Pricing "Tariff Downgrade," the market rebounded strongly, but could it be too early to celebrate?

Despite Goldman Sachs stating that there is a 45% chance of the U.S. falling into recession in the next 12 months, and Apollo even declaring a high probability of 90%, the market is celebrating while "ignoring the warnings." The S&P 500 has risen for nine consecutive days, down only 3.3% year-to-date, and bond yields and the dollar have stabilized, as if no one is genuinely worried about what comes next. On May 3rd, Eastern Time, Wall Street Journal authors Jack Pitcher and Sam Goldfarb pointed out that the market's calmness is mainly due to investors' confidence in robust economic data, including Friday's employment report, and their hope that President Trump's global trade war will quickly de-escalate. However, economists are deeply concerned. They worry that sustained tariffs will drag down consumption, business investment, and employment, with the worst-case scenario being "stagflation," where prices rise but economic growth slows. PGIM Chief Economist Tom Porcelli noted that the current stock market feels like everyone is pretending nothing is happening while knowing there are risks ahead: "Given the significant uncertainty that still exists, the stock market's rebound feels like whistling next to a graveyard." Is the market too happy too soon? The authors pointed out that some strong data only temporarily masks the truth. March's inflation-adjusted household spending surged 0.7%, exceeding expectations, but this may be due to stockpiling before tariffs; Visa credit card data also shows no signs of consumers becoming stingy up to April 21. Raymond James Chief Investment Officer Larry Adam stated: "I am now watching credit card data like a hawk; this could be the earliest signal of an economic recession." "I believe we have passed the peak uncertainty period regarding tariffs, and now we are in the peak uncertainty period regarding the economy." But Goldman Sachs economists warn that it may take another two to three months for the impact of tariffs to truly reflect in the CPI inflation, after which we will see a slowdown in consumption. Some institutions have already begun to lower their full-year economic growth forecasts, such as Vanguard, which has cut its full-year U.S. GDP growth forecast to below 1%, and expects inflation to rise to 4% by the end of the year, higher than the previous forecast of 2.7%. Economist Kevin Khang from the institution also reminded: "To think we will return to the previous state without any disruption to the economy is actually too optimistic." Moreover, although the stock market has risen overall, there are hidden concerns upon closer inspection. Most of the gains rely on a few major tech stocks. Defensive stocks, typically seen as safe havens during economic downturns, such as consumer staples and utilities, have performed well. In contrast, economically sensitive sectors like energy and discretionary consumer goods have lagged. Other market traders are clearly preparing for at least a slowdown in economic growth. Interest rate futures traders are now convinced that the Federal Reserve will cut rates at least three times this year, reflecting market expectations that the central bank will need to support the economy through loose monetary policy. Predictive market Kalshi bettors believe the probability of a recession this year is 63%, up from about 40% in March Moreover, stocks may not be as cost-effective as one might think. The yield on the 10-year U.S. Treasury bond remains high. As of the end of April, the "excess CAPE yield," which measures whether stocks are "worth buying" relative to bonds, is now only 1.8%, about half of its 50-year average, indicating that the "excess compensation" obtained from investing in stocks is very low