The US stock market is in a terrible place. What it needs to see next.
Stocks have taken a beating—but this week may provide a more definitive direction for the coming months.
All three major U.S. indexes were deeply in the red for a second consecutive day Friday. The S&P 500 is down 17% from the record close it notched in late February, and marked its worst week since March 2020.
Stocks are sliding after President Donald Trump announced his “Liberation Day” tariffs plan this week, as investors remain uncertain about how much the global economy will suffer.
On Wednesday, Trump announced 10% tariffs on all goods imported to the U.S., additional ones for goods from certain countries, and 34% higher tariffs on goods from China, all of which go into effect this month.
The implications: the cost of over $3 trillion worth of global goods will skyrocket, according to Office of the United States Trade Representative. Consumers will likely pull back on spending, which is forcing the stock market to reduce its expectation for sales and earnings.
Compounding the economic concern, China retaliated Friday morning by implementing 34% tariffs on U.S. goods. China imported $140 billion of goods from the U.S. in 2024—and U.S. companies that sell to China will likely see a hit to demand in 2025.
The market won’t fully understand the damage to companies’ profits until investors can examine economic data and quarterly earning reports over the coming quarters. That is why the market won’t stage any kind of meaningful recovery in the next few weeks unless a few saving graces emerge.
Negotiations between the U.S. and its major trading partners, China, Mexico, Canada, and the European Union, could provide a significant boost. Trump has yet to give a strong signal that he’ll roll back tariffs, but he told reporters Friday that he’d be open to negotiation, depending on the degree to which trading partners offer favorable terms to the U.S. on any of the issues the president is concerned about.
Softening needs to happen quickly for the market to bounce. Various U.S. economic data points have shown that businesses have lost confidence, indicating they’re likely to curb their investments and hiring, which could spark a negative economic cycle, paving the way for a recession.
“If we see countries come to the negotiating table in the near-term and tariff rates are reduced, that would likely help alleviate some of the pressure on confidence channels,” wrote Mike Wilson, Morgan Stanley’s chief U.S. equity strategist in a Thursday note. “If high tariff rates stay in place, negotiations are drawn out over a multi-month period and additional measures are taken, the risk of a recession/our bear case is likely to rise.”
The March consumer price index reading, which is slated to be released Thursday, could also shape things. Economists tracked by FactSet expect the latest reading to show a 2.6% year over year gain, which would be lower than February’s 2.8% increase. “Front-loading of purchases and pre-emptive price increases in anticipation of higher tariffs appear to have pushed up core goods prices,” wrote economists at Nomura in a Friday note.
A high March reading could make the Federal Reserve’s job difficult. The central bank wants to cut interest rates if the economy heads south, but justifying rate cuts is more difficult when inflation is high. Hot inflation data could delay the market’s expectations of when rate cuts will happen.
Ultimately, less hiring and consumer spending could also show up in economic data in the coming weeks and months and act as a counteracting force on inflation, eventually pushing it down toward the Fed’s 2% goal. At that point, the Fed may cut rates to stabilize the economy. While the March jobs reported looked strong on Friday, and showed the U.S. economy added more jobs than expected, April may be a different story.
Fed members will also speak next week and shed light on how the central bank is approaching inflation and the economy. The speakers that matter the most are Fed chair Jerome Powell and Fed governors Michael Barr and Christopher Waller, since they will speak one day after the CPI reading is released.
For stocks, “upside would likely have to come from either a more dovish Fed than expected or near-term progress on tariff negotiations that clearly offers a path for lower tariff rates,” Wilson writes.
