By Randall W. Forsyth

The stock market has predicted nine of the last five recessions, according to the famous quip from economist Paul Samuelson. That tally may soon be 10.

Even as the S&P 500 hit the so-called correction of 10% on Thursday, the U.S. economy still shows signs of growth, even if the daily and hourly flip-flops on tariffs and other policies from the Trump administration are affecting the psyches of consumers and businesses alike.

Growth should continue, albeit slower than 2024's 2.8% inflation-adjusted rate, which was a full percentage point over what Federal Reserve policymakers see as the U.S. economy's real longer-run growth potential.

Unlike stocks, the corporate credit markets have barely budged. Yield spreads -- the premium paid on investment-grade and high-yield bonds over risk-free Treasuries -- have increased slightly, but only from historically low levels of late last year.

Even as the credit dog refuses to bark, the conventional wisdom has blindly focused on signs of recession coming from stock markets.

"The talking heads on bubblevison are staring at their screens in disbelief and asking 'where exactly is this recession?'" David Rosenberg, the head of Rosenberg Research, posted on X this past week. "Good grief. It's not about recession. It's about realigning the market multiple from perfection to an environment of high and rising economic and policy uncertainty."

Indeed, the Cboe Volatility Index, aka the VIX, has moved up in tandem with the Economic Policy Uncertainty Index for U.S. from the St. Louis Fed.

The options volatility gauge had been at low levels that implied complacency late last year. In the credit market, spreads haven't corrected much, implying continued confidence in the economy.

The Bloomberg U.S. Aggregate Corporate Index spread increased to 94 basis points as of Wednesday, from 80 basis points at the end of 2024, but well below its long-term average of 147 basis points. (A basis point is 1/100 of a percentage point.) Similarly, the Bloomberg U.S. Corporate High Yield Index spread has increased to 313 basis points, from 287 basis points at year-end, but it's well under a historic average of 512 basis points.

For those playing along at home, exchange-traded funds tracking investment-grade and high-yield bonds have held up, while stock exchange-traded funds are posting losses so far in 2025.

"Markets are ignoring the broader macroeconomic picture of an underlying healthy economy," writes Steven Ricchiuto, chief U.S. economist of Mizuho Americas. "Solid balance sheets, excess liquidity, accommodative financial markets, and lower rates along the curve in the past four weeks, all add to our above-trend 2025 growth call." The benchmark 10-year Treasury yield is down nearly 50 basis points from its recent peak in mid-January.

"Investors, on the other hand, are incorrectly focused only on the negative aspects of tariffs and government layoffs," he adds in a client note this past week. "They should be looking instead at how the expansion will morph in light of these developments." Consumers are apt to shift spending between goods and services while public-sector employees will likely find work in the private sector given the still tight labor market.

"The dynamic nature of a healthy economy allows the system to deal with shocks rather than be adversely impacted," Ricchiuto concludes. He concedes that stocks' correction, while part of an ongoing bull market, is likely to mean no rate cuts from the Federal Reserve this year, in contrast to the three 25-basis-point reductions priced in by the market.

To be sure, forecasts are being downgraded, even by optimistic seers. This past week, Goldman Sachs Chief Economist Jan Hatzius revised his estimate for 2025 real U.S. gross domestic product growth to 1.7% from 2.4%, measured from fourth quarter to fourth quarter. He added that this was the first time in more than two years that Goldman's forecast was below the consensus, which remains at 2%, according to Bloomberg's survey.

Goldman's downgrade didn't reflect recent data, but rather "that our trade policy assumptions have become considerably more adverse and the administration is managing expectations towards tariff-induced economic weakness," Hatzius wrote in a client note. But he also sees strong productivity growth and solid underlying real household incomes underpinning the economy, along with pro-growth aspects of the Trump agenda, such as tax cuts and regulatory easing.

The stock market still could impinge on the real economy if well-heeled investors are spooked enough to cut back on spending, says Doug Ramsey, chief investment officer at the Leuthold Group.

The stock market looms larger over the economy than ever, at 1.99 times U.S. GDP, Ramsey notes. But it's a small slice of the country. The richest 10% of Americans account for 87% of all household ownership of equities, according to the latest Fed data.

The story being told by the credit markets is more reflective of reality. Even if GDP contracts in the current quarter, owing to a rush of imports and gold bars to beat tariffs, the underlying economy is slowing, not slumping.

Write to Randall W. Forsyth at randall.forsyth@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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March 14, 2025 13:59 ET (17:59 GMT)

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