Market Minute: U.S. Equities Face Turbulence Amid Trade Tensions and Economic Slowdown
U.S. equities have experienced significant weakening over the past two weeks, driven by fears over President Trump’s tariffs and their potential impact on economic growth. The S&P 500 (SPX) has nearly erased all its post-election gains, marking a stark reversal of the U.S.’s multiyear dominance in global equities. Meanwhile, Europe’s shift toward fiscal stimulus has attracted foreign investors, particularly in major economies like Germany. The weakening U.S. dollar has also provided a tailwind for U.S. investors in foreign markets.
Economic data has further fueled concerns, with manufacturers reporting a steep decline in orders in February and hiring slowing sharply. The ADP Employment Report revealed that U.S. companies added only 77,000 jobs in February, far below expectations and January’s figures. Policy uncertainty, slowing consumer spending, and trade tensions have contributed to this slowdown, with economists predicting modest job growth and an unemployment rate holding steady at 4.0%.
The bond market has also reflected dimmer growth expectations for the U.S., with the ten-year Treasury yield falling nearly 70 basis points from its January peak. Fed Funds futures now indicate a 50% chance of a rate cut by May, with year-end projections suggesting up to 1% in rate cuts. However, the Federal Reserve is likely to wait for more concrete evidence of economic weakness before acting.
The bearish sentiment is further fueled by concerns over a potential bubble burst in the artificial intelligence sector, policy uncertainty, and a sharp downgrade in 1Q GDP estimates. Personal consumption, which accounts for nearly 70% of GDP, has stalled, signaling a potential unfolding recession and negative impacts on corporate earnings.
Despite the volatility and negative headlines, the market has so far weathered the trade war. However, with sentiment extremely bearish and the market oversold, rallies are likely to be short-lived, and volatility is expected to persist throughout the year. While the Fed may hold off on immediate rate cuts, the combination of weak economic data, trade tensions, and slowing growth suggests the U.S. economy may be at a significant inflection point. Investors, who entered 2025 optimistic about tax cuts and regulatory rollbacks, now face a more uncertain and challenging environment.
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Charles Schwab and all third parties mentioned are separate and unaffiliated, and are not responsible for one another's policies, services or opinions.
