Despite a worse-than-expected first quarter 2025 GDP report, U.S. stocks rebounded and ended mostly higher. Several factors help explain this counterintuitive market reaction.

The GDP Miss Was Driven by a Temporary Surge in Imports, Not Broad Economic Weakness

The contraction in GDP was primarily due to a 41.3% surge in imports, as businesses and consumers rushed to bring in goods ahead of new tariffs imposed by President Trump in early April. Since imports subtract from GDP calculations, this front-loading effect is seen by many investors as a temporary distortion rather than a sign of underlying economic deterioration. One expectation is that this drag will reverse in future quarters, which may lead to a potential rebound in GDP.

Consumer Spending Remained Resilient

Following the initial selloff, markets bounced back after mid-morning data revealed that personal spending in March exceeded previous estimates. Robust consumer spending indicates that, despite unfavorable headlines, the core of the U.S. economy—consumer demand—continues to be strong. This supports corporate revenues and bolsters equity valuations.

Investors Anticipate Policy Responses or Reversal of One-Off Effects

The market may be pricing in the likelihood that policymakers (such as the Federal Reserve ) could respond to economic weakness with supportive measures or that the negative impact of tariffs and import surges will be short-lived. Investors often look past one-off shocks if they believe the underlying trend is stable or that policy will cushion the blow.

The GDP Report Was Seen as “Noisy” and Not Indicative of a Recession

The GDP report showed significant "noise," indicating that distortions from trade policy shifts and inventory changes were more influential than a widespread economic decline. The contraction was mild relative to pessimistic forecasts, with certain elements, such as investment and exports, even seeing growth. Consequently, some investors perceived the headline GDP shortfall as less worrying than it first seemed.