Market Trends and Economic Outlook

The S&P 500 had a remarkable gain of over 16% in 2025, leading many investors to anticipate a repeat in 2026. Unfortunately, that’s not the case. Currently, this major index has dropped approximately 7% since the start of the year. Similarly, the Dow Jones Industrial Average and tech-heavy Nasdaq Composite have seen declines of more than 10%.

Things could deteriorate quite quickly. Moody’s, utilizing its AI-based recession model, indicates a 49% chance of a recession occurring in the U.S.

This might sound uncertain, like flipping a coin, but looking into data from the last 80 years reveals a pattern: whenever the model’s odds surpassed the 50% mark, a recession followed within a year.

Interestingly, this 49% estimate dates back to February, long before the conflict between the U.S. and Iran disrupted 20% of global oil supplies, pushing prices up to nearly $120 a barrel.

Mark Zandi, who designed the model, shared in a recent interview that the surge in odds largely stems from a weakening labor market, while almost all economic indicators have shown a downturn since late last year.

The most recent jobs report revealed a drop of 92,000 jobs in the U.S., which was against expectations of a 59,000 rise. The unemployment rate has climbed to 4.4%. It’s still relatively low, but the trend isn’t encouraging. Additionally, the latest GDP estimate has been revised down from 1.4% to 0.7%.

On top of that, inflation is still above the Federal Reserve’s target of 2% and appears to be gradually increasing.

Yet, these numbers aren’t outright disastrous. Zandi’s model hovers just below that pivotal 50% mark, leaving a flicker of hope for investors. Avoiding a recession is crucial, as a downturn typically leads to significant declines in the S&P 500. Historically, declines have ranged anywhere from about 20% to over 55% during recessions, according to research.

However, a significant concern arises from the fact that Moody’s current probabilities rely on data collected before the onset of the Iran conflict. If this war continues, the likelihood of recession may very well exceed 50%.

This model is quite sensitive to energy prices—a correlation that isn’t surprising. Aside from the recession caused by the COVID-19 pandemic, every U.S. recession since World War II has been preceded by high fuel costs.

Not everyone shares Moody’s cautious outlook; some analysts maintain a more optimistic view.

• Goldman Sachs has set recession odds at 25% and maintains a target for the S&P 500 at 7,600 by year-end.
• Oxford Economics posits that for a global recession, oil prices would have to stay above $140 a barrel for a couple of months—an unlikely scenario.

Moody’s model has proven accurate in the past, but predicting the future remains complex and uncertain. Just because the odds cross 50% doesn’t guarantee a recession will happen.

If I were to hazard a guess, I might lean towards a recession within the next year. The ongoing oil shock is unlikely to resolve quickly, and the damage to vital infrastructure could linger for years after any ceasefire. History suggests that if a recession hits, a market downturn follows.

That said, there’s no need to panic and sell off investments. For one, I could be mistaken. But also, historically speaking, the market has bounced back from all 11 recessions since 1950. Timing the market is tricky; many investors end up selling at inopportune moments, securing their losses.

My suggestion would be to take this chance to reassess your portfolio. If you’re mostly invested in high-growth stocks with thin margins and inflated valuations, it might be wise to pivot towards companies with solid financials to safeguard against any possible future losses.

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