Global markets news: Why is the US stock market falling? 5 key reasons behind Dow Jones, S&P 500 selloff

Global markets news: The US stock market is witnessing one of its steepest losses in recent times following President Donald Trump’s tariff salvo against countries across the globe.

Trump’s reciprocal tariffs on the US’s key trading partners have stoked fears that a full-blown trade war could severely hurt global economic growth, revive inflationary pressures, erode corporate earnings, and potentially trigger stagflation.

On Friday, the S&P 500 crashed 5.97 per cent and Dow Jones ended with a loss of 5.50 per cent. Tech-heavy Nasdaq plunged 5.73 per cent.

Thus, the S&P 500 saw its biggest weekly drop since March 2020, and the Nasdaq Composite crashed more than 20 per cent from its record high last December. The Dow Jones Industrial Average has suffered losses of over 10 per cent from its December record high.

Why is the US stock market falling?

While Trump’s tariffs are the biggest and most immediate trigger for the sharp selloff in the US stock market, several other key factors also appear to have contributed to the downtrend on Wall Street.

1. Trade war jitters

Trump’s aggressive tariff policy has triggered a trade war, which could potentially damage global economic growth, drive up inflation, and alter global trade practices.

His April 2 announcements fetched sharp counterattacks. For example, China announced on Friday that it will impose an additional 34 per cent tariff on all US imports.

According to reports, the European Union (EU) has also indicated that it is keeping all options open, including responding with countermeasures and going after big tech companies if talks with the Trump administration fail.

India, too, is engaged with US authorities to find a way out of tariff tussle.

“Trump tariffs imposed overnight are more severe than expected. We view the April 2 event as the beginning of the next stage of the trade war. Persisting trade-tariff noises and policy uncertainty will be shaping things for the worse – a hostile environment for investment spending,” said Madhavi Arora, Lead Economist at Emkay Global Financial Services.

2. Inflation spectre resurfacing

Sticky inflation has been one of the biggest macro challenges the post-COVID world has been grappling with. The ongoing trade war has further intensified fears that inflation could rise sharply, hurting corporate profitability and dampening consumer sentiment.

According to experts, US consumers will be directly affected by the trade war as a significant portion of fruits and vegetables, petroleum products, toys, electronic items and other products are imported from countries like Canada, Mexico and China. These items will get expensive due to higher tariffs.

Arora of Emkay Global believes higher tariffs could lower US corporate profit margins and lift US inflation, which would offset supposed fiscal revenue gains from tariffs.

3. Stagflation fears

The trade war could slow down the US economy, and when combined with elevated inflation, it raises the risk of stagflation.

Bloomberg reported, quoting JPMorgan Chase & Co chief US economist, Michael Feroli, that the real GDP may contract due to tariffs. For the full year, the JPMorgan economist anticipates real GDP growth of -0.3 per cent, down from 1.3 per cent previously.

J.P. Morgan has increased its odds for the US and global recession to 60 per cent.

4. Uncertainty over US Fed interest rate trajectory

Experts are divided over the prospects of rate cuts in the US. While some believe Trump’s tariffs could slow the US economy significantly, prompting quicker rate cuts from the Federal Reserve, others remain cautious.

US Federal Reserve Chair Jerome Powell on Friday hinted that a trade war may cause more damage than expected, including higher inflation and slower growth.

“We face a highly uncertain outlook with elevated risks of both higher unemployment and higher inflation,” he said.

Powell indicated that the US Fed may not cut rates at a hurried pace.

“To me, it’s not clear at this time what the appropriate path for monetary policy will be, and we’re going to need to wait and see how this plays out before we can,” Powell said.

5. Flight to safety

Rising economic uncertainty and fears of a recession in the US are driving US stock market investors towards safer investment options such as government bonds.

Strong bond buying pushed the yield on the 10-year US Treasury below 4 per cent, marking its biggest weekly drop since July 2024.

Bond and bond yields move in opposite directions because a surge in bond prices means lower yields.

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Disclaimer: This story is for educational purposes only. The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions, as market conditions can change rapidly, and circumstances may vary.