests turbulent times ahead, both Yardeni Research and Capital Economics highlight that panic may lead to overreactions. With the broader macroeconomic framework still holding steady and themes of innovation and resilience emerging, investors may want to reassess their risk perspectives in light of ongoing assessments.