US GDP growth and LEI signal no 2026 recession despite high valuations

The U.S. economy expanded at an annual rate of 1.5% in the second quarter of 2026, a figure that indicates continued growth despite a slowdown from the 2.1% pace recorded in the first quarter. This positive gross domestic product growth stands in contrast to the approximately 3.8% annual rate seen in the second quarter of 2025, suggesting that while momentum has eased, the broader economic conditions do not currently point toward a contraction.

Supporting this view, the Conference Board's Leading Economic Index (LEI) rose 0.2% in July, marking the first time in more than four years that its six-month growth rate turned positive. While most components within the index showed gains, consumer expectations remained a notable exception. The Conference Board interpreted this shift as a sign that moderate economic growth could lie ahead, providing a counterweight to more pessimistic market narratives.

Professional forecasters have also updated their outlooks in a positive direction. In an August survey conducted by the Philadelphia Fed, 32 forecasters assessed the U.S. economy as being in a better position than it was three months prior. Their projections include 2.5% annualized growth for the third quarter and 2.3% for the fourth quarter of 2026. These figures suggest that the consensus among these experts does not anticipate a downturn in the immediate term.

Despite these favorable macroeconomic indicators, equity market valuations have reached levels that warrant caution. The S&P 500 has entered extreme valuation territory, a condition not observed since the dot-com crash of 2000. The Shiller CAPE ratio has been hovering around 40 to 41, making the current market the second most expensive in the last 156 years according to data presented by YCharts.

While the CAPE ratio does not directly predict recessions, historical patterns indicate that periods with lower returns have often followed unusually high valuations. This disconnect between strong economic growth and elevated stock prices creates a complex environment for investors. The available data suggests that a recession is not imminent based on current GDP and leading indicators, yet the high cost of equities implies that future returns may be harder to achieve than in previous cycles.