The stock market's sharp drop might have already priced in a 'shallow' recession

The S&P 500 (^GSPC) is nearly 10% off its most recent record high as fears over slowing economic growth have gripped investors and spawned a stock market sell-off.

Now, the pressing question for investors becomes: What has the market told us, and does this decline have further to go?

“The S&P is already down close to 9% since its highs, suggesting a shallow recession scenario is already reflected,” HSBC head of equity strategy for the Americas Nicole Inui wrote in a note to clients on Tuesday.

“Even taking the average of all recessions (including deep recessions) the sell-offs have been 11%-12%, again suggesting we may be near the bottom.”

With Tuesday’s close, the S&P 500 is now down 9.3% from its record closing high of 6,144 on Feb. 19.

Economic data has largely come in weaker than expected to start 2025, prompting economists to downgrade their outlooks for economic growth this year.

The prevailing market fear is that President Trump’s current economic policies — namely tariffs, federal job cuts, and strict immigration — could further slow economic growth. Still, few economists are actually calling for a recession in the US economy this year.

Read more: What is a recession, and how does it impact you?

And should forecasts for the US to avoid recession come to pass, a sell-off pricing in a “shallow recession” could ultimately serve as a buying opportunity.

In this case, HSBC’s Inui sees opportunity in tech, after a large sell-off over the past month has lowered valuations, and financials, a top sector over the past year that has limited tariff exposure.

‘It’s not easy to price out’

Still, some strategists tell Yahoo Finance that a traditional recession playbook might not work in the current market moment.

“It’s not easy to price out how tariffs may influence the US economy, but it’s possible,” JPMorgan Asset Management global market strategist Jack Manley told Yahoo Finance.

“What becomes a lot more difficult is pricing in how Canada might respond to tariffs from the US and how those could lead to additional tariffs. It snowballs very, very quickly and makes pricing in anything extremely difficult.”

For instance, the current flow of tariff news is back and forth, to say the least.

Just take Tuesday’s whipsaw market action — stocks fell on news Trump would double some tariffs on Canada; hours later, stocks recouped some losses after Trump said he’d consider scaling back some tariffs on Canada.

“It’s hard to say that [the market] is pricing in slow growth or no growth because one of the things that makes this environment so difficult — if you talk to almost any company or listen to what they’re saying— there’s basically no visibility on the macro outlook or on their own outlooks, because of tariff and trade policy,” Charles Schwab senior investment strategist Kevin Gordon told Yahoo Finance.

There’s also little clarity on which of Trump’s tariff proposals will stick, how long they’ll last, or how other countries may retaliate.

Read more: What Trump’s tariffs mean for the economy and your wallet

Piper Sandler chief investment strategist Michael Kantrowitz wrote in a note on Tuesday, “[We’re] unlikely to see a material recovery in equities until we see the start of fiscal policy uncertainty abating,” noting that a recent surge in economic policy uncertainty measures have coincided with the market’s recent slide.

“Of course, that can happen in more than one way,” Kantrowitz added.

“We can either be more certain of tariff policies that will be implemented, or Trump can slow the pace or roll back some of his actions.”

Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

Click here for the latest stock market news and in-depth analysis, including events that move stocks

Read the latest financial and business news from Yahoo Finance