Trump Recession Fear Continues to Grow

President Donald Trump’s tariffs have unsettled investors, fueling fears of an economic downturn and triggering a stock market selloff that erased $4 trillion from the S&P 500’s peak last month. Just weeks earlier, Wall Street had been optimistic about much of Trump’s agenda. No more.

A wave of new policies from the administration has created uncertainty for businesses, consumers, and investors. The ongoing back-and-forth tariff measures against major trading partners such as Canada, Mexico, and China have heightened volatility.

The stock market selloff deepened on Monday, with the S&P 500 falling 2.7%, marking its largest daily drop of the year. The Nasdaq Composite saw an even sharper decline, sliding 4%, its worst one-day performance since September 2022.

As of Monday, the S&P 500 had dropped 8.6% from its February 19 record high, losing over $4 trillion in market value and approaching a 10% decline, which would qualify as a correction. The tech-heavy Nasdaq has now fallen more than 10% from its December high.

Over the weekend, Trump refrained from speculating on whether the U.S. could enter a recession, even as investors remained concerned about the economic effects of his trade policies. The uncertainty surrounding tariff disputes with Canada, Mexico, and Europe has led corporate leaders to rethink their strategic plans. While ongoing tensions with China are expected, the disputes with close allies have added further complexity. If these uncertainties persist in the coming weeks, they could significantly impact economic growth and merger-and-acquisition activity.

Corporate earnings have already taken a hit. Delta Air Lines slashed its first-quarter profit estimates by half, prompting a 14% drop in its shares during after-hours trading. CEO Ed Bastian attributed the decline to heightened uncertainty in the U.S. economy.

Beyond trade policy, investors are also watching whether lawmakers can pass a funding bill to prevent a partial government shutdown. An upcoming U.S. inflation report on Wednesday is another key focus.

The administration appears more willing to tolerate market declines and even the possibility of a recession as part of its broader economic strategy, signaling a shift that has caught Wall Street’s attention.

Wealth disparities in stock ownership remain stark. The bottom 50% of the U.S. population by wealth owns just about 1% of corporate equities and mutual fund shares, while the top 10% holds 87%, according to data from the Federal Reserve Bank of St. Louis as of July 2024.

The S&P 500 had recorded back-to-back annual gains of more than 20% in 2023 and 2024, driven by megacap technology stocks such as Nvidia and Tesla. However, these stocks have struggled in early 2025, weighing down major indexes. On Monday, the S&P 500’s technology sector declined 4.3%, while Apple and Nvidia each lost about 5%. Tesla saw a steeper decline, tumbling 15% and shedding approximately $125 billion in market value.

Other risk assets also faced losses. Bitcoin fell 5% alongside the stock market decline, while some defensive sectors performed better. The utilities sector gained 1% for the day as investors moved toward safer assets. U.S. government bonds saw increased demand, with the benchmark 10-year Treasury yield dropping to about 4.22%.

Market sentiment has shifted significantly. The S&P 500 has now erased all gains recorded since Trump’s November 5 election and is down nearly 3% during that period. Hedge funds made the largest reduction in stock exposure in more than two years on Friday, according to a Goldman Sachs report released Monday.

Initially, investors had been optimistic that Trump’s pro-growth policies—such as tax cuts and deregulation—would fuel market gains. However, ongoing uncertainty surrounding tariffs and additional policy shifts, including federal workforce reductions, has dampened confidence.

Market expectations had been high that Trump’s presidency would create a favorable business environment, but structural changes have introduced uncertainty and friction. As a result, some investors are beginning to take profits as concerns grow. As such, many investors, like voters, are having regrets about the Trump Administration.

Despite the recent declines, stock market valuations remain well above historical averages. As of Friday, the S&P 500 was trading at just over 21 times forward earnings estimates, compared to its long-term average of 15.8, according to LSEG Datastream.

Concerns about overvalued U.S. equities have persisted, with some investors anticipating a market correction. A mix of trade war fears, geopolitical tensions, and economic uncertainty could serve as the trigger.

Investor positioning in equities has declined in recent weeks, dipping slightly below neutral for the first time since briefly reaching that level in August, according to Deutsche Bank analysts. If exposure drops to the lower end of historical levels—similar to the U.S.-China trade war of 2018-2019—the S&P 500 could decline further to 5,300, representing another 5.5% drop from current levels.

Signs of growing unease are evident, with the Cboe Volatility Index reaching its highest closing level since August on Monday.

The administration continues to search for a clear definition of success—politically, economically, and in terms of timing. Until a more concrete strategy emerges, market volatility is likely to persist.