By Lewis Krauskopf
NEW YORK (Reuters) – Fears that uncertainty over trade tariffs will spark an economic downturn are causing investors to flee equities, in a major shift for Wall Street which had been fired-up by the prospect of President Donald Trump’s agenda.
Stocks continued their steep decline on Monday, with the benchmark S&P 500 down 2% in mid-day trade and the Nasdaq Composite sliding more than 3%. The S&P 500 was down about 8% from its February 19 all-time high, nearing a 10% decline that would show a correction for the index. The tech-heavy Nasdaq ended down more than 10% from its December high last week.
The S&P 500 tallied back-to-back gains of over 20% in 2023 and 2024, led by megacap technology and tech-related stocks such as Nvidia and Tesla that have struggled so far in 2025 and dragged major indexes down with them.
“We’ve seen clearly a big sentiment shift,” said Ayako Yoshioka, senior investment strategist at Wealth Enhancement.
“A lot of what has worked is not working now.”
Investors are grappling with a barrage of new policies from the new Trump administration, particularly in trade where back and forth on tariff policy has increased uncertainty for businesses, consumers and investors.
Trump over the weekend declined to predict whether the U.S. could face a recession amid stock market concerns about his tariff actions on Mexico, Canada and China.
“The Trump administration seems a little more accepting of the idea that they’re OK with the market falling, and they’re potentially even OK with a recession in order to exact their broader goals,” said Ross Mayfield, investment strategist at Baird. “I think that’s a big wake up call for Wall Street.”
The S&P 500 has given up all of its gains since Trump’s November 5 election, and is now down more than 2% in that time. Investors had expressed optimism that Trump’s expected pro-growth agenda including tax cuts and deregulation would benefit stocks, but uncertainty over tariffs and other changes including federal workforce cuts, have dampened sentiment.
INVESTOR UNEASE
“It was the overwhelming consensus that everything was going to be this great environment once President Trump came into office,” said Michael O’Rourke, chief market strategist at JonesTrading.
“Every time you have structural change you’re going to have uncertainty and you’re going to have friction,” O’Rourke said. “It’s understandable people are starting to be a little concerned and starting to take profits.”
While stock valuations have moderated with the recent selloff, the market broadly is still significantly above historic averages. The S&P 500 as of Friday was at just above 21 times earnings estimates for the next year, compared to its long-term average forward P/E of 15.8, according to LSEG Datastream.
Investors’ equity positioning has fallen in recent weeks, dipping to slightly underweight for the first time since it briefly hit that level in August, Deutsche Bank analysts said in a note on Friday.
A further retreat to the bottom of its historical range, as seen in Trump’s first term during the U.S.-China trade war period in 2018-19, could drag the S&P 500 to as low as 5,300, or down another 6% from current levels, they added.
Beyond the tariff uncertainty, investors are watching to see if lawmakers can pass a funding bill to avert a partial federal government shutdown, while a crucial report on inflation looms on Wednesday.
In a sign of growing investor unease, the Cboe Volatility index hit its highest level since late December on Monday.
“Considerable uncertainty remains over the size and scope of tariffs to be implemented,” strategists at Glenmede said in written commentary.
“Are they temporary in order to extract concessions, or are they a new permanent fixture of U.S. trade policy? Until there’s greater clarity on these key questions, market volatility is likely to persist.”
(Reporting by Lewis Krauskopf; additional reporting by Saqib Iqbal Ahmed and Caroline Valetkevitch in New York and Lisa Pauline Mattackal in Bengaluru; editing by Megan Davies and Christina Fincher)
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