Since the bear market bottomed out in October 2022, the bulls have been in firm control on Wall Street. The mature-stock-powered Dow Jones Industrial Average (^DJI 1.14%), benchmark S&P 500 (^GSPC 1.12%), and growth-focused Nasdaq Composite (^IXIC 1.46%) have all rocketed to numerous record closing highs.

Catalysts have been aplenty for investors, with everything from the rise of artificial intelligence to Donald Trump's return to the White House propelling the stock market higher. During President Trump's first term in the Oval Office, the Dow Jones, S&P 500, and Nasdaq Composite rose by 57%, 70%, and 142%, respectively.

But based on a recently updated forecast from the Federal Reserve Bank of Atlanta, the stock market's party may come to an abrupt end.

Image source: Getty Images.

The U.S. economy may be on the verge of a reality check

Prior to the COVID-19 recession, which lasted only two months, the U.S. economy was enjoying a period of expansion that had endured for more than a decade. Since this two-month swoon in early 2020, the U.S. has avoided falling into a recession, as determined by the National Bureau of Economic Research. However, this enduring streak of avoiding a protracted downturn may be on the verge of ending.

Roughly six or seven times per month, the Federal Reserve Bank of Atlanta updates its GDPNow model. This model, which has been tweaked since its inception in 2011, aims to provide a real-time estimate of U.S. gross domestic product (GDP) for the current quarter.

The Atlanta Fed's GDPNow model factors in a host of economic data releases, such as international trade, the monthly Consumer Price Index, housing starts, existing home sales, and retail sales, to front-run the release of quarterly GDP data by the federal government. Historically, the Federal Reserve Bank of Atlanta's GDPNow model has "an average absolute error of around 0.77 percentage points when forecasting final GDP growth." In other words, it's not perfect, but pretty close.

On March 3, the Atlanta Fed released its latest update to the GDPNow model for the first quarter -- and it was a doozy. Whereas this model was forecasting nearly 4% first-quarter GDP growth near the beginning of February, it's now predicting a 2.8% contraction in GDP for the current quarter.

On March 3, the #GDPNow model nowcast of real GDP growth in Q1 2025 is -2.8%: https://t.co/T7FoDdgYos. #ATLFedResearch Download our EconomyNow app or go to our website for the latest GDPNow nowcast: https://t.co/NOSwMl7Jms. pic.twitter.com/FdSehrEcSg

-- Atlanta Fed (@AtlantaFed) March 3, 2025

To put this figure into context, the U.S. economy has only had three quarters of negative GDP growth over the last decade: (5.5%) in Q1 2020, (28.1%) in Q2 2020, and (1%) in Q1 2022. If the GDPNow forecast of a 2.8% contraction is in the neighborhood of the final GDP figure for the first quarter, it would mark the biggest non-pandemic quarterly decline in U.S. GDP since the Great Recession in 2009.

The culprit for this weakness appears to be growing uncertainty over President Trump's use of tariffs. Tariffs on select imports from Canada and Mexico went into effect on March 4, while tariffs on select Chinese imports had already been in place. The president has also announced agricultural tariffs that are expected to take effect in early April.

According to a study from Liberty Street Economics, which publishes research and analysis from economists at the Federal Reserve Bank of New York, Trump's tariffs on China had a decisively negative impact on exposed stocks the days they were announced in 2018 and 2019. What's more, companies exposed to tariffs saw declines in profits, employment, sales, and labor productivity from 2019 to 2021.

The economists at Liberty Street also note the key difference between input and output tariffs as an issue. Tariffs placed on finished products (i.e., output tariffs) have the potential to make domestic goods more price competitive. In comparison, tariffs on imports used to make products domestically (input tariffs) tend to drive prices higher and hurt U.S. manufacturers.

Although the U.S. economy and stock market aren't tied at the hip, weakness in the U.S. economy correlates highly with declines in corporate earnings. Based on a study from Bank of America Global Research, around two-thirds of the S&P 500's peak-to-trough drawdowns from 1927 through March 2023 occurred after a recession was declared. In short, a stock market crash can't be ruled out based on the latest GDPNow forecast.

Image source: Getty Images.

Economic and stock market cycles aren't linear -- and that's fantastic news for investors

At any given moment, there's bound to be an economic data point or predictive tool that spells trouble for Wall Street. In addition to the Atlanta Fed's GDPNow forecast, the S&P 500's Shiller price-to-earnings Ratio recently hit its third-highest level during a continuous bull market rally spanning 154 years.

Thankfully, investors can be comforted by the fact that neither economic nor stock market cycles are linear.

As much as working Americans would prefer to never see the economy dip into a recession, this simply isn't feasible. No amount of fiscal or monetary policy maneuvering can prevent recessions, which are a normal and healthy aspect of the economic cycle.

But here's the all-important catch: recessions tend to be short-lived. Since World War II came to a close, the average recession has endured roughly 10 months. On the other hand, the typical period of expansion has lasted in the neighborhood of five years. Wagering on the U.S. economy to expand, and aligning your investment portfolio to take advantage of these long-winded periods of growth, has historically been a smart move.

This same nonlinearity holds true for the stock market.

It's official. A new bull market is confirmed.The S&P 500 is now up 20% from its 10/12/22 closing low. The prior bear market saw the index fall 25.4% over 282 days.Read more at https://t.co/H4p1RcpfIn. pic.twitter.com/tnRz1wdonp

-- Bespoke (@bespokeinvest) June 8, 2023

In June 2023, shortly after the broad-based S&P 500 was confirmed to be in a new bull market, the analysts at Bespoke Investment Group released a data set on social media platform X that compared the length of every bull and bear market dating back to the start of the Great Depression in 1929.

Whereas downturns were somewhat common -- 27 bear markets in a 94-year stretch -- the typical 20% (or greater) decline for the S&P 500 lasted only 286 calendar days, or 9.5 months. Meanwhile, the average bull market endured for 1,011 calendar days, or roughly 3.5 times as long.

Furthermore, the lengthiest bear market, which occurred in the mid-1970s, measured 630 calendar days. Including the current bull market, when extrapolated to present day, 14 out of 27 S&P 500 bull markets have lasted longer than 630 calendar days.

Regardless of how scary or ominous economic data and predictive tools might seem, maintaining perspective and wagering on high-quality stocks to increase in value over time has historically been a surefire investment strategy.