As they saw the line go down, American investors may have felt an unfamiliar sensation: anxiety. The S&P 500 fell by another 4% in the week to March 12th, leaving the world’s most watched stockmarket down by 9% since its recent peak. The NASDAQ, dominated by tech firms, has fallen by 12%. It is not quite the bold new era of American growth promised by Donald Trump in his election campaign.
The president’s unpredictable trade policies got things going. On March 12th, in the latest twist in Mr Trump’s trade saga, America levied tariffs of 25% on imports of aluminium and steel. After years of growth, the health of the American economy is a source of concern, too, with worries provoked by a drip of discouraging data. Statistics released the same day showed that consumer prices rose more slowly in February than analysts had expected. But the relief for shoppers also hints that America’s economy is shifting into a lower gear. Such news is beginning to undermine the idea of American exceptionalism: after all, investors have seen much better returns in China and Europe this year.
During Mr Trump’s first term, investors came to believe that his administration’s focus on tax cuts and deregulation would ultimately overwhelm his unpredictable, protectionist tendencies. They also saw that he was sensitive to market moves, and keen to avoid falls. This combination was referred to as the “Trump put”: temporary sell-offs, often driven by the trade conflict with China, were quickly reversed as the president did whatever it took to change the market mood. Investors who sold tended to regret their decision.
The current dynamic appears to be different. Mr Trump’s new administration is more hard-nosed. On March 6th the president said that he was not looking at the stockmarket, but was concentrating on the long term. The same day, Scott Bessent, his treasury secretary, offered a similar view: “Wall Street’s done great. Wall Street can continue doing well. But this administration is about Main Street.” Then, on March 9th, the president avoided questions about whether America faced a recession, and warned of a “period of transition”. Many market participants had believed that Mr Trump would use the threat of tariffs merely as a negotiating tactic. They are gradually being convinced that he really means it this time round.
And just look at the lovely alternatives. So far this year, as American stocks have swooned, Europe’s Stoxx 600 index has risen by 12% in dollar terms, and Germany’s DAX by 19%. A combination of factors, including a falling dollar and a boom in European defence stocks—driven by expectations of higher defence spending, to cope with America’s newfound disregard for the continent—have put Europe in the limelight. Even China’s moribund market has gone on a tear, inspired by hype about the progress of the country’s artificial-intelligence firms. The Hang Seng, which includes many Chinese firms listed in Hong Kong, is up by 17%. For investors worried about their portfolios being dominated by a handful of American tech giants, overseas markets are increasingly enticing.
The sell-off has hit highly valued tech stocks hardest of all. Broadcom and Nvidia, two world-leading semiconductor manufacturers, are down by around 15% in the year to date. But the stand-out loser is Tesla, an electric-car firm owned by Elon Musk, a close ally of Mr Trump, which has fallen by 39% this year. On March 10th alone its value dropped by 15%. European sales of the firm’s vehicles have dropped as the continent’s consumers express their political opinions by buying other cars.
America’s wobble is not confined to the stockmarket. The dollar has dropped by more than 5% against a basket of other currencies since its peak in January. Credit spreads on risky bonds, a measure of the protection that investors demand for holding them, have risen, too. On February 18th junk bonds issued by less creditworthy firms offered yields just 2.6 percentage points above Treasury bonds. By March 11th that margin had risen to 3.2 percentage points, near its highest in six months.
If Mr Trump wants to turn things around, which does not yet appear to be the case, it may take something big given the building economic gloom. On March 10th Goldman Sachs cut its forecast for American growth in 2025 by 0.7 percentage points, to 1.7%. Most analysts still predict some growth, but a few expect a recession. Peter Berezin of BCA Research is one of them. He notes that, on top of Mr Trump’s turbulence, household savings built up during the covid-19 pandemic have been depleted, and past rises in interest rates continue to feed through to mortgages.
A month ago the federal-funds futures market suggested that investors believed there was a 70% chance the Federal Reserve’s policy rate would remain at or above 4% by the year’s end. Now it implies a chance of 12%, with a growing number of investors expecting more aggressive monetary easing. Although inflation remains above the central bank’s target, Jerome Powell, the Fed’s chairman and a long-time target of Mr Trump’s ire, may have to cut rates faster than he had planned.
The S&P’s remarkable rise in recent years—it has more than doubled in value since March 2020—means it remains vulnerable. The index’s price-to-earnings ratio, based on expectations of the constituent firms’ earnings over the next year, has dropped from 25 times to 21 times in less than a month. Even so, by historical standards, stocks are expensive. Expectations for the American market, established over many years of strong performance, have become far easier to disappoint. So far, at least, the S&P’s fall represents a wobble rather than a nightmare. How will things look after another round of tariffs? ■
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