A rolling recession in the economy is turning into a rolling recovery that should help limit downside in the stock market

• A rolling recession in the economy has turned into a rolling expansion, according to market veteran Ed Yardeni.
• He said the resilience of underlying sectors of the economy should help limit stock market downside.
• "We expect that consumers will have enough purchasing power to keep the economy growing."

A rolling recession hit different sectors of the economy over the past year as the Federal Reserve aggressively hiked interest rates.

Now, that rolling recession is turning into a rolling expansion across that should help boost the ongoing economic recovery and help limit any potential downside in the stock market, market veteran Ed Yardeni said in a Tuesday note.

"What happens after a rolling recession? Perhaps a rolling expansion as the economic sectors that fell into a recession recover," he said.

Yardeni highlighted strong housing starts in May as reason to believe that a recovery in the economy is in fact underway, given that the housing sector represents a sizable chunk of the US economy and was negatively impacted by surging mortgage rates over the past year.

He pointed out that the National Association of Home Builders/Wells Fargo Housing Market Index, which has soared 77% since December, is now above the neutral level of 50 for the first time since July 2022, indicating that a shortage of existing homes is boosting demand for new ones.

Other areas of the economy hinge on the strength of the consumer, and while many expect consumers to spend down their excess savings by the end of the year and enter a period of malaise, Yardeni is more optimistic.

"We don't agree. We expect goods demand to start growing again later this year once it returns to its pre-pandemic uptrend. We also expect that consumers will have enough purchasing power to keep the economy growing," he said.

All of the recent economic data has translated into a second-quarter GDP growth estimate of 1.9%, according to the Atlanta Fed, and growth could jump even higher if the strong housing starts data indicate residential investment is turning around.

To be sure, there are still some pockets of weakness in the US economy that will persist as other areas grow, and that's mainly in commercial real estate.

But that weakness should be more than offset by ongoing trends of onshoring and more fiscal spending, according to Yardeni. The Atlanta Fed's GDPNow model estimates that due to these trends, nonresidential structures investment will grow 17.5% in the second quarter.

"Stocks may be due for a technical correction, but the underlying economic fundamentals should limit any downside move," Yardeni said.