Investing.com -- The recent slide in U.S. equities may be more noise than signal when it comes to forecasting a recession, according to Capital Economics.

The firm argued in a note Friday that the market’s pullback earlier this year likely marks “another false signal about an economic downturn.”

Though the S&P 500 fell nearly 19% from its February 19 peak to its April 8 trough, narrowly missing the typical 20% threshold for a bear market, analysts at Capital Economics say the decline was driven largely by shifting investor sentiment, not earnings fundamentals.

“The price action in the stock market… has stemmed mainly from fluctuations in the price investors are willing to pay for earnings,” the note said. “There hasn’t been much change in analysts’ expectations for earnings themselves, at least outside the energy sector.”

Drawing on historical context, Capital Economics notes that bear markets have only “predicted” recessions when accompanied by earnings downgrades that were later justified.

“When a bear market in the S&P 500 only resulted from a drop in its FTM P/E ratio, there wasn’t a recession,” the report said, citing 1987 and 2022 as similar cases.

The firm also downplayed concerns over first-quarter GDP contraction, citing strong demand from private domestic purchasers, possibly due to “tariff ‘front-running’ by firms and households.”

It added that ISM manufacturing data suggests tariffs are “weighing on the economy, but not crushing it.”

While risks remain from China’s growing AI competition to possible fallout from President Trump’s trade policies, Capital Economics concludes, “Our sense is that the recent slide in the stock market was another false signal of a recession.”

The real test, they say, will be whether earnings in the AI-driven big-tech sector hold up.