The Recession Started Months Ago. Now What?

Introduction

Three years ago, the Federal Reserve (Fed) pushed the US economy into a rolling recession that pummeled all except the high-end consumer and the government sectors. Now, even those previously resilient sectors are giving way. While many economists are forecasting a recession that could extend into 2026, we believe that the “stealth recession” in place for the past three years will end soon and will be followed not only by a productivity-led economic boom but also a healthy, broader-based bull market. Now in deep value territory, technologically enabled innovation should be one of the prime beneficiaries. 

Rolling Recession

During the sixteen months that ended in July 2023, the Federal Reserve jacked the Fed funds rate up a record-breaking 22-fold, hammering one sector after another for the next three years. Never in post-World War II history has the Fed tightened monetary policy as suddenly and dramatically as in this cycle, as shown below. Indeed, prior to this cycle, the most significant hikes over a 16-month period were only 4-fold each—in 2005 and in 2017. Even as Fed Chairman Volcker tackled inflation that had soared into the double-digits, interest rates increased only ~2-fold, from 10.6% to 20% over the six months from August 1979 to February 1980. Unlike the seventies that were characterized by years of rising inflation and interest rate expectations, the sharp and sudden increase this time around upended decision-making based on many years of near 0% interest rates.

Source: ARK Investment Management LLC, 2025, based on data from Macrobond as of April 28, 2025. For informational purposes only and should not be used as the basis for any investment decision.

Housing was the first victim in this cycle. With mortgages at 2-3% rates, many homeowners have been trapped in their homes for three years, unable to afford rates two- to three-times higher. Existing home sales peaked at 6.4 million units in 2022 and dropped 39%, with little sign of recovery during the past three years, as shown below.

Source: ARK Investment Management LLC, 2025, based on data from Macrobond as of March 31, 2025. For informational purposes only and should not be used as the basis for any investment decision.

Since June 2021, until the rush to get ahead of tariffs began within the last few months, auto sales also have struggled in the 15–16-million-unit range, 10-15% below the 17-18 million units normal in an expansion, as shown below.

Source: ARK Investment Management LLC, 2025, based on data from Macrobond as of March 31, 2025. For informational purposes only and should not be used as the basis for any investment decision.

As indicated by the PMI (Purchasing Managers Index) below 50, manufacturing has been contracting since November 2022, as shown in the first chart below; and, despite the AI-related spending boom on data centers and power, capital spending as measured by non-defense capital goods excluding aircraft has begun to fall on a year-over-year basis, as shown in the second chart below.

Source: ARK Investment Management LLC, 2025, based on data from Macrobond as of March 31, 2025. For informational purposes only and should not be used as the basis for any investment decision.

Source: ARK Investment Management LLC, 2025, based on data from Macrobond as of March 31, 2025. For informational purposes only and should not be used as the basis for any investment decision.

Meanwhile, small and medium sized businesses—the backbone of the US economy—have been reeling: as measured by the NFIB (National Federation of Independent Business), their optimism dropped by June 2022 to levels last seen in 2008-09 and remained depressed until the election in November 2024, as shown below. After rebounding in hopes of deregulation, tax cuts, and lower interest rates, their optimism is relapsing now in response to tariffs and weaker economic activity. 

Source: ARK Investment Management LLC, 2025, based on data from Macrobond as of March 31, 2025. For informational purposes only and should not be used as the basis for any investment decision.

Concurrently, as measured by the University of Michigan, consumer confidence among high-income earners just capitulated in April, falling toward the 2008-09 levels at which low- and middle-income earners have been mired since the Fed raised rates in 2022, as shown below.

Source: ARK Investment Management LLC, 2025, based on data from Macrobond as of March 31, 2025. For informational purposes only and should not be used as the basis for any investment decision.

Despite that broad-based weakness, after a brush with an “official recession” in early 2022, real Gross Domestic Product (GDP) has been propped up primarily by high-end consumers and the government. Now that those two sectors are beginning to contract, the Atlanta Fed’s GDPNow is projecting that real GDP dropped 2.5% at an annual rate during the first quarter.¹ Moreover, in response to the uncertainty associated with tariffs and other government policies, the velocity of money declined sequentially in the fourth quarter and probably is declining on a year-over-year basis now, suggesting that real GDP could drop more precipitously in the second quarter. 

Confirming that the economy has been in a recession, the yield curve has transitioned from inverted to positive territory and is steepening. As measured by the 10-year minus the 2-year Treasury bond yields, the yield curve was inverted—typically a harbinger of recession—from July 2022 to September 2024. Since then, it has moved into positive territory and steepened to 59 basis points.² Never in the past fifty years has the yield curve moved from negative to positive territory in the absence of a recession, as shown below. 

Source: ARK Investment Management LLC, 2025, based on data from The U.S. Federal Reserve as of April 24, 2025. For informational purposes only and should not be considered investment advice or a recommendation to buy, sell, or hold any particular security. Past performance is not indicative of future results.

Productivity-Led Recovery

While many economists are beginning to forecast a recession extending into 2026, our research suggests that the rolling recession that has been in place for the past three years should end with clarity on tariff, tax, regulatory, and monetary policies during the next three to six months. If the current tariff turmoil results in freer trade, as tariffs and non-tariff barriers come down in tandem with declines in other taxes, regulations, and interest rates, then real GDP growth and productivity should surprise on the high side of expectations at some point during the second half of this year.

Our working assumption has been that President Trump will assess his own success by two measures: economic growth and the stock market. How many times during the tariff turmoil has he proclaimed what he believes will be the outcome of the negotiations: an economic and stock market boom. Clearly, he is looking to increase the Republican majority in the House of Representatives in the midterm elections, contrary to the outcome typically associated with the incumbent administration. Otherwise, he will become the proverbial lame duck!

Innovation tends to gain traction during tumultuous times: when consumers and businesses are concerned about the future, they are willing to change the way they do things. Inertia gives way to better, less expensive, faster, more productive, and more creative ways of living and working. During the current turbulent transition in the US, we think consumers and businesses are likely to accelerate the shift to technologically enabled innovation platforms including artificial intelligence, robotics, energy storage, blockchain technology, and multiomics sequencing. 

Lower Inflation

Taken together, those innovation platforms are likely to increase productivity and lower inflation. Why? Technologies follow learning curves, which are expressed in cost declines. According to Wright’s Law, for every cumulative doubling in the number of units produced, costs associated with a given technology decline by a consistent percentage rate. 

Astonishingly, the cumulative doubling in AI compute units produced has been taking place in less than one year, causing AI hardware and software costs to drop 52% and 45% per year, respectively. As a result, AI training costs have been dropping 75% per year, and AI inference costs 85-90% per year. Because AI is permeating every industry and company, the deflationary undercurrents are likely to gain momentum during the next few years. Compounding the cost declines in AI, we expect a 50% cost decline for every cumulative doubling in the production of industrial robots, a 28% decline in electric drivetrain costs, and a 40% drop in DNA sequencing costs, all of which should create booming unit growth conditions.

Note: “Network density” measures the degree of interconnectedness between nodes relative to the maximum potential interconnectedness. In our research, if every technology were expected to catalyze another technology to increase in value by an order of magnitude or more, that would equate to a fully interconnected network. Source: ARK Investment Management LLC, 2025. This ARK analysis draws on a range of external data sources as of December 31, 2024, which may be provided upon request. For informational purposes only and should not be considered investment advice or a recommendation to buy, sell, or hold any particular security. Past performance is not indicative of future results. Forecasts are inherently limited and cannot be relied upon.

Assuming the tariff turmoil subsides during the next six to nine months, we believe the narrowest “bull market” in history should give way to a much broader-based and healthier bull market. As suggested by Truflation, shown in the chart below, inflation should continue to surprise on the low side of expectations, supported by the price deflation that we expect will be associated with the five innovation platforms described above. To the extent they are enacted, the impact of tariffs is likely to be “transitory,” according to Fed Chairman Powell. At the same time, news about deregulation, tax cuts, and lower interest rates is likely to be hitting the headlines. If they are made effective either retroactively or in real-time, they should catapult the economy into the accelerated growth trajectory that every technology revolution has spawned.

Note: The Consumer Price Index (CPI) is the primary US economic metric used to track inflation, reflecting the average change in prices of a basket of consumer goods and services. It's calculated and published by the U.S. Bureau of Labor Statistics (BLS). Truflation provides an alternative inflation index to the widely used Consumer Price Index (CPI), aiming to offer more real-time and accurate data. While the CPI is updated monthly, Truflation uses daily data from a vast number of sources, including decentralized oracles and foreign sources, to provide a more frequent and potentially more accurate reflection of inflation. Source: ARK Investment Management LLC, 2025, based on data from Truflation and Macrobond as of April 15, 2025. For informational purposes only and should not be considered investment advice or a recommendation to buy, sell, or hold any particular security. 

Broader-Based Bull Market Or Bear Market?

The seeds for all of these new technologies were planted during the 20 years that ended in the tech and telecom bubble (1980- 2000). While the innovation platforms have been germinating for 25-30 years and are beginning to flourish today, with the exception of a narrow set of AI beneficiaries, investors have been reluctant to allocate capital to them.

In late-2022, ChatGPT created the “coming of age” moment for this innovation revolution, benefiting the stocks of companies like Nvidia, Amazon, Microsoft, and other cloud companies. Unlike in the late nineties, when they threw capital at any company associated with the internet, investors in public markets today seem to have little appetite for companies investing aggressively in innovation—especially for those not included in the indexes against which they are measured. Indeed, investors do not seem to be straying far from their benchmarks and have contributed to the narrowest equity bull market in history, as shown below. 

Source: ARK Investment Management LLC, 2025, based on data from Macrobond as of December 31, 2024. For informational purposes only and should not be considered investment advice or a recommendation to buy, sell, or hold any particular security. Past performance is not indicative of future results.

Highly concentrated equity markets end in one of two ways: a bear market, as in the end of the Nifty Fifty in the early 1970s and the tech and telecom bust in the early 2000s, or—more often—a bull market that broadens out and strengthens. After the US closed the gold window in 1971, monetary policy became unhinged and accommodated profligate fiscal policies, leading to inflation that threw the equity market into convulsions lasting into the early eighties. Today, monetary policy is not accommodating inflation. Quite the contrary, in response to deteriorating consumer and business confidence, the velocity of money—the rate at which money turns over in the economy—is dropping sequentially, suggesting that the Fed could be much tighter than perceived.³

In the early 2000s, the market sold off for more than three years after “irrational exuberance” sent technology and biotech stocks soaring years before their underlying businesses were ready for prime time. For example, the “cloud” didn’t appear until 2006 when AWS debuted; AI was still science fiction and experimental until two big breakthroughs—Deep Learning in 2012 and transformer architecture in 2017—paved the way for the “ChatGPT” moment in 2022; and the cost to sequence one whole human genome was prohibitive, the first in 2003 $2.7 billion. Today, the cost is below $500.

Ironically, now that these technologies are ready for prime time, investors are making what we believe is a mistake that is an inversion of the one made during the tech and telecom bubble. Investors did not fare well by chasing any stock associated with the internet during the late nineties as the tech and telecom bubble turned into a bust. Now, clinging to the broad-based benchmarks against which they are measured, most investors are “short” the stocks of companies that literally are creating the new world. In our view, that decision ultimately will be deemed less than productive during the next few years.

Compounding that problem, many companies dominating the broad benchmark indices are prioritizing short-term shareholder returns through dividends and stock buybacks, often at the expense of investing in innovation. Their focus on immediate financial metrics could leave them deeply vulnerable in rapidly evolving, winner-takes-most markets. Without significant investment in disruptive technologies, companies eschewing investment in their own innovation risk being outpaced by more agile competitors who are innovating actively to capture market share. In such an environment, the lack of commitment to innovation could lead to diminished long-term competitiveness and growth. 

Three Headwinds Shifting to Bull Market Tailwinds

During the past four years, innovation-focused equity strategies have been fighting three headwinds: a narrowing bull market, higher interest rates, and premium valuations. As described above, we believe the current equity market correction is likely to stop short of a bear market and will evolve into a broader-based healthier bull market, reinforced by lower interest rates. In other words, the first two headwinds are likely to reverse during the next three to six months.

The third headwind, valuation, has already reversed. As measured by EV to EBITDA⁴ adjusted for research and development (R&D) and stock-based compensation (SBC)—a measure that we developed in partnership with S&P—the premium valuation for pure-play innovation strategies like ARK’s Disruptive Innovation portfolio has compressed from 278% relative to the S&P 500 at its quarter end peak in June 2021 to 13.3% in March 2025, as shown below. As a result, we believe that the valuation of innovation is in deep value territory.

Source: ARK Investment Management LLC and Standard & Poors (“S&P”), 2025. Note: SPX represents the S&P 500 Index. Data through March 31, 2025. The ARK Innovation information is based on the strategy's representative portfolio, with the underlying company data sourced from Bloomberg. The ARK Adjusted EV/EBITDA ratio is calculated by adding expenses related to R&D and stock-based compensation (SBC) back into the EBITDA in order to show what a company’s EBITDA would be if it stopped making voluntary investments and focused on profitability. Specifically, the formula is the following: Enterprise Value / (EBITDA + R&D Expense + All Stock Based Compensation Expense – R&D Stock Based Compensation Expense). One caveat to this calculation: while most companies delineate stock-based compensation expenses related to R&D, some do not, which can lead to some duplication of R&D SBC being added back to the EBITDA, since R&D SBC is already included in the “R&D Expense” figure as well as the “All Stock Based Compensation Expense” figure. This is done consistently for both the calculation of ARK’s portfolios and related benchmarks. The calculation is a weighted average using period end portfolio weights and uses trailing-12-month GAAP financials that are not adjusted prior to ARK’s calculation. Companies without 12-month financials are excluded from the calculation. We calculate the EBITDA/EV ratio for each company and then calculate a weighted average EBITDA/EV based on each company’s weight within the portfolio. Following the way that such metrics are usually presented, we reverse the result and report Enterprise Value/EBITDA. The data are provided by S&P Global. For informational purposes only and should not be considered investment advice or a recommendation to buy, sell, or hold any particular security. Past performance is not indicative of future results.

As always, our rate of return expectation for stocks in the innovation space assumes that their premium valuation will compress to a market multiple or lower over our five-year investment time horizon. Because innovative companies are investing aggressively, sacrificing short-term profitability in seeking to capitalize on the exponential—if not super-exponential—investment opportunities of our time, stocks held in our portfolio typically have sold at a significant valuation premium to the market. To generate a minimum 15% hurdle rate of return at an annual rate over the next five years, they must generate revenue growth and margin expansion that will overwhelm that multiple compression. Today, however, the ARK Disruptive Innovation portfolio⁵ is closing in on a market multiple, suggesting that innovation is on sale and has entered deep value territory in the public equity markets.

Our research suggests that the pace of technological advancement, as depicted in the chart below, is accelerating faster than ever. With valuations at deep discount levels, monetary and policy headwinds poised to reverse, and structural innovation drivers gaining momentum, we believe now is not the time for hesitation. Investors who wait for perfect clarity may find their performance lagging in the most transformative growth cycle in history. 

Note: “CAGR”: Compounded Annual Growth Rate. *We include cryptocurrencies and crypto assets in disruptive innovation capitalization. **Microsoft, Nvidia, Meta, Apple, Amazon, and Alphabet. Source: ARK Investment Management LLC, 2025. This ARK analysis draws on a range of external data sources as of December 31, 2024, which may be provided upon request. For informational purposes only and should not be considered investment advice or a recommendation to buy, sell, or hold any particular security. Past performance is not indicative of future results. Forecasts are inherently limited and cannot be relied upon.

For those seeking to future-proof portfolios and participate in the potentially exponential upside of this technological revolution, we believe the opportunity is now. At minimum, a strategic allocation to innovation may offer both an offensive position in tomorrow’s leaders and a defensive hedge against the disruption of the traditional world order already underway.

Important Information

Please note, companies that ARK believes are capitalizing on disruptive innovation and developing technologies to displace older technologies or create new markets may not in fact do so.

ARK aims to educate investors and to size the potential opportunity of Disruptive Innovation, noting that risks and uncertainties may impact our projections and research models. Investors should use the content presented for informational purposes only, and be aware of market risk, disruptive innovation risk, and regulatory risk. 

The content of this material is for informational purposes only and is subject to change without notice. This material does not constitute, either explicitly or implicitly, any provision of services or products by ARK and investors are encouraged to consult counsel and/or other investment professionals as to whether a particular investment management service is suitable for their investment needs. All statements made regarding companies or securities are strictly beliefs and points of view held by ARK and are not endorsements by ARK of any company or security or recommendations by ARK to buy, sell or hold any security. Historical results are not indications of future results. 

Certain of the statements contained in this material may be statements of future expectations and other forward-looking statements that are based on ARK's current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. The matters discussed in this material may also involve risks and uncertainties described from time to time in ARK's filings with the U.S. Securities and Exchange Commission. ARK assumes no obligation to update any forward-looking information contained in this material. Certain information was obtained from sources that ARK believes to be reliable; however, ARK does not guarantee the accuracy or completeness of any information obtained from any third party. ARK and its clients as well as its related persons may (but do not necessarily) have financial interests in securities or issuers that are discussed.

“Fed” refers to the U.S. Federal Reserve, the central banking system of the United States.

Fed Funds Rate is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight on an uncollateralized basis.

The “PMI,” or Purchasing Managers Index, measures manufacturing, services, and hospital supply and demand trends, and is based on a monthly survey of supply chain managers across multiple industries, covering upstream and downstream activity. 

Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. Nominal GDP is a measure of economic output that uses current prices and does not adjust for inflation. Real GDP is an economic metric that is used to describe the economic output of a country within a specific year. It reflects the value of all goods and services produced while factoring inflation into its calculation.

Yield Curve is a graphical representation of the interest rates on debt for a range of maturities. It shows the yield an investor is expecting to earn if they lend their money for a given period of time. An inverted curve appears when long-term yields fall below short-term yields. An inverted yield curve occurs due to the perception of long-term investors that interest rates will decline in the future.

The “Nifty Fifty,” as referenced in this video, was a group of 50 large-cap stocks on the New York Stock Exchange that were most favored by institutional investors in the 1960s and 1970s. Investment in these top 50 stocks—similar to blue-chip stocks of today—is said to have propelled the American economy to its bull market of the 1970s.

“CPI” refers to the Consumer Price Index, which is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Core CPI excludes food and energy.

The S&P 500 Index is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States.

©2025, ARK Investment Management LLC. No part of this material may be reproduced in any form, or referred to in any other publication, without the express written permission of ARK Investment Management LLC (“ARK”).