Recession Fears Are Growing Louder Yet Equity Markets Keep Rising

Central banks are flashing yellow lights about slowing global growth while stock markets hit fresh record highs, creating one of the more puzzling disconnects in recent memory.

The IMF’s October 2025 World Economic Outlook pegs global growth at 3.2% this year, down from 3.3% in 2024, with further easing expected into 2026. The European Central Bank’s September projections echo this downshift, forecasting global GDP slowing from 3.3% in 2025 to 3.1% in 2026, with the euro area limping along at roughly 1.2% growth.

President Lagarde reiterated these risks in October testimony, making clear the ECB sees genuine headwinds rather than just statistical noise.

Yet major indices have seemingly ignored these warnings entirely.

The combination of slowing but not collapsing growth, moderating inflation, and decent employment has created conditions where investor psychology tilts heavily toward fear of missing out rather than fear of recession, outweighing the macro caution that typically accompanies growth downgrades from major institutions.

Corporate Earnings And Liquidity Are Keeping The Rally Alive

Earnings performance has provided genuine fundamental support for elevated equity prices rather than just hope and momentum. With early Q3 reporters in, an impressive 87% of S&P 500 companies beat analyst estimates, with consensus expectations for third quarter earnings per share growth revised upward to roughly 9.2% year over year.

Valuations have stretched well beyond historical norms, with the forward 12-month price-to-earnings ratio sitting around 22 times or higher. FactSet had it at 21.9 times in late June, while real-time trackers show roughly 23 times by October, well above the 10-year average around 18 to 18.5 times.

Yet the earnings strength provides at least partial justification for these elevated multiples, preventing the kind of fundamental vacuum that typically precedes major corrections.

Moreover, share buybacks have become a powerful undercurrent supporting prices in ways that transform market dynamics. S&P 500 repurchases hit a record $293.5 billion in Q1 2025, easing to $234.6 billion in Q2, but the 12-month total through June still ran roughly $998 billion.

Announced and executed buybacks passed $1 trillion year-to-date by August 20, with strategists projecting approximately $1.1 trillion by year end.

With roughly $1 trillion in buybacks against an index market cap around $60 to $61 trillion, the absorption rate runs approximately 1.6% to 1.7%. Our analysts note that when this rate approaches or exceeds 2% while valuations sit in the 95th percentile historically, price discovery often becomes one-way, with drawdowns when they finally come arriving abruptly rather than gradually.

However, the Q2 dip in buybacks of roughly 20% quarter over quarter demonstrates how quickly this cushion can evaporate if corporate confidence wavers.

Furthermore, the Federal Reserve has slowed quantitative tightening and openly discussed ending balance sheet runoff, which implies greater reinvestment support for market liquidity going forward.

Chair Powell indicated the quantitative tightening endgame may be coming into view, signaling markets shouldn’t expect continued headwinds from shrinking central bank balance sheets much longer.

Valuations Are Stretched But The Bull Case Remains Intact

The valuation stretch versus history becomes stark when you examine the numbers closely. The S&P 500 trading above 22 times forward earnings represents a level seen roughly 7% of the time over the past 40 years, as Reuters’ valuation review documents.

The Cyclically Adjusted Price-to-Earnings ratio sits around 40, its loftiest level since 2000, a comparison that should make anyone who lived through the dot-com crash deeply uncomfortable. The IMF flags current U.S. equity valuations as higher than approximately 96% of readings since 1990, placing current prices in genuinely extreme territory by any historical measure.

FactSet’s longer-term averages show the five-year average forward price-to-earnings around 19.9 times and the 10-year average at 18.4 times, meaning today’s multiple sits one to three turns above trend depending on which timeframe you use for comparison.

Bulls justify these stretched valuations by pointing to durable earnings and AI-led productivity gains as structural changes that merit paying more.

The argument goes that artificial intelligence represents a genuine productivity revolution that will drive profit margins and growth rates justifying multiples that look expensive by historical standards but prove reasonable given transformed economics.

With 2025 price gains led by megacaps and FactSet showing profit margins between 12.3% and 12.8%, near record levels, the multiple expansion has again done outsized work relative to actual earnings growth. When this gap exceeds five to seven percentage points for multiple months, historical analogs from 1998 through 2000 and 2020 through 2021 suggest re-rating risk rises substantially.

Research from our analysts highlights that current readings show valuation in the red zone, with CAPE at 40 and forward price-to-earnings in the 95th percentile historically. Concentration sits amber to red, with top 10 names accounting for roughly 35% of index value and driving approximately 70% of year-to-date returns, levels that Goldman Sachs and others warn represent extreme concentration carrying significant risk.

Our analysts’ gauge currently sits at what they describe as high amber, one notch below full bubble territory, because while valuation and concentration flash red and credit spreads show complacency, margins and earnings remain solid with genuine if lagged productivity gains providing fundamental support. What keeps this from bright red bubble status is that profits are actually materializing rather than being purely hoped for, distinguishing current conditions from 1999 when valuations exploded despite many companies having no earnings at all.

However, rather than de-risking wholesale in response to stretched valuations, many investors are rotating within equities, moving from pure growth plays toward quality names with earnings visibility and relying on buybacks and dividends as carry while they wait for either earnings to grow into valuations or for better entry points.

Global Investors Are Rotating Not Retreating

Capital flows reveal investors are repositioning rather than fleeing risk assets entirely, with geographic rotation reflecting views about where growth and returns will come from over the next several years. Flows favor the United States and Asia excluding China, with India seeing record inflows in 2025 as tracked by EPFR, drawn by macro and earnings resilience that foreign capital finds increasingly attractive relative to developed markets offering slower growth.

Japan has attracted persistent foreign money throughout 2025, with strategists citing structural reforms and improving shareholder returns as reasons the Japanese equity story has finally gained credible traction after decades of false starts.

South Korea has seen inflows pick up alongside the semiconductor cycle and policy support for markets, benefiting from both the AI infrastructure boom driving chip demand and government initiatives aimed at making Korean equities more attractive to international investors.

Even Europe, after mid-year underperformance that had many investors writing off the region entirely, has seen major houses including J.P. Morgan and Deutsche Bank upgrade euro-area equities to overweight in October, citing valuation appeal and improving policy backdrops.

This suggests investors are rebalancing rather than exiting, rotating capital toward regions that look cheap after underperforming rather than abandoning international diversification for pure U.S. concentration.