Fears that uncertainty over trade tariffs will send the U.S. economy careening into a recession had investors fleeing stocks Monday, with the S&P 500 suffering its worst day of the year and the Nasdaq falling the most since 2022.
North American equities - especially those in the high-growth and pricey megacap tech sector in the U.S. - have been under increasing pressure over the last few weeks as President Donald Trump sent conflicting signals over the speed and depth of his tariff policies.
The bout of selling has been a major shift for Wall Street, which had been fired-up by the prospect of Mr. Trump’s pro-growth agenda. Investors are also concerned about a possible federal U.S. government shutdown related to a spending bill.
“Many people have been worried about elevated valuations among U.S. equities for some time and looking for the catalyst for a market correction. A combination of concerns about a trade war, geopolitical tensions and an uncertain economic outlook could be that catalyst,” said Dan Coatsworth, investment analyst with AJ Bell in London.
On Sunday, Trump declined to comment on the negative market reaction to his on-again, off-again tariff actions against the biggest U.S. trading partners, and whether anxieties related to his erratic policy shifts could nudge a softening economy into recession. “I hate to predict things like that,” he told Fox News. “There is a period of transition because what we’re doing is very big. We’re bringing wealth back to America.”
That wasn’t the reassurance markets were looking for.
“Trump was seen as the market’s savior, promising lower taxes and less stringent regulation. Now his actions represent the harbinger of doom. The R word is back on everyone’s lips as people ponder if trade tariffs will backfire and lead to recession rather than U.S. economic prosperity,” Mr. Coatsworth added.
Many investors have been buying recent dips in stocks on the belief that Mr. Trump would quickly reverse policies that spark a negative reaction in markets - the so-called Trump put.
Now, some are rethinking that approach.
“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. I think that’s a big wake-up call for Wall Street. There had been a sense that President Trump kind of measured his success on stock market performance,” said Ross Mayfield, investment strategist with Baird in Lousiville, Kentucky.
Chart-based technical selling was also a factor Monday. The bellwether S&P 500 closed below its 200-day moving average, a closely watched support level, for the first time since November 2023.
The U.S. economy has already given some signals of weakening, mostly through surveys showing increased pessimism. A widely followed collection of real-time indicators compiled by the Federal Reserve Bank of Atlanta suggests the U.S. economy may already be shrinking.
Some economists are marking down their forecasts for how the economy will perform this year.
At Goldman Sachs, for example, David Mericle cut his estimate for U.S. economic growth to 1.7% from 2.2% for the end of 2025 over the year before, largely because tariffs look like they’ll be bigger than he was previously forecasting.
Another factor working against U.S. technology stocks has been a stronger Japanese yen and a spike in the country’s bond yields, as investors unwind yen carry trades on expectations of an upcoming interest rate hike in Japan.
The carry trades involve borrowing yen at a low cost to invest in other currencies and assets offering higher yields, and that unwinding is at least partially responsible for the selloff in tech stocks such as the “Magnificent 7″ group of artificial intelligence-related megacaps, traders said.
“The carry trade is unwinding, and all that hot money was in Mag 7. So that’s why tech is down,” said Thomas Hayes, chairman at Great Hill Capital in New York.
The CBOE Volatility Index, often called the “fear index,” surged to its highest close since August 2024.
Still, some investors cautioned against the belief that a bear market - a downward move of at least 20% from recent highs - is just around the corner, given the U.S. economy is still relatively strong and showing firm employment. And while bond yields fell Monday - the U.S. 10-year yield was down about 10 basis points to 4.219% - they didn’t fall too dramatically. That suggests investors weren’t rushing to buy bonds for safety (bond prices and yields move inversely).
“It is a very bad day, no two ways about that, but in terms of the context of the overall market and how we’ve been doing ... (it’s) not time to panic just yet,” said Michael Currie, senior investment adviser at TD Wealth.
The Dow Jones Industrial Average fell 890.01 points, or 2.08%, to 41,911.71, the S&P 500 lost 155.64 points, or 2.70%, at 5,614.56 and the Nasdaq Composite dropped 727.90 points, or 4.00%, to 17,468.32.
Among the 11 major sectors of the S&P 500, tech shares lost the most, falling 4.4%. Growth stocks fell 3.8%, their biggest one-day slide since September 2022.
Tesla plunged 15.4%, the stock’s largest single-day drop since September 2020, as the electric carmaker’s luster dimmed in the wake of billionaire CEO Elon Musk’s Department of Government Efficiency firings and protests arising from his support of far-right political parties in Europe.
In cryptocurrencies, bitcoin dropped to a four-month low and was down 5.53% at $78,488.64.
The S&P/TSX composite index closed down 378.05 points, or 1.53%, at 24,380.71. The slide wasn’t a broad-based one, however. Base metals, tech, financials and industrials led the way down while telecom and utilities stocks rose.
With reports from Reuters, The Associated Press and The Canadian Press