US stock markets may officially enter bear territory soon, and that could actually be the least of worries for economists and market participants. The ripple effect of an escalating trade war with China, US President Donald Trump’s sharp attack on the Federal Reserve chairman, and the rising US Treasury yields are all raising fundamental questions about the US economy.
US stock markets experienced sharp declines on Monday as Trump intensified his criticism of Federal Reserve Chairman Jerome Powell. This heightened concerns amongst investors regarding the central bank’s autonomy, whilst they simultaneously dealt with the uncertainty caused by Trump’s unpredictable trade policies.
The Dow Jones Industrial Average declined by 971.82 points, or 2.48%, closing at 38,170.41, whilst the S&P 500 dropped 124.50 points, or 2.36%, ending at 5,158.20. The Nasdaq Composite fell by 415.55 points, or 2.55%, finishing at 15,870.90.
Every major sector within the S&P 500 finished the day lower, with the consumer discretionary and technology sectors recording the most significant percentage declines.
According to Reuters, S&P 500 companies are projected to show first-quarter earnings growth of 8.1% compared to the previous year, reduced from earlier predictions of 12.2% at the quarter’s start, according to LSEG data. This week’s significant earnings reports include “Magnificent Seven” constituents Tesla and Alphabet, alongside major industrial firms Boeing, Northrop Grumman, Lockheed Martin and 3M.
China, the world’s second-largest economy, has become a primary focus of Trump’s recent attention, whilst maintaining its own strong stance. On Monday, China issued a stern warning to nations considering trade agreements with the United States that might compromise Chinese interests, particularly as Japan, South Korea and other countries pursue negotiations.
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“If this happens, China will never accept it and will resolutely take countermeasures in a reciprocal manner,” China’s Commerce Ministry said in a statement.
Where are the US stock markets heading and why are rising Treasury yields worrying investors? Will the world’s largest economy slip into recession? Here’s what you should know:
Some startling numbers
- The S&P 500 ended trading at 16% lower than its February 19 peak closing level. The index would officially enter bear market territory if it drops to 20% below its previous all-time high.
- The three primary indices declined by more than 2%, with the technology-focused Nasdaq experiencing substantial drops, particularly affected by losses in the “Magnificent Seven” large-cap growth companies.
- Nvidia shares fell 4.5% following a report that Huawei Technologies would commence bulk deliveries of sophisticated AI chips to Chinese customers as soon as next month.
- Tesla shares declined 5.8% after a report about delays in launching a basic Model Y variant. The electric vehicle manufacturer’s stock value has decreased by more than 50% since its peak in December, with critics citing overvaluation and concerns about CEO Elon Musk’s involvement in US government spending reduction initiatives affecting brand perception.
- In an unexpected development, US government bonds and the US dollar depreciated alongside broader market declines. This represents an atypical situation, as traditionally, Treasury securities and the dollar have appreciated during periods of market uncertainty. The current scenario differs because the Trump administration’s policies are generating market anxiety and potentially undermining their status as premier safe-haven investments.
- The increasing Treasury yields present a significant challenge for the administration, as they would result in elevated interest rates for mortgages, vehicle financing and other consumer loans, whilst creating more costly borrowing conditions for businesses.
- The global reserve currency, the US dollar, is experiencing a decline due to various economic factors, including concerns about tariffs, rising inflation and economic uncertainty in the United States. When compared against a collection of major currencies, including the euro, Japanese yen, Canadian Dollar and Swiss franc, the US dollar has witnessed a significant decline of 9% this year. The currency’s downward trend commenced at the start of 2025, with the pace of depreciation becoming more pronounced during the recent two months.
Trump’s Big Warning
Trump intensified his attacks on Fed chief Powell through a confrontational Truth Social post on Monday, expressing concerns about an economic slowdown and demanding immediate interest rate cuts, which raised questions about Federal Reserve independence.
“With these costs trending so nicely downward, just what I predicted they would do, there can almost be no inflation, but there can be a SLOWING of the economy unless Mr. Too Late, a major loser, lowers interest rates, NOW,” Trump said on Truth Social.
However, the Federal Reserve’s upcoming meeting on May 6-7 is expected to see the central bank maintain the current benchmark interest rate between 4.25% and 4.50%.
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The Federal Reserve remains cautious about swift rate reductions, aiming to prevent inflation from surging again. Having successfully brought inflation down from over 9% three years ago to nearly its 2% target, the central bank maintains its vigilant stance.
Economic forecasts and market confidence have deteriorated as Trump increased tariffs on imports from key US trading partners and essential commodities, with leading economists indicating higher probability of recession this year.
US markets heading for ‘shakier days’?
Any attempt by Trump to dismiss Powell would likely trigger significant anxiety across financial markets. Although Wall Street generally favours lower rates due to their positive impact on equity valuations, investors would be more concerned about a compromised Federal Reserve’s ability to manage inflation effectively. Such an action could potentially damage or destroy the USA’s standing as the globe’s most secure destination for monetary assets.
Countries with autonomous central banking institutions demonstrate superior economic performance, including accelerated growth and reduced inflation rates, benefiting their citizens, according to Jed Ellerbroek, who manages portfolios at Argent Capital Management in St. Louis. He expressed serious concerns about political interference with the Federal Reserve, noting its detrimental impact on market stability.
“Companies are…not sure how to respond, waiting for final answers from the United States about tariff rates,” Ellerbroek said according to a Reuters report. “What makes it dispiriting, I think, is the fact that this is like self-inflicted; we’re in this situation by choice, by this administration’s choice.”
Mark Mobius, chairman of Mobius Emerging Opportunities Fund, sees ‘shakier’ days ahead for markets. “You can expect more uncertainty in the market as Donald Trump is negotiating. He has got a pile of trade deals to sort out before his 90-day timeout on some tariffs runs out. And let’s face it, when you are negotiating, you have to give something to get something. People who have worked on trade deals in the past say this kind of rushed timeline brings all sorts of complications and roadblocks.So, brace yourself, the market is likely to get even shakier,” he told ET.
Mobius notes that the dollar is weakening because of China. “They have been selling US treasury bonds quite aggressively. Now, since China is the second-biggest holder of US government debt, this kind of move shakes things up. So, when China sells these bonds, it gets paid in dollars. That puts pressure on the dollar and pushes US interest rates higher. China is basically using its bond holdings as a bargaining chip.They are trying to put pressure on the US during trade negotiations. By the end of this process, the dollar should settle,” he said.
The widespread uncertainty affecting crucial financial market foundations has prompted investors to reconsider their fundamental investment strategies.
“We can no longer extrapolate from past trends or rely on long-term assumptions to anchor portfolios,” strategists at BlackRock Investment Institute said in a report. “The distinction between tactical and strategic asset allocation is blurred. Instead, we need to constantly reassess the long-term trajectory and be dynamic with asset allocation as we learn more about the future state of the global system,” they said according to an AP report.
According to strategists led by Jean Boivin, this situation might encourage international investors to maintain their investments within their domestic markets rather than investing in the United States.
