Based on the recent US and ASX share market rallies, it would appear that the US economy is booming.
However, recent macroeconomic data and warnings from the Federal Reserve paint a different picture.
What's going on?
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The Stock Market
The recent stock market rally has been one of the strongest in recent history.
The S&P 500 Index (SP: .INX) is up nearly 10% in the past month. The Nasdaq Composite Index (NASDAQ: IXIC) has charged even higher, and is 14% above where it was a month ago.
Those who invested in US-focused ASX ETFs have done well for themselves. The Vanguard US Total Market Shares Index AUD ETF (ASX: VTS) is up 10% in a month, while the Betashares Nasdaq 100 ETF (ASX: NDQ) is 14% higher.
Over the past month, markets have latched onto every piece of positive (or potentially positive) news about potential trade deals coming out of the Trump administration. The agreement between the US and China to suspend reciprocal tariffs for 90 days sparked a particularly strong market reaction.
This has fueled a local share market rally, with the S&P/ASX 200 Index (ASX: XJO) increasing nearly 8% in the past month.
Tariff-affected stocks have rallied strongly. At the time of writing, Breville Group Ltd (ASX: BRG) and Lovisa Holdings Ltd (ASX: LOV) have surged 22% and 36% since their April lows, respectively.
The S&P 500 is now up 1% for the year to date, while the ASX 200 is nearly 2% higher.
The Macroeconomic data
However, this stock market rally does not appear to reflect recent macroeconomic data.
In the March quarter, US gross domestic product (GDP) contracted 0.3%. The main driver was net exports (the difference between what America imports and exports). As businesses and consumers acted to get ahead of tariff announcements and stockpile goods, imports soared.
This has raised the risk of a formal recession. Two consecutive quarters of negative GDP growth is required for one to be declared.
There have been other signs of pessimism, too. Specifically, consumer spending has grown at the slowest rate since 2023, and government spending has been lower due to Elon Musk's DOGE cost-cutting efforts.
This has prompted Federal Reserve Chairman Jerome Powell to warn of stagflation, a scenario in which growth slows but inflation rises.
The April Consumer Price Index (CPI) was lower than expected, bringing the annual headline increase to 2.3%. This was the smallest year-over-year gain since February 2021. However, Chairman Powell continues to warn that higher inflation may be on the horizon.
On May 6-7, the Federal Reserve opted to keep the Federal Funds rate on hold at between 4.25% and 4.50%.
This week, Chairman Powell expressed his current thinking around the US economic outlook:
We may be entering a period of more frequent, and potentially more persistent, supply shocks—a difficult challenge for the economy and for central banks.
Foolish Takeaway
There's no doubt that the recent stock market rally looks past recession risk. However, legendary investor Warren Buffett once famously said, "Never bet against America". Where will we be 12 months from now? Only time will tell.
