Security: Does the sharp pullback in US stocks indicate an imminent economic downturn?

Shenwan Hongyuan Group Securities has released a research report stating that since early 2025, under the impact of weakening economy and retaliatory tariffs, US stocks have been continuously declining. Will the drop in US stocks have a "negative feedback" effect on the economy, and does the significant retreat in US stocks foreshadow an impending economic recession? Hot topic reflections: "Falling" into Recession for the American Economy? I. Historically, does the retreat of US stocks foreshadow an economic recession? More importantly, what are the reasons for the decline? Since the beginning of the year, US stocks have seen a significant retreat, approaching the brink of a "bear market." Since February 19, the S&P 500 and Nasdaq have retreated by 17.4% and 22.3% respectively; according to SEC definition, a "bear market" refers to a market index falling by more than 20% and lasting for over 2 months, and currently, US stocks are approaching this threshold. Structurally, recent cyclical stocks are significantly oversold compared to defensive stocks, which also fits the characteristics of "recession trading." Historically, a bear market in US stocks most likely foreshadows an economic recession. Is this time different? Looking back at history, out of the 14 bear markets since 1929, only the bear markets in 1961, 1966, and 1987 were influenced by panic sentiment and credit tightening; the other 11 rounds of market decline and economic weakening reinforced each other, leading to subsequent economic recessions in the US. II. From a qualitative perspective, how should we understand the "wealth effect" of US stocks? The core lies in the consumption willingness of high-income groups and dividend income. The transmission mechanism of the "wealth effect" of US stocks: household income and consumption tendency. 1) On the income side, dividend income is related to stock market performance, but it only accounts for 8% of household income, and short-term capital gains are not included in household income; 2) On the consumption tendency side, according to historical patterns, the US household savings rate is negatively correlated with net worth/disposable income, meaning that stock market appreciation can boost consumption willingness. The "wealth effect" of the stock market may only affect the consumption capacity and tendency of high-income groups. The consumption of American residents is mainly contributed by high-income groups, with the top 20% income group contributing 39% of consumption, and having a consumption tendency close to 50%. The proportion of dividend income for the high-income group is larger, and they hold more equity assets, with company equity accounting for 45.6% of assets for the top 1% income group. III. From a quantitative perspective, how significant is the "wealth effect" of US stocks, and will a stock market decline lead to a "negative feedback" effect on the economy? It is generally believed in academia that the elasticity (MPC) of the wealth effect of the US stock market on consumption ranges from 0.02 to 0.08. The elasticity of the stock market on consumption shows three main characteristics: higher elasticity in a loose monetary environment, higher elasticity for high-income groups, and higher elasticity for long-term stock market changes. In addition, some studies suggest that the wealth effect of the US housing market may be greater than that of the stock market due to the "collateral effect." To what extent will a decline in US stocks drag down the US economic growth? 1) A 20% decline in US stocks could potentially drag down the US economy by up to 1 percentage point; 2) According to the fit between the Federal Reserve's financial conditions index (equities sub-index) and stock market performance, the extent to which the stock market decline has dragged down economic growth since the end of 2024 may be between 0.4 and 0.5 percentage points. This time, does the significant retreat of US stocks foreshadow an economic recession? Attention should be paid to the following aspects: 1) The current decline in US stocks is related to the panic caused by Trump's tariff policies, and the key is how tariff policies will play out; 2) The continued decline in US stocks may have secondary impacts, with a focus on financial fragility; 3) The labor market is the foundation of the US economy, and the unemployment rate is the "touchstone" for determining whether a recession will occur. Risk Warning Escalation of geopolitical conflicts; US economic slowdown beyond expectations; Federal Reserve unexpectedly turning "hawkish."