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The stock market's rally since President Donald Trump paused reciprocal tariffs on April 9 has been impressive. The S&P 500 and Nasdaq have surged 18% and 25%, respectively, in hopes that cooler heads and trade negotiations would reduce the risk that tariffs would send the U.S. economy into a tailspin.
The surge in stocks has been so impressive that the S&P 500, the benchmark most use to gauge the stock market's strength, has recovered all its tariff-driven losses, shifting from a nearly 20% bear-market loss to a year-to-date return of 0.19%.
Related: Goldman Sachs announces major change to S&P 500 forecast
While optimism has clearly rebounded, not everyone, including the billionaire hedge fund manager Steven Cohen, is convinced that stocks and the U.S. economy are out of the woods.
Cohen is a legendary fund manager whose success at SAC Capital made him one of the most prominent money managers ever. He currently runs Point72, another hedge fund with $37 billion in assets under management, and he owns the New York Mets.
Cohen commented on the recent stock market rally this week, offering a frank assessment of recession risks and an updated stock outlook that may raise some eyebrows.
The Fed is on hold, and potentially, behind the curve
The Federal Reserve sets the Federal Funds Rate at levels to encourage low unemployment and inflation. Unfortunately, that’s not as easy as it sounds.
Employment and inflation often run contrary to each other. When the Fed raises interest rates, it slows the economy, crimping inflation but causing unemployment. When it cuts rates, it accelerates the economy, boosting jobs but increasing inflation.
Related: Major economist revamps recession forecast after trade deal
We’ve seen this dynamic play out over the past few years. In 2022, after incorrectly labeling inflation as transitory, Fed Chairman Jerome Powell embarked on the most hawkish pace of rate hikes since the early 1980s to lower inflation.
It worked — inflation has slipped below 3% — but it also has caused the unemployment rate to rise, to 4.2% from 3.4% in 2024.
Over the past year, we’ve seen a steady increase in layoffs, including more than 602,000 this year through April, according to Challenger, Gray & Christmas. That's the most since Covid.
The economy was already showing signs of wear heading into 2025, and market watchers have become downright pessimistic since Trump unveiled a series of surprising tariffs.
In February, the president instituted 25% tariffs on Canada and Mexico, and 10% tariffs on China, which increased to 20% in March. In April, he unveiled harsher than hoped reciprocal tariffs worldwide, including a 10% baseline import tax.