The U.S. stock market experienced a significant downturn on Friday, with the S&P 500 plummeting 1.7%, its worst performance in two months. The Dow Jones Industrial Average also fell 1.7%, and the Nasdaq composite tumbled 2.2%. This sharp decline was triggered by a confluence of factors, primarily concerns about the potential negative impact of President Donald Trump’s policies on the U.S. economy.
Economic Data Fuels Market Worries
Several weaker-than-expected economic reports fueled the market’s anxieties. A preliminary report from S&P Global indicated that U.S. business activity is nearing stagnation, slowing to a 17-month low. Growth unexpectedly contracted for U.S. services businesses, and survey respondents cited waning optimism due to concerns surrounding tariffs and other potential policies emanating from Washington.
Chris Williamson, chief business economist at S&P Global Market Intelligence, noted that companies expressed widespread concerns about the impact of federal government policies, ranging from spending cuts to tariffs and geopolitical developments. He added that sales are being negatively affected by the uncertainty generated by the changing political landscape, and prices are rising due to tariff-related price hikes from suppliers.
Consumer Sentiment and Inflation Expectations Rise
A separate report from the University of Michigan revealed that U.S. consumer inflation expectations surged to 4.3% for the next 12 months, a significant jump from the 3.3% forecast last month. This increase aligns with preliminary data from earlier in the month and suggests that consumers are bracing for higher prices, potentially due to tariffs on imports. Interestingly, a political divide emerged within the survey, with inflation expectations rising for political independents and Democrats, while slightly decreasing for Republicans.
Furthermore, sales of existing homes fell short of economists’ expectations last month. High mortgage rates and elevated home prices continue to hamper sales in the housing market.
Broader Market Implications and Outlook
Despite the market’s sharp decline, the U.S. stock market remains up for the year and is still relatively close to its all-time high set earlier in the week. Most analysts are not predicting a recession in the near future. However, Friday’s economic reports raise concerns about the sustainability of the economy’s resilience. The sell-off was widespread, with small-cap stocks, which are more sensitive to domestic economic conditions, experiencing steeper declines than their large-cap counterparts.
While better-than-expected corporate earnings reports had previously supported the market, concerns about persistent inflation and the potential for the Federal Reserve to maintain higher interest rates longer than anticipated are weighing on investor sentiment. The Federal Reserve’s recent meeting minutes indicated that officials might hold interest rates steady due to concerns about inflation stemming from potential tariffs, immigration policies, and other factors.
Declining Treasury yields further underscored the market’s unease. The yield on the 10-year Treasury note fell to 4.41% from 4.51% the previous day, a significant move reflecting investors’ flight to safety. Global markets exhibited mixed performance, with European indexes showing varied results and Asian markets largely posting gains.
