The stock market's rally since President Donald Trump paused reciprocal tariffs on April 9 has been impressive. The S&P 500 and Nasdaq have surged 18% and 25%, respectively, in hopes that cooler heads and trade negotiations would reduce the risk that tariffs would send the U.S. economy into a tailspin.

The surge in stocks has been so impressive that the S&P 500, the benchmark most use to gauge the stock market's strength, has recovered all its tariff-driven losses, shifting from a nearly 20% bear-market loss to a year-to-date return of 0.19%.

Related: Goldman Sachs announces major change to S&P 500 forecast

While optimism has clearly rebounded, not everyone, including the billionaire hedge fund manager Steven Cohen, is convinced that stocks and the U.S. economy are out of the woods.

Cohen is a legendary fund manager whose success at SAC Capital made him one of the most prominent money managers ever. He currently runs Point72, another hedge fund with $37 billion in assets under management, and he owns the New York Mets.

Cohen commented on the recent stock market rally this week, offering a frank assessment of recession risks and an updated stock outlook that may raise some eyebrows.

The Fed is on hold, and potentially, behind the curve

The Federal Reserve sets the Federal Funds Rate at levels to encourage low unemployment and inflation. Unfortunately, that’s not as easy as it sounds.

Employment and inflation often run contrary to each other. When the Fed raises interest rates, it slows the economy, crimping inflation but causing unemployment. When it cuts rates, it accelerates the economy, boosting jobs but increasing inflation.

Related: Major economist revamps recession forecast after trade deal

We’ve seen this dynamic play out over the past few years. In 2022, after incorrectly labeling inflation as transitory, Fed Chairman Jerome Powell embarked on the most hawkish pace of rate hikes since the early 1980s to lower inflation.

It worked — inflation has slipped below 3% — but it also has caused the unemployment rate to rise, to 4.2% from 3.4% in 2024.

Over the past year, we’ve seen a steady increase in layoffs, including more than 602,000 this year through April, according to Challenger, Gray & Christmas. That's the most since Covid.

The economy was already showing signs of wear heading into 2025, and market watchers have become downright pessimistic since Trump unveiled a series of surprising tariffs.

In February, the president instituted 25% tariffs on Canada and Mexico, and 10% tariffs on China, which increased to 20% in March. In April, he unveiled harsher than hoped reciprocal tariffs worldwide, including a 10% baseline import tax.

While Trump paused most reciprocal tariffs on April 9, a trade war with China caused Chinese tariffs to soar to 145%.

The Trump administration recently rolled back those Chinese tariffs to 30% in a sign of good faith while negotiating a broader trade agreement, but the taxes still represent a massive burden on the economy that didn’t exist one year ago.

Steven Cohen offers blunt words on the economy, stocks

Cohen has been tracking the market professionally since 1978, and his decades of experience mean that he’s navigated more than his share of good and bad economies and seen plenty of bull and bear markets.

Related: Legendary fund manager makes bold stock market prediction

While the stock market's recent rally is impressive and the progress on trade deals lately is encouraging, Cohen isn’t entirely convinced that we’re out of the woods yet, given his candid words at the Sohn Investment Conference this week.

Cohen said at the conference that the S&P 500 might retest its April lows. He also said that there’s a 45% chance the U.S. economy will still wind up in a recession.

“We’re not in a recession yet. I think we are going to have significant slowing growth. We think it will probably be a 45% chance of recession. So, that’s not insignificant,” said Cohen.

Cohen doesn’t expect the Fed to move quickly to support the economy or stocks.

“We don't think the Fed's going to act right away because they're still going to be worried about inflation from tariffs,” said Cohen.

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Cohen says GDP will grow 1.5% or less next year, though. That’s not terrible but not as strong as many would like, given GDP clocked in at 3% last summer.

Cohen said that Trump's recent actions with China eliminate the “dire scenario,” but he expects a range-bound market.

If the stock market retests its lows, it would be tough news for investors, who have been on a roller-coaster this year. The S&P 500’s volatility has soared, leaving many investors wringing their hands over what could happen next.

The Treasury bond market may also be signaling problems. The 10-year Treasury note yield has broken out above 4.5% on Wednesday, its highest since mid-February. Rising bond yields can typically present headwinds for stocks, as higher yields make Treasuries more competitive against stocks for returns.

Related: Veteran fund manager unveils eye-popping S&P 500 forecast